top of page

The simple finance hack to remember when purchasing a property

Buyers should be aware there is a significant information gap between what consumers believe they are receiving versus what they are actually given in the pre-approval process for a home loan.

I have noticed there are important distinctions between different terms used by lenders in the home buying process - some lenders simply put pre-approval when they’re actually referring to pre-qualification.

This practice means buyers are oftentimes misled into thinking they have pre-approval, when they have merely been pre-qualified.

Pre-qualification is largely a surface level step in the home loan process which only gauges the lender’s basic requirements at a specific moment in time.

Through this process, a rough estimate of what size loan a buyer can afford can be obtained, but it is explicitly not a guarantee that you’ll get approved for a home loan.

Pre-approval is a much more comprehensive assessment wherein a lender verifies your income, assets, liabilities, serviceability and credit score.

Pre-approval means lenders have already done all the work to 100 per cent validate everything the customer has told them.

It’s not just based on what the customer is saying because sometimes, that is incorrect, or they might assume things are okay when they are not. This helps avoid potential issues by narrowing down factors that could go wrong.

When it comes to seeking pre-approval, once this preliminary review of a buyer’s financial portfolio is complete, a letter of pre-approval is then issued. This represents a commitment for financing up to a certain loan amount that is then bound to the final property approval.

For anyone who is seeking pre-approval, I warn buyers to beware of a number of red flags in the process, such as online forms, as these are particularly unreliable.

The credit assessor in this process only subjects your details to a “generic calculation” that does not verify any of the information that makes up a proper pre-approval.

I also noted liabilities such as the presence of a Higher Education Loan Program (HECS-HELP) debt or a novated lease will have to be considered in the pre-approval process.

If you were looking at a pre-qualification that used what the customer stated, those figures come out massively different because it’s not factoring in those extra things that go into a conservative assessment.

Things that customers might not think to say and that won’t come out until the full assessment is done could massively impact their borrowing power.

Moreover, the benefits of a letter of pre-approval can endow buyers with more confidence and give them “the edge” necessary to make time-sensitive auction purchases or offers subject to finance.

Such preparedness can also aid buyers dealing with agents who are more likely to perceive a formally pre-approved client as a serious buyer.

I believe the biggest benefit to having timely home pre-approval in today’s housing market is it can reduce your time to full approval and settlement period.

This can be advantageous for you, and appeal to real estate agents, as it means they and the Seller have certainty that they are dealing with a solid buyer.

Claude Iaconi is an award-winning, inner Perth real estate agent with over 25 years real estate experience. If you're a buyer, seller or investor who needs confidential and free advice, contact him below.


bottom of page