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Understanding Home Loans – Approvals

Guarantors

This month I am going to discuss that all in important approval. I thought it would be prudent to ensure that we review all the different types of approvals and how they fit into purchase or building a house. Let’s start with the:

Pre-approval or Approval in Principle.

This is an approval where the lender has completed a preliminary assessment of your income, expenses and liabilities and has determined an indicative amount that you can borrow. Documents generally required are payslips, debt repayment amounts and evidence of deposit. This type of approval generally last 3-6 months and are useful if you are looking for properties and want to know what you can borrow before making an offer.

It would be fair to say these approval are usually done up front to give a borrower a sense of what they can borrow. Little verification is done so it is not uncommon that people may get an approval at the start but be declined because they have not provided factual information, so it is important you are up front from the get go and disclose all sources of income and monthly debt commitments such as credit card limits and personal/car loan repayments.

Conditional approval

This is an approval which as the name suggests, will have some conditions attached to it. It is similar to a pre-approval in that the bank has done some preliminary assessments on your capacity to repay the loan. Conditions such as a fully executed and signed building contract with plans and specifications would be asked for if it is for construction lending. Another condition may be evidence of deposit money’s held in an account for 3 months, or satisfactory independent valuation of the property being purchased or constructed.

Often a specific condition set is based on the type of loan required. For the purchase of an established home, the bank would set a condition that a fully executed and signed contract of sale or “Offer and Acceptance. In the case of a house and land construction loan, they would want to have signed building contract outlining the full plans and specifications. They would also require the contract of sale for the land. You may be also asked to provide evidence of any deposits paid to the builder or the land agent. If you already own a block and want to now build a house on it, you would be required to provide a rate’s notice for the block or evidence of the title showing that the land is held in your name(s). These are all fairly generic conditions – your mortgage broker will guide your through all the requirements.

All lenders will require some form of deposit, generally it is a minimum of 5%. This condition will be satisfied if you have shown that you have held this money in an account for 3 months and the savings balance hasn’t fallen below that amount. As an example you would need to show $25,000 in an account for a total purchase price of $500,000. If during the 3 months it drops to say $24,000 the day it comes back to $25,000 would be the day your 3 months period would start again.

Another condition may be a valuations, these are conducted by independent valuers and they provide the lender with an amount to which they can determine what they can lend to you. This can often trip customers up. If our $500,000 property is determined to have a value of $490,000, then we could only borrow a maximum of 95% of $490,000 and not the purchase price of $500,000. In this case, you would either approach another lender and request a new valuation or fund the shortfall of $10,000 yourself.

Unconditional or Formal Approval 

This is when you can be really excited as it means the lender has made an informed decision on the documents provided. They have determined that you are able to afford to repay the loan, the loan to value ratio meets lender policy from a satisfactory valuation and you have demonstrated they have the minimum deposit available.

The only thing left to do now is to accept their offer, sign the legal documents, return them to the bank, move into your established house or watch your new home start to be built and start paying back the loan.

I hope this is explains in a little more detail the approval process!

Stephen Lee – InReach Finance

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