Those in the market for a home loan are being urged to scrutinise the details of their home loan application, as lenders may be giving ‘pre-qualification’ under the guise of ‘pre-approval’.
Many lenders give home loan pre-qualification under the guise of pre-approval, leading to a false sense of confidence.
- Pre-qualifying doesn’t guarantee home loan approval.
- Pre-qualification is often not a comprehensive assessment and could impact borrowing power.
- A red flag when seeking pre-approval is you haven’t been asked to supply any verification.
- Pre-approval gives you an edge in today’s housing market as it’s more appealing to agents.
Veronica Millman, Credit Assessor Lead at Tiimely Home, says there is an informational gap between what consumers believe they are getting and what they are receiving when it comes to pre-approval for a home loan.
Veronica says, “A lot of lenders put pre-approval when they’re referring to pre-qualification so a lot of language within the industry, such as conditional approval, pre-approval and quick qualification are all bucketed into the same ”.
Pre-qualification vs pre-approval.
Pre-qualification for a home loan only means that you meet the lender’s basic requirements at a specific moment. You’ll get a rough estimate of what size loan you can afford but it is not a guarantee that you’ll get approved for a home.
Whereas pre-approval is a full assessment that involves a lender verifying income, assets, liabilities, serviceability and credit score. A preliminary review of the financial portfolio is done and, if all goes well, a letter of pre-approval is issued which is a commitment for financing up to a certain loan amount. However, it’s still subject to the final property approval.
Veronica adds, “Pre-approval means lenders have already done all the work to 100% validate everything the customer has told them. It’s not just based on what the customer is saying because sometimes, that is incorrect, or they might assume things are okay when they are not. This helps avoid potential issues by narrowing down factors that could go wrong.
For example, you might have a pre-qualification where you say ‘I earn this much’ and ‘I get this bonus’ and when a credit assessor adds that up, affordability looks great. When we do an actual assessment, we realise that your bonus isn’t eligible because you only got it once and we don’t know if you’re ever going to get that again meaning your affordability goes down”.
The benefit of actual pre-approval is that your application is checked against your income and your statement and it’s not just based on figures someone is estimating.
Whether you’re a first-time home buyer or looking at buying an investment property, it’s important to know how you qualify when applying for a home loan.
Pre-qualifying information given under the guise of pre-approval is misleading.
The home loan application can be confusing especially when pre-qualifying information is given under the guise of pre-approval as it’s one of the most misleading terms in the industry.
Veronica says, “A pre-qualification given under the guise of a pre-approval either makes people feel too confident, as it’s not done the work customers thinks will be done. Then, when they buy a house, they often wonder why there is still a lot of paperwork and checks left to do.
On the other hand, some people might have already been burnt by pre-qualification or heard similar stories, and not trusted an actual pre-approval.
They may not have confidence before they buy a house and might not be willing to make any auction purchases or only make an offer subject to finance, making it harder to find a property because you need to have that edge at the moment.
The consumer isn’t getting the full picture of the work being done, either way”.
Many factors aren’t considered in pre-qualification which could impact borrowing power.
As there is no verification with pre-qualification, you may be given an overestimation of your borrowing power. A pre-approval works on a comprehensive estimate meaning you can go to auction or make an offer with confidence.
Veronica adds, “If you were looking at a pre-qualification that used what the customer stated, those figures come out massively different because it’s not factoring in those extra things that go into a conservative assessment.
There are so many factors that customers might not think about. For example, a Higher Educational Loan Program (HECS-HELP) debt is a factor to consider because many home loan calculators don’t ask if you have a HECS-HELP debt and how much that is, which is considered in a formal assessment.
Additionally, customers don’t think, for example, that a novated lease is considered debt and they might not state that but we do need to consider that as an ongoing debt. Things that customers might not think to say and that won’t come out until the full assessment is done could massively impact their borrowing power”.
A red flag is if you haven’t been asked to supply evidence of your financial situation.
The main red flag when seeking pre-approval is if you haven’t been asked to supply any evidence of your financial situation.
Veronica adds, “It’s common for lenders to not do a credit check during pre-approval which you might think is favourable, but that’s not a good thing because what if something negative comes up on the credit history? It’s better if they’re checking your credit history and confirming your true financial situation.
Another red flag is if it sounds too good to be true; you submit some details in an online form and then you instantly get an answer. That’s because the lender is likely doing a generic calculation, it’s not doing an assessment. Assessment comes down to verifying and some lenders don’t verify anything.”
Pre-approval gives buyers a competitive edge in today’s housing market.
Verification in the digital process involves linking your accounts for evidence of your income such as salary credit on a linked account, a payslip or an income statement. As well as showing evidence of debts such as providing your credit history or statement of debts.
It also involves verifying you have the deposit through a statement, statutory declaration if it’s a gift or your shares statement if you’ve got some shares that you want to sell.
Pre-approval doesn’t guarantee a home loan, but it gives buyers more confidence when shopping around and an edge in today’s competitive housing market. Agents can be pretty tough about you needing to have pre-approval because they don’t want any time-wasters.
With pre-approval, your offering would be more appealing as an agent would trust that you’re serious and less likely to encounter any issues heading into settlement, whether that’s for auction or just talking about offers.
Veronica adds, “The biggest benefit to having timely home pre-approval in today’s housing market is it can reduce your time to full approval and settlement period. Much of the groundwork has already been completed, including verifying your financials. This can be advantageous for you, and appeal to real estate agents, as it means they receive their commissions more quickly.”
About Tiimely Home, formerly Tic:Toc Home Loans
Tiimely Home is Australia’s original digital home loan, offering a faster, simpler and more cost-effective way for Australians to access home finance. Tiimely Home partners with AFG to provide access to 30+ lenders via its in-house broker service, and Tiimely Own home loans are backed by Bendigo and Adelaide Bank. Tiimely Home is a subsidiary of Tiimely, and utilises its platform technology to prove its solutions in the market and enable better customer experiences.
