Pre-approval can be your best friend, or your worst enemy. Make sure you understand the fine print when your lender pre-approves you. The first few months of the year are always busy for property investors. Not wanting to get caught out by any further changes to bank lending policy, many investors have been seeking pre-approval for their investment loans early. In case they find the perfect property, they’re working out their limits and starting the paper trail in anticipation. Or at least they think they’re ready.
Be wary that a pre-approval doesn’t always mean a loan offer is guaranteed. There are a number of nuances included in pre-approvals that could halt a loan, so it’s beneficial for investors to understand what they are.
As a rule, you’ll find that if your lending needs are straightforward, and you’ve provided the right paperwork to tick all the boxes, your pre-approval will be straightforward as well. However, if you know you’re not going to tick the boxes, and you want to ensure your dream property doesn’t slip through your fingers, you should understand what that fine print means.
What to look out for:
Pre-approvals that are subject to credit checks, or lenders’ mortgage insurance, will leave you the most exposed – because the lender hasn’t done the critical checks to determine the risk of providing you with the loan.
The most common condition you’ll come across is that the loan is subject to a satisfactory valuation of the property. However, the use of the term “satisfactory” can mean a number of things to different lenders. It could mean ensuring that the property isn’t a serviced apartment, or that it’s in the right residential zone and isn’t zoned mixed use – so make sure you understand what your lender is looking for when they use the term - particularly if your property has unique characteristics.
What you’ve paid for the property will need to stack up against recent comparable sales. For rural areas particularly – lenders want confidence they can sell a property quickly if they need to – so some won’t lend if the market is slow or weak, or you’ve paid more than market rate for the property.
Ask your lender if there are any risks of over exposure in the area you’re looking in. Some lenders set restrictions as to the number of loans they will provide for properties in any one given area.
The property you want to buy will need to reflect the property outlined in the pre-approval, so don’t bid on a commercial property if you were pre-approved for a residential home. The type of property you want to buy can affect the size of the deposit you need to have saved. Many lenders will require a different loan-to-value ratio for an apartment, warehouse conversion, free standing dwelling or a commercial property.
Get it right and you’ll get it quickly.
If you go through the fine print in your pre-approval and make sure you have as few conditions as possible, you can act on the loan pretty quickly when the perfect property comes up. The best case scenario is you have a loan pre-approval subject to valuation – which means all that needs to be completed is a formal valuation of the property. The valuer can take between two or three days to do the inspection report. Once your lender has the report and can made the final assessment that the property is satisfactory, they’ll issue it as unconditional.
If you’re unconditional, you’re ready to go.