What Are Pre-approvals

Pre-approvals are a type of loan application in which you seek approval from a lender before having a specific property under contract. This step typically occurs between preparing your finances and purchasing a property. Pre-approvals are generally broader in nature and do not guarantee that your finances will be approved when you find a property. However, they provide a good indication of how much you will be able to borrow and display that you are a serious buyer.

How Does Pre-approvals Work?

‍Pre-approvals typically last for 90 days. At the end of that period, you will usually have the ability to extend the pre-approval or wait until a suitable property is found and then apply for a full approval. If no property is found, you may need to reapply for a new pre-approval when you’re ready to make an offer.

Some brokers do charge for pre-approvals, but here at The Newstead Group our fundamental belief is to put you into a financially better position, which we don’t believe that fees or charges accomplish.

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Types of Pre-approvals

There are two types of pre-approvals, one is system generated and one is credit assessed. The system generated pre-approval is the most simplified form of pre-approval and will generally be obtained by a basic submission of data without the requirement of the bank’s credit team to review any of the supporting documents required.

An assessed pre-approval required credit to manually review the statements and alternative documents required to support your financial position. An assessed pre-approval is a stronger form of approval and will require less input upon finding a suitable property to convert your application to a full approval.

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Do Pre-approvals Vary from Lender to Lender?

Most lenders offer pre-approvals, but the type and complexity tends to vary. Depending on the lender’s volume of applications, you may receive a system generated pre-approval. If your scenario is more complex in nature, then a credit-assessed pre-approval is significantly more beneficial, as it involves a detailed review by the lender’s credit team. A credit-assessed pre-approval offers a stronger indication of your borrowing potential.

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Downsides of Pre-approvals

While pre-approvals can provide a clear budget, there is no guarantee of a final loan approval, as lenders will still need to assess the property and your financial situation in more detail. If your financial circumstances change, your pre-approval may no longer be valid.

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Examples

Consider this: a client is looking to purchase a block of land that was still in the process of being registered. Since the land is not officially registered, the client could not proceed with a full property purchase. In a situation like this, it is beneficial to obtain a pre-approval, either system generated or fully assessed to be prepared once the land is ready for sale.

However, the challenge with pre-approvals is that they generally last for 90 days. If the land is unlikely to be registered within that timeframe, a system-generated pre-approval might lapse prior to the block being registered. However, if the land was due to register within 90 days, we would most likely apply for a lender that has a fully assessed pre-approval to avoid the risk of a system generated pre-approval.

In this scenario, opting for a fully assessed pre-approval would place the client in a more favourable position moving forward, minimising the risk of the pre-approval expiring before the purchase in complete.

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