When it comes to buying a home, getting the home loan is one of the most essential steps yet also the most confusing. Homeowners are constantly faced with questions such as:
- How much can I borrow?
- Will my loan application be accepted?
- What are the lenders looking at?
- How much do I qualify for?
- What is my credit score?
An easy way to clear up the fog around the loan application process is to get pre-approved for a home loan.
What Pre-approval Is
Pre-approval simply means having a lender check your financials over before you decide on a house. Since the amount you can borrow is determined more by your personal financial history than the property you’re purchasing, this can give you a good idea of what you can afford.
A pre-approval will be valid for a certain period, generally 6 months.
Different lenders have different definitions of “pre-approval”. Some lenders will give a quick 30 minute assessment over the phone or in person and give you a verbal or informal pre-approval for a certain amount. What this gives you is a general idea of how much you can borrow, but it’s less accurate than a more formal types of pre-approval.
Other lenders take pre-approval more seriously and will actually run a credit check on you. These approvals take time but they are worth much more. These take more effort from the lender so they are naturally harder to get. However, if you get a pre-approval in writing that has taken your credit history into account you can be fairly sure you’ll be able to get that amount.
What Pre-approval is Not
Pre-approval is not a formal or legal term, which means there’s no regulatory body or standard. Each bank has its own process and definition. Pre-approval is also not a legal contract that banks are obligated to fulfill. It doesn’t guarantee funds or even that the loan will be approved.
That doesn’t mean pre-approvals aren’t useful. First home buyers often have trouble determining an appropriate price range to look for and how much to take out for their home loan. The pre-approval helps not only in increasing the chances of getting approved, but in understanding the overall home loan process and what approval involves.
What Will the Loan Officer Check?
In a simple quick pre-approval, a series of questions designed to assess your ability to repay a loan will be presented through survey or in person. The process is fairly quick but since everything is based on your word, this kind of pre-approval is less solid.
A more formal pre-approval could be almost as involved as the actual home loan approval and would require formal documentation. This could include:
- Proof of deposit/savings
- Proof of income
- Expenses, such as credit cards
- Documentation of liabilities and assets
- A formal credit check
What Can I Do to Improve My Chances?
Paying your bills on time, having a steady income, and savings are the basics of good credit. It can actually be good to have some debts on your record such as a car loan or credit cards so that you have a credit history, but they need to always be paid on time.
Besides the basics, during the time leading up to your loan, it’s good to keep from making major changes in your life like quitting or even changing your job, moving, buying a new car, or anything else that could affect the factors listed above.
Pre-approval is a great way for home buyers to improve their chances of getting the home they want, and understand the home process better. If you have any questions about a first home loan, contact First Home Owners Centre today.