House hunting is an exciting and stressful time, and the nature of the experience will hinge on a range of factors. But one way to make it a pleasant one is to gain pre-approval from a lender, prior to setting out on your hunt.
Gaining pre-approval will seem like a tedious task in itself, as you need to provide payslips, bank statements, explanations of debt and proof of any existing assets, but it will make your overall home buying experience a smoother, stress free task in the long run.
In general, it’s the less-risky option, and widely recommended for most, especially first home buyers. But it also comes with a myriad of other benefits.
More efficient house hunting process
Pre-approval tells you exactly how much you can spend, according to your income and outgoings, so you are less likely to waste time viewing homes out of your budget.
It will help you when researching suburbs and houses within your price range, so the homes that you do inspect are within reach and tick all of your boxes, wasting no time on homes that don’t suit your family’s needs.
Pre-approval does not lock you in with a lender but it does give you a good idea of what most banks will allow you to borrow. It also prevents you from wasting time and paperwork placing unrealistic offers that won’t be formally approved by the bank.
Makes you an attractive buyer
Perhaps the biggest pain point of house hunting is the competition you come up against when you find your perfect home. Stories of young families trying to buy their first home, and boomers coming along and blowing them out of the water, are commonplace in Australia’s real estate market.
One way to make yourself a stronger competitor is to gain that pre-approval letter, so that when you place your offer, or come up against other prospective buyers, your offer seems legitimate rather than risky.
Sellers and agents are always looking for the quickest way to make a guaranteed profit, so your offer will seem all the more attractive if it's backed up by a lender, who’s already indicated they’re willing to front the money.
Enhanced bargaining power
As in any sales situation, when you prove that you’re a serious buyer, sellers are more inclined to pay attention to you.
Pre-approval proves to the sales agent that you intend to buy, in a timely manner, and you have the means to afford the home.
Establishing this early, with a letter of pre-approval gives you more bargaining power when it comes to talking figures. Even if you come up against another buyer offering more, if you have the pre-approval and they don’t, your offer might be more valuable to the seller.
Sometimes sellers jump the gun on their own house hunt and end up committing elsewhere, even before selling their existing home - in situations like these, a quick sale is invaluable and pre-approval allows that.
Buyers don’t have to be so aware
There are risks associated with buying a home regardless of financial status, however making offers without pre-approval can present additional risks if buyers are ill-informed.
When an offer is accepted on a home, buyers are required to pay a holding deposit which is usually 0.25% of the purchase price.
If your offer is still subject to finance approval, this can be protected by a finance clause but if a buyer neglects this detail, they run the risk of losing their holding or house deposit.
Buying is an exciting time, but the uncertainty without pre-approval can end with dashed hopes and dreams, if it turns out that the bank won’t finance the offered amount.
It’s also a bad time to discover issues with your credit score, or that your income won’t fund the mortgage repayments, so getting this looked at prior to beginning your house search will reduce the likelihood of any unsavoury surprises.
With interest rates facing volatility, triggered by moving cash rates, banks lending criterias have tightened and it's more important than ever to have current pre-approval, if only to know how much you can spend.
Get into your new home in a shorter time frame
Pre-approval means you can waive cooling off periods with more confidence, and if the seller is ready to go, you can request a shorter settlement period.
It also means the bank has most of the information needed to formalise your approval, so you’re not subjected to as long a process of submitting documents as you would be starting from scratch.
Pre-approval is a great guiding and bargaining tool for homebuyers, and a knowledgeable mortgage broker should be your first port of call.