How Reliable Is Your Pre-Approval?
Your approval may be withdrawn!
Has your home loan been pre-approved? Did you know that a bank has the right to decline your application when you find a property to buy? This is because pre-approvals are “indicative” only, they are not a formal commitment to approve your loan.
Unfortunately, it is quite common for people to get a pre-approval from their bank, find and win a property at auction, only to have their loan approval withdrawn when they request an unconditional approval.
The person buying the property then goes into a mad rush to find another lender to approve their loan or to get a family member to help them before they lose their 10% deposit.
In many cases pre-approvals are not actually assessed by the bank! Read on to find out more…
What is a pre-approval?
A pre-approval is also known as a conditional approval (St George Bank & ANZ), indicative approval, approval in principal (Westpac uses the acronym AIP) or Homeseeker (CBA).
It is only an indication from a lender that they are willing to approve your loan when you lodge a full application. In the vast majority of cases, a pre-approval is not fully assessed by the lender and often hasn’t even been to their credit department or their Lenders Mortgage Insurer!
The lender is under no obligation to formally approve your loan when you find a property.
It is common for most people to seek a pre-approval before looking for a property to buy. This way they know that they have the finance to fund the purchase and can make an offer on a place that they like. Some people choose not to get a pre-approval and in doing so are taking a risk because they have no indication that they can get approved for a loan.
What are the conditions?
Pre-approvals have conditions that must be fulfilled, before the loan becomes formally approved.
Below is an example of a pre-approval letter that list the conditions that need to be met.
This conditional approval is valid for a period of 90 days from the 01/01/2010. Subject to the following details being confirmed, we will send the applicant a loan offer:
1) That all information supplied to us for assessing your client’s eligibility is true and correct.
2) That we have received all documentation necessary to verify your client’s deposit, security, assets, liabilities and income.
3) Verification of your client’s personal and financial details.
4) Our satisfactory assessment (including a valuation) of any property offered as security for your client’s loan(s).
5) Whether Lenders Mortgage Insurance is required. If it is required (generally when the loan amount is for more than 80% of the value of the security property) the loan(s) will be provided only if the insurer agrees to provide the insurance. Your client will also need to pay the Lenders Mortgage Insurance premium.
Please note that this response does not constitute a Loan Offer that your client can accept.
No further processing is provided at this stage – please retain all supporting documentation until you are ready to convert to an unconditional approval.
As you can see, the lender has not actually assessed the home loan application! The details have been entered in their system and the loan appears acceptable.
A reliable pre-approval has far fewer conditions and has been assessed by a credit officer that works for the lender.
On the spot approvals
There are many lenders who offer pre-approvals online or via the branch, in as little as thirty minutes. The reality is that this is a sales tool used by lenders to get people to apply for a home loan.
These applications are not sent to the lender’s credit department for full assessment, and because of that, they are effectively worthless.
Do not assume that a bank manager knows the credit policies of the bank that they work for. They are sales staff, their job is to bring in new mortgage applications, not to assess them.
How do I know if I have a “real” pre-approval?
Our mortgage brokers always request that your pre-approval be fully assessed by the bank. If for some reason a full assessment is not possible, then they will advise you that your pre-approval is not completely reliable.
To get a reliable pre-approval you will need to submit a full loan application. This means providing the following:
- A completed & signed application form.
- Evidence of your income such as payslips & or tax returns.
- Evidence of your savings such as bank statements.
- Evidence of your current debts such as credit cards, personal loans & home loans.
- Identification documents, e.g. a drivers license (if you not an existing customer of the lender).
You may have to wait anywhere from between one to five days for the credit department to assess your application & issue an approval.
Is it reliable?
If you are not sure if your pre-approval can be relied upon, then ask your mortgage broker / bank manager the following questions:
- Has my application been accepted by the credit department?
- Has the Lenders Mortgage Insurer approved my application?
- What are the conditions on my approval?
- Can I bid in an auction based on this pre-approval?
If you used our services to get your pre-approval, then please contact us on 1300 889 743 and we’ll help to explain any conditions on your pre-approval.
Common reasons for a decline
Have you received pre-approval and found a property to purchase? There are several reasons why your loan may still be declined when you apply for formal approval.
The most common reasons are:
- The pre-approval was worthless: If you had an on the spot approval or system generated approval then your loan was never really approved to begin with. In this case, your loan will be declined because it does not meet (and never did meet) the lenders policy.
