18 May Is Getting a Pre-Approval Worthwhile?
Arguably the most important factor when it comes to buying a property for most people is their ability to get finance from a lender.
For the most part, buyers should look to obtain preapproval from a lender prior to starting their search for a property. However, some don’t think the process is worth it.
So is it worthwhile to get a preapproval from a lender?
A pre-approval in itself is simply an indication from a lender that they can potentially lend to you assuming your property meets their criteria and your circumstances don’t change. This can offer buyers a degree of confidence and also allows them to know what they are able to spend, prior to starting their search.
However, it’s important to remember that a pre-approval doesn’t mean you will be approved by a lender. It’s simply a conditional agreement subject to final approval, which is only obtained once a buyer selects a property. This final approval relies on the lender’s property valuation and any changes to the buyer’s financial conditions.
The issue most borrowers face comes from the conditional nature of pre-approvals. There have been cases where pre-approved buyers have been successful in auctions, only to be left in the lurch when the lender’s final property valuation falls short of the purchase price, or when changes in their financial circumstances lead to the loan being refused.
This can also occur in a market experiencing rapid price increases. If a lender’s valuation doesn’t align with the latest sale prices, there can be a gap between the loan amount and the property’s selling price.
Despite the potential disadvantages, pre-approvals do come with significant benefits. They provide a transparent indication of your borrowing power, which gives homebuyers a lot of clarity and also some bargaining power when they are looking for properties and ultimately negotiating. This is particularly valuable at the moment as rising interest rates are impacting people’s borrowing capacity.
Pre-approvals can also offer you a competitive advantage, particularly in private treaty sales, by demonstrating to sellers that you are a serious buyer with readily available finance.
The process of obtaining a pre-approval can also help discover any issues in your credit history that could hurt your loan application and it provides you with the opportunity to address these issues early on.
However, it’s vital for buyers to understand what a pre-approval encompasses and what it doesn’t, and to avoid financial overcommitment based solely on a pre-approval.
It is always advisable to maintain open communication with your mortgage broker throughout your property search and especially after obtaining pre-approval. Also, it’s important to keep them informed if your circumstances change, or if there is an extended period between when you get pre-approved and when you are ready to make an offer on a property.
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