Why You Should Get a Pre Approval for a Home Loan Before You Start Looking at Properties

Are you eager to dive into the property market but unsure where to start? Understanding why you should get a pre approval for a home loan before house hunting can make all the difference in your buying journey. In this article, we’ll explore the importance of securing a pre approval and how it can empower you to navigate the real estate market with confidence and clarity.

In the excitement of buying a new home, it can be tempting to dive right into house hunting. And in our experience MANY people do.  They call us with a hint of desperation in their voice and the conversation sounds something like this:

New client: ”Hi, I was given your number by a friend.  I was hoping you could help us with finance”

Hatch: “Sure, we would love to do that.” 

New client: “The thing is, we kind of found a place on the weekend we really like and it goes to auction this Saturday. You can get us a pre-approval in time for that right?! We might even want to put in an offer before the auction. Do you think that is possible?”

And many times we have been able to help the client out but it is not ideal for the client (or us).

Before you start scrolling through listings or attending open houses, there’s a crucial step that can make the entire process smoother, less stressful and typically more successful: obtaining a home loan pre-approval. 

A pre-approval can be your guiding star, helping you navigate the complexities of the property market with confidence. Before diving into WHY you should secure a pre-approval, lets first talk about WHAT is a pre-approval?

What is a Pre-Approval?

A home loan pre-approval, sometimes referred to as conditional approval or approval in principle, is an indication from a lender that they are willing to lend you a certain amount of money to purchase a property. 

This is based on an initial assessment of your financial situation, including your income, expenses, assets, liabilities, and credit history.

Why Should I get a Pre-Approval?

Here’s why securing a pre-approval should be your first move in the home-buying process.

1. Understanding Your Budget

A pre-approval gives you a clear picture of how much a lender is willing to loan you based on your current financial situation. This is crucial because it sets realistic expectations and helps you understand what you can truly afford. 

Without a pre-approval, you might waste time looking at properties outside your budget, leading to potential disappointment. Knowing your budget upfront enables you to focus your search on homes that fit within your financial means, making the entire process more efficient and enjoyable.

2. Demonstrating Seriousness to Sellers

In a competitive property market, sellers are more likely to take you seriously if you have a pre-approval. It shows that you’re not just window shopping but are a serious buyer with the financial backing to make a solid offer. This can be especially advantageous in situations where there are multiple offers on a property. A pre-approval could set you apart from other potential buyers who haven’t taken this step, giving you an edge in negotiations. 

3. Speeding Up the Buying Process

When you find the perfect property, you want to move quickly to secure it. Having a pre-approval in place allows you to act fast when making an offer and to offer shorter settlement terms (which may be attractive to a seller). 

This is possible because your financials have already been reviewed by the lender and so the final approval process can be expedited. This will position you favourably as compared to other potential buyers and in a hot market (where delays can result in missing out on a property). This preparedness can make the difference between securing your dream home and watching it slip away to another buyer.

4. Avoiding Last-Minute Surprises

Getting a Pre-Approval involves a thorough assessment of your financial situation, including income, expenses, and credit history. This means any potential issues are identified and addressed early in the process, reducing the risk of unpleasant surprises later on. It’s better to discover any red flags during the pre-approval process rather than when you have found a property you like and are emotionally invested in buying it. This foresight gives you time to rectify issues or adjust your expectations before you’re under the pressure of making a purchase.

5. Gaining Negotiating Power

Armed with a pre-approval, you’re in a stronger position to negotiate with sellers. It provides you with a clear understanding of your financial limits, allowing you to make competitive yet sensible offers. Sellers are more inclined to engage in negotiations with buyers who have demonstrated their ability to secure financing, and in some cases, a pre-approved buyer might be able to negotiate a better deal or favorable terms.

6. Clarifying Lender Policies

Lending policies differ from one lender to another which can significantly impact how much you can borrow. Talking to a mortgage broker and going through the process of getting a Pre-Approval helps clarify which lenders are willing to work with you and how much each will lend to you. This knowledge allows you to tailor your property search to fit within those parameters, avoiding the frustration of falling in love with a home only to find out you don’t meet the lender’s criteria.

7. Peace of Mind and Confidence

The home-buying journey can be stressful, especially if you’re unsure about your financial standing. A pre-approval offers peace of mind by confirming that a lender is willing to support your purchase up to a certain amount. This assurance allows you to focus on finding the right property rather than worrying about whether you’ll be able to secure financing. It empowers you to make decisions with confidence, knowing you have a solid financial foundation.

When should I get a Pre-Approval?

Sooner rather than later.  Basically before you start looking at properties with any intentions of buying one!

How long does a Pre-Approval last for?

A pre-approval is usually valid for 90 days after which time you might need to submit a few new documents to extend the pre-approval for another 90 days, or do a new application.

Is a Pre-Approval a Guarantee of Finance?

It’s important to note that pre-approval is not a guarantee of a final loan approval. The lender will still need to assess the specific property you wish to buy and verify that your financial situation hasn’t changed. 

Are All Pre-Approvals The Same?

Many lenders these days rely on a computer based assessment of the data input in a Pre-Approval Application. This makes the Pre-Approval very unsafe to rely on as if the bank does not accept or agree with the data input then the Pre-Approval will not be worth anything.

So you really want a Pre-Approval from a lender that manually assesses the application and verifies the data submitted (income verified against payslips etc). Your mortgage broker will know which lenders do full assessments or not. They will also be able to identify if this is a relevant concern for you or not. 

Am I Bound To A Lender If I Get A Pre-Approval From That Lender?

In short, No. You are not obligated to proceed with a Lender that gave you a Pre-Approval. Ideally for them, you will take the loan with that Lender but there is no commitment on you to do so.

How Long Does It Take To Get A Pre-Approval?

It generally takes between 1-2 weeks to get a fully assessed Pre-Approval. It can take more or less time depending on the lender, how busy they are, how busy the broker is, the urgency involved and how organised and decisive the customer is.

Is it worthwhile getting 2 Pre-Approvals with Different Lenders?

As a rule, one Pre-Approval is more than enough so long it is with a Lender you would be prepared to take a loan with if all other options evaporated. The point of a Pre-Approval is just give you confidence that you will be able to get acceptable finance from one Lender.

It is also important to understand that multiple loan inquiries in short succession will lower your credit score and may raise questions from a Lender. A lender will wonder “Why did the client need to apply to 3 banks for a Pre-Approval? Were they knocked back by the other lenders? What did those Lenders see that I have missed?”

Conclusion

Understanding why you should get a pre approval for a home loan is a strategic step that can save you time, reduce stress, and significantly increase your chances of securing the right property. A pre-approval equips you with the knowledge and confidence to navigate the real estate market, signaling to sellers that you’re a serious and capable buyer. By clarifying your budget and avoiding unexpected hurdles, it sets the stage for a smoother, more successful home-buying experience.

At Hatch Financial Services, we recognise the importance of being well-prepared on your journey to homeownership. Our team is here to guide you through every step, from obtaining a pre-approval to finding the perfect loan tailored to your needs. Reach out to us today to start your path toward owning your dream home with confidence and clarity.