Many lenders are taking a number of weeks (sometimes months) to approve loans at the moment. These delays have been caused mainly by significantly higher mortgage application volumes and the operational disruption from onshoring back-office services due to Covid lockdowns in the Philippines and India.
As such, banks are prioritising applications for borrowers that have already purchased property and have a definitive settlement date to meet. Consequently, pre-approval applications are low priority and can take a long time to arrange. This blog discusses the pros and cons associated with buying a property without a loan pre-approval.
What is a mortgage pre-approval?
A pre-approval is a conditional loan approval. Typically, the main condition is that the borrower is able to offer a suitable property as security for the proposed loan. For example, a bank may approve a loan for $800,000 subject to the borrower buying an
acceptable property that is valued by the bank at an amount of at least $1,000,000 (to keep the loan to value ratio at 80%). The only other condition might be that the borrower’s financial circumstances do not change. This is called an approval-in-principle (AIP) or pre-approval.
Arranging a written pre-approval with a bank (via a mortgage broker), gives borrowers a higher level of certainty that, if they go ahead and purchase a property, that the bank will ultimately unconditionally approve a loan to fund that property.
Pre-approvals do not attract any fees (they are free) and you are not obligated to use that lender or borrow the pre-approved amount.
What could go wrong even if you have a pre-approval?
Things can still go wrong even if you have a pre-approval.
Typically, the only material risk is that the bank values your new property below the purchase price. The bank will lend against the contract price or valuation, whichever is lower. If the property valuation is lower than purchase price, it will mean you won’t be able to borrow as much and you must contribute more cash (or additional property as security).
For example, if you buy a property for $1,000,000 and need to borrow 80% (or $800,000), and the property valuation comes back at $950,000, the bank will reduce your loan amount to 80% of that value, being $760,000. That means you mu
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