A loan pre-approval means a lender has assessed your financial situation and determined how much you can borrow. It’s a good indication they’ll give you a formal loan approval later.
Banks have been tightening their lending criteria and this is one of the things influencing falling property prices. Fewer loans are being approved, and the size of loans being approved has also reduced. Home buyers who could easily get finance a year ago, are now facing much more rigorous tests to get loan approval.
Under no circumstances should you place a deposit on a property until your loan pre-approval is confirmed – otherwise you may risk losing your money.
Did you know that a lender can reject the property you want to buy, even if they have given you a pre-approval on a loan big enough to buy it? You can reduce the risk of lenders rejecting your home selection by asking us to confirm you have chosen a viable property before putting down your deposit.
There are several reasons why a lender may not give you final approval on a loan for the property you want to buy. The main reason is negative equity risk.
Negative equity is when the amount you have borrowed becomes more than the market value of the home. There is a risk this can occur due to falling home values. For example, in 2018 many off-the-plan homes were unexpectedly valued at less than the contract price upon completion and some buyers were unable to get the loan approval they needed to complete their purchase without topping up their deposit.
To avoid a negative equity situation, a deposit of at least 20% is recommended. If buying off-the-plan, it is also recommended you insert a clause in the sales contract confirming the final price will not be more than the market value of the property upon completion.
The other reasons a lender may not approve your loan is if the property is in poor condition, in a remote or unpopular location, or is too small (less than 52sqm).
Research is key when buying in a falling market. Ask more questions about the underlying factors that drive capital growth to ensure the property will hold its value and you’re not paying too much – look at local employment rates, proximity to schools, public transport and other important amenities, rental demand etc. You can also contact us to access free reports that have this information.
Remember, it’s a buyer’s market and with careful research you can buy with confidence. If you want to secure a bargain this Autumn, then call us now to confirm your borrowing capacity and get pre-approval on a loan. In addition to helping to protect you from risk, a pre-approval will help you move quickly when you find the right property and negotiate strongly to get the right price. Call us for a chat about your plans today.