Pre Approval ... Thinking about buying? Are you prepared?

Pre Approval ... Thinking about buying? Are you prepared?

Peter Oates
6 minute read

Pre Approvals as we come out of lockdown

Since March of this year Lendtribe has been working with clients during the pandemic with increased volumes of refinances and decreased volumes of purchases. It is a challenging environment with effects ranging from clients seeing their financial position improve, to others experiencing the negative impact of the pandemic. Without doubt Victoria has been hardest hit by the pandemic and we have all felt the mixed emotions of lockdown and navigating our way through this difficult time. 

Melbourne Property Market Supply

Home values have dropped 4.6% in Melbourne with less than half as many property listings currently versus this time last year and a 3.8% rental vacancy rate (20%+ increase since March). The property market is feeling the pressure of the pandemic. Now as COVID case numbers fall and the exit from lockdown approaches, the restrictions on the Real Estate Industry have been eased and property inspections will commence. It is widely believed that this will trigger a large amount of properties to be listed for sale as the Spring season finally gets underway and sellers can proceed with their plans. 

Melbourne Property Market Demand

At Lendtribe we are already seeing increasing demand for pre-approvals to meet this looming property supply. This demand is born out of various factors including:

• Clients that have not been financially affected by the pandemic.

• Clients believing supply will outweigh demand leading to price decreases in certain property markets.

• Clients that have been unable to purchase due to the lockdown restrictions in place on the Real Estate Industry.

• Clients that have been waiting for what they perceive to be improved stability in the market during this unprecedented time.

Pre-approval Strategy 

No matter the driver of the buyer demand or seller supply, it is important to understand the pre approval strategy in detail. Pre approvals are now quite different at various lenders and clients must consider their goal and the best pre approval strategy.

Pre Approval Items to Consider 
1. Full Assessment Pre Approval vs Partial Assessment Pre Approval

Many lenders now do not fully assess a pre approval application due to the low conversion rate of pre approvals to an actual purchase in recent times being 15% conversion. It is common that a second or third tier lender will not assess a client’s full position, not giving them a credit hit to issue a pre approval. The partial assessment enables a low-cost pre approval to be issued to the client by the lender. This is not a true pre approval and means that if the client purchases, the lender will require many current documents and need to check the clients credit report. This is a problem, as at that time the lender may discover an issue and decline the client’s application, not providing the funding needed to complete the purchase. Which could result in the client losing their deposit and being liable for the full value of the property they are now unable to purchase. Clients must confirm their pre approval is a full assessment pre approval with a credit hit and all documents assessed and reviewed by the assessor. 

2. Length of the Pre Approval

The length of time a pre approval remains valid for ranges from 30 days to 180 days (with payslips requested at 90 days to ensure employment is still valid). A client must consider if a 30 day or 90 day pre approval is enough time to make their purchase. If not they must be prepared to keep supplying updated documents and receive another credit hit each time the apply for another pre approval. Clients should consider opting for the longest pre approval period of 180 days to protect their credit rating, their time and to ensure they can bid with the confidence of having a pre approval in place long after their original application.

3. Chasing the best deal in the market today

Clients should consider that the best offer in the market today may not be the best offer in the market by the time they purchase their property. For this reason, it may be an error of judgement to base their pre approval on an interest rate that may change or a cash back offer that may expire before a purchase is executed and then settled.

4. Clients buying over 80% LVR with LMI applying for too many pre approvals

A critical error we often see at Lendtribe is a client applying for more than one pre approval when purchasing a property over 80% LVR requiring LMI. This usually occurs due to receiving poor advice from their lender or another broker regarding loan product and then deciding to apply for a different loan product. It is a critical error as the LMI reinsurers will often decline an application if an applicant has 3 credit hits in the past 3 months. This can easily occur when a client has applied through their lender and then found a better deal at another lender, giving them 2 credit hits. The issue then is if the client purchases, they cannot apply for another loan product as that would be their third credit hit. Of course, this is not an issue if they are happy with their first or second pre-approvals, but this is a concern if there is another offer in the market that they cannot now apply for. It is best to just get one pre approval for LMI deals and then review the market again once the client has bought.

5. Not reviewing the mortgage market after a purchase is made

Once a client does purchase, they should review the mortgage market at that time to ensure the loan product they are pre approved for is still the most suitable loan product for their circumstance. This is an important step to consider ensuring their goals still align with their loan product strategy.

The above items spell out Lendtribe’s strategy of obtaining pre approvals for clients that are Full Assessments, with Long Pre-Approval Periods and then, in line with Best Interests Duty of Mortgage Brokers, reviewing the mortgage market once a client has bought. This protects our clients financially, respects their time, reduces their stress and ensures they always achieve a suitable loan product once they have purchased. A solid pre-approval strategy puts clients in the best position to negotiate and purchase when implemented correctly with care. For all the clients seeking to buy or sell in this market Lendtribe wishes you all the best and are happy to assist at any time. 

 

We have more detail listed here about purchasing a property or if you are a first home buyer you can click here. 

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