The Pre Approval Process
Are you feeling ready to purchase your first home? Or are you looking to refinance your home to get a better deal? The home pre approval process can change so often that what you thought you didn’t need is actually now required. For example, a lot more stringent rules apply when lending to customers with a high credit card limit.
Back when I bought my first house, the bank wanted to see 3 months worth of statements. What they really wanted was to identify whether I was paying off the credit card every month and if I had incurred any interest. If I was paying it off in a timely manner, I could maintain my credit card. Now, banks take into account your actual credit card limit regardless of whether you pay it off each month.
Good news! You’ve saved enough money for a deposit, whether it’s 10%, 15% or 20% deposit. Now you’re ready to take the plunge and research on how to get a pre approval from your bank or getting a mortgage broker to help. I’ll share some tips on the home loan pre approval process below which will hopefully improve your chances of getting that loan approved.
There is a lot of information that the bank or a mortgage broker will require from you. So the first thing is to gather all your documents ready. Your lender or mortgage adviser should provide you with a list of what you need. I will outline a typical list of information that the banks require.
Why is it that the banks require so much information for a pre approval? Let’s look at some numbers. You're looking to purchase a home valued at $800,000 and you’ve got a deposit of $80,000, which is 10%. You need to borrow $720,000 from the bank. The bank is basically lending you 90% of their money so that you can buy your first home. That is why they want to gather as much information from you to make an informed decision on whether they want to lend you their money! Wouldn’t you do the same?
What Is A Pre Approval VS An Approval?
There is a difference. A pre-approval provides a letter saying that you’re conditionally approved to borrow up to $X amount, dependent on satisfying their conditions. Once you’ve met those conditions the bank has outlined, then you move from a pre approval to approval.
Here is a link to an article that I wrote on how to apply for a home loan.
What would be some standard conditions in a pre approval?
Here are some examples on what are some standard conditions.
- Kiwisaver withdrawal confirmation - If you plan on using your Kiwisaver to buy your first home.
- Signed Sales And Purchase Agreement - This is where you can go to open homes and negotiate! Signed means by both parties - the vendor and buyers (you).
- Insurance - This is the most overlooked area. Banks want to know that the property is insurable, so you should get it checked that it can. Why is it overlooked? If you’re buying a clifftop property with the increasing impact of climate change, insurance companies are becoming wary and hesistant of insuring these high-risk areas. As a result, they may insure you but at a very HIGH premium!
There are also some very specific conditions to your home loan. For example, as mentioned earlier, you may need to cancel your credit card. As I mentioned in my other posts, every mortgage or home loan is different as we have our own unique financial position!
Why do I need a pre-approval?
A pre-approval will give you confidence in your finances on purchasing a property. It can also give you an advantage. Here’s an example. You went to an open home with a pre-approval and you fell in love with the house, but another party also loves it and is putting in an offer on the property too. You will then have the upper hand as you’ve got your financing ready, whereas the other party may still need to sort out their finances which could take up to 15-20 working days. Your chances of purchasing will increase as you can cut down the time on financing and the seller may take your offer because of a better timeframe.
Here is a great link from the Government on conditional finances.
On a side note, every bank assesses pre approvals differently. Depending on the banks lending terms and conditions, you could get pre approved for $35k-$100k more.
How Long Does A Pre-Approval Last?
The duration depends on the bank. Some banks give you 60 to 90 days. However, you can extend the pre approval, subject to extra information being required.
Mortgage Broker vs Bank for Home Pre Approval Process
The decision is up to you on where you want to go through the home pre approval process. You can go directly to the bank to get the mortgage or through a mortgage adviser. Each has their own advantages and disadvantages.
Mortgage advisers/brokers will help you along the process as they do this day in and day out. They will also know the best deals around for you as they don’t have any allegiance to one specific bank. Not only that, if your financial situation is not suited for the main banks such as ANZ, ASB, Westpac etc, mortgage brokers can assist with non-bank lending too. They have a wide range of lenders that can assist your situation.
Banks are limited by their own product advice and so in some cases, even that bank may not be the best for you. You’ll need to get prices from other banks to get a better understanding of which one suits you, so there is more time involved in researching to find the best deal. Banks also have something called Mobile Mortgage Managers, where they can come to you too.
I value my time, so rather than spending my weekends going from bank to bank I’d rather spend it with my family and friends.
I’ll write up another article on whether you should choose a mortgage broker/adviser or go direct to the bank in the future.
7 truths about the home pre approval process
I’ll share my 7 truths on getting a positive and faster outcome for your pre approval below.
- Employment - Obviously this is one of the biggest factors that the banks look at. They want to see that you are in a stable job and that your pay is consistent. They’ll also ask what your previous employment was and how long it was between jobs. If you are self employed, then banks will typically ask for 2 years worth of financial statements prepared by a Chartered Accountant.
- Deposit - If you’ve got a 20% deposit, then you’d have a higher chance of getting it approved. Even though you may hear RBNZ (Reserve Bank of New Zealand) have lifted or removed LVR limits, the retail banks still have an internal limit on having a deposit of less than 20% deposit.
- Reduce debt - Having less or no short term debt will improve your chances of getting approved again. If you’ve got a car loan to be repaid over 3 years, even with no interest on it, you’re making huge monthly repayments. This will impact your servicing capacity!
- Trouble-free - Avoid getting into defaults or missing payments causing a dishonour fee. It's fine if it’s once in a blue moon because you forgot, but if there is a pattern and trend that payments are being missed then the bank will factor it in its account conduct. This will also show up on your credit report which will impact your credit rating!
- SAVE! - Banks take into account how well you save. What they want to identify is that you can manage your money.
- Expenses - Banks will review your expenses in particular utilities, such as rates, insurance and mortgage repayments. If you can demonstrate that you come out with a surplus per month, then there is a good chance of getting a positive outcome.
- Disclosure - Please have full disclosure. In some cases, a non disclosure can jeopardise your pre approval processes, resulting in a decline!
Summary
Getting a home loan pre approved can be a simple process if you’ve got your finances in place, but knowing that you’ve got a good pre approval that works for you and the right advice is another thing.
If you want guidance on the home pre approval process along with the fun advice, then get in contact with me. You can book in a time below or send me an email directly at will@simplyfinance.co.nz
I’d love to hear if you’ve got the home pre approval process down yourself, or if there is anything else you might want clarification on.