Pre-Approval Nightmares
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Pre-Approval: Definition, Meaning, How It Works, and Types

Prefer reading? Here is a transcript of the video!

Hi all, and welcome to our latest video. In this video today, we’re going to talk about pre-approvals and understand the different types of pre-approvals on the market.

If you’re new to the channel. My name’s Ryan Pappas and I’m a mortgage broker in Sydney. We have a strong passion for educating our clients everything to do with property and finance related. So if you’re new to the channel, please like and subscribe to our channel.

Now while buying a home can be and should be an exciting experience, it can also be a very stressful experience when you’re up against other like-minded buyers who are fighting for that same property. Now, the way to get ahead of the pack is to get a pre-approval, and we’re going to talk about the different types of pre-approval in the market today.

What is a Pre-Approval?

Well, a pre-approval is a preliminary assessment of your individual circumstances that basically grants you a shopping license for three months. A loan pre-approval will provide some clarity on the amount you can borrow and therefore you’ll be able to understand what you can purchase for as a result of getting a pre-approval. You’ll therefore be able to adjust your price ranges online when searching for property. Now, unfortunately, pre-approvals are the only way you can safely purchase property. Now that you understand what a pre-approval is.

What are the different types of Pre-Approval?

Let’s go through the different types of pre-approvals on the market today. So there’s two types of pre-approvals on the market today. A computer-based pre-approval and a human being. Fully assessed pre-approval.

What is a computer-based Pre-Approval?

Now, what is a computer-based pre-approval? A Computer based pre-approval is, well, pretty self-explanatory. It relies on data that you input to the system along with your credit file and then makes a decision. Whilst a computer-based pre-approval is pretty quick to attain, it obviously comes with some risks. Now, while there’s a major shift for automation in most industries today via AI, it obviously comes with some risks. For example, your credit file isn’t yet 100% accurate. If you have an existing loan, it doesn’t show the repayment amount, it doesn’t show the interest rate, both of which are crucial in the pre-approval process. Now, another big issue when seeking computer-based pre-approvals is living expenses. The way you calculate your living expenses is different from how a lender will calculate your living expenses. What are your running costs of the new property? What are your investment property running costs? All these small things have major influences on the amount you can borrow. So it’s very crucial that you get your living expenses analyzed before seeking a pre-approval. Now, what’s even worse, with computer based pre-approvals, you may only find out about potential issues after you’ve purchased the property. Does that seem right? When you’ve spent, let’s say, a million dollars at auction, put down a 10% non refundable deposit.

Again, this is another reason why we recommend our next type of pre-approval.

What is a FULLY ASSESSED Pre-Approval?

So this brings us on to our next type of pre-approval, which is a fully assessed human being pre-approval. That is, obtaining pay slips, bank statements, credit card statements, home loan statements, everything, and assessing your borrowing capacity based on this data. This is much safer than a computer-based pre-approval. Now, while providing this information is a pain, and then, you know what…We’re all human. We understand paperwork is a nightmare for some. It is the safest way to obtain a pre-approval. Now, it is quite common that you would calculate your income differently to how a lender would calculate your income. For example, the superannuation payments that your employer makes for you. We don’t include these in the borrowing capacity assessment. Bonus income generally needs to be shown over two years. Shares, dividends, all these small things impact the amount you can borrow. So it’s important that you obtain a fully assessed pre-approval so we can have all these issues ironed out before you go and purchase your property.

What Pre-Approval should you seek?

So, just in summary, a computer based pre-approval, unfortunately, isn’t the safest way to obtain a pre-approval.

A fully assessed pre-approval will give you the certainty and the confidence you need that the only condition outstanding is generally valuation on the property. When you go and purchase your property for a million dollars at auction, you want to have the confidence that you are pre-approved prior to going to auction and negotiating on property.

Unfortunately, we’re seeing this happen way too much with lenders these days. They want to do computer-based pre-approvals because it’s easier, quicker and obviously cheaper. But unfortunately, it comes with some risks. That’s all from me. I hope you’ve enjoyed our video today. Please do remember to like and subscribe to our channel. And I look forward to seeing you in the next video. Bye.