- The LMI provider declines your home loan: Your bank may approve the loan, however, if your loan amount is more than 80% of the property value, then the bank may need approval from their Lenders Mortgage Insurer as well. Often a loan is pre-approved by a bank, however when the customer finds a property, the loan is then referred to the LMI provider who has different guidelines to the lender. The Insurer may decline your loan.
- The security property is unacceptable: The property that you are buying is not assessed when you apply for a pre-approval. When you inform the bank of the type of security property you are purchasing, they may not approve the loan because of the risk involved. You can find a list of the types of properties that are usually unacceptable to lender on our property types page. Most people aren’t aware that their bank may not accept inner city apartments, units under 50m2 or hobby farms, so they often buy them without first checking with their bank.
- The pre-approval has expired: Pre-approvals are typically valid for three to six months, depending on the lender. If it takes you longer than this to find a property then your pre-approval will no longer be valid.
- Your situation has changed: If you change jobs, get a car loan / credit card or have some other aspect of your situation change, since your loan was pre-approved, the lender will re-assess your application. If you no longer meet their lending policy, your loan will be declined.
- The lender’s policy has changed: Some lenders will honour pre-approvals that are lodged before their policy changes, others will only formally approve your loan if it meets their new lending policies. Most lenders tweak their lending policy on a monthly basis.
- Interest rates have increased: If interest rates increase then the maximum amount you can borrow will decrease. First home buyers often get a pre-approval for the maximum loan amount possible. This means that if the rates increase, their formal approval for that loan amount, may be declined.
Please note that if interest rates increase or the lender’s policy changes, your lender will not notify you that your approval is no longer valid. Their systems are not setup to give these kind of notifications.
Which lenders tend to give unreliable pre-approvals?
Our mortgage brokers always request your pre-approval to be fully assessed by the bank. If for some reason a full assessment is not possible, then they will advise you that your pre-approval is not completely reliable.
There are several lenders who frequently give unreliable pre-approvals:
- St George Bank: St George’s pre-approvals do not always go to their credit department and almost never go to their Lenders Mortgage Insurer.
- Westpac Bank: Westpac’s pre-approvals are system generated and do not go to their credit department.
- Suncorp Metway: Suncorp’s pre-approvals go to a file owner, but not to a credit officer for formal assessment. Their credit department often disagrees with the pre-approval that was issued by the file owner.
- ANZ Bank: ANZ branches often give on the spot pre-approvals that are not reliable as they have not been to the credit department for assessment.
- NAB: NAB’s pre-approvals generally do not go to their credit department for approval, they are often just an assessment of the customer’s borrowing capacity.
- Rams Home Loans: Rams does not offer pre-approvals, only a confirmation that you appear to be able to afford the loan.
- On the spot pre-approvals: All major banks offer on the spot pre-approvals which are not reliable. You must request a full assessment from their credit department!
Read on to find out how you can get your loan fully assessed by the bank.
Why don’t lenders give reliable pre-approvals?
Assessing a loan application costs the banks a significant amount of money, as the credit staff they use to assess loans are usually highly trained and well paid.
The general public is often unaware of the behind the scenes work involved in arranging pre-approvals. This work can include credit checks, employment verification, fraud checks, credit scoring, data verification and finally a decision.
Australian banks are always trying to reduce the costs associated with doing business. In 2008 several lenders stopped doing a full assessment of pre-approvals, as many pre-approvals did not convert into a settled loan.
In doing so, they increased their bottom line, but left many people at risk of losing their deposit by committing to buy a property at auction, that they cannot finance.
What if I am buying at auction?
If you are buying at auction then you must have a reliable pre-approval! Do not bid at an auction using an “on the spot” pre-approval. Your loan must have been fully assessed by your lender.
There are other risks with buying at an auction, so it is necessary to discuss this with your conveyancer or solicitor before bidding on a property.
If your pre-approval is not reliable, it is important to request a cooling off period or finance clause (depending on the state you are in). This will give your lender enough time to formally approve your loan, before you pay a 10% deposit and commit to buying a property.
How can we help?
Our mortgage brokers have all worked in the credit department for major lenders. Their high level of knowledge and experience means they know which bank will approve your loan.
We know which lenders offer reliable pre-approvals, and how to get the other lenders to fully assess your application. Don’t risk losing your deposit at auction! Please enquire online or call us on 1300 889 743 and one of our mortgage brokers can make sure you get the finance you need to purchase a property.