Home loan pre-approval is a preliminary assessment by the lender to determine how much credit you can be approved for when purchasing a home. While pre-approval isn’t required before bidding on a property, it can be highly advantageous. It strengthens your position as a serious and reliable buyer.
In this article, you’ll learn why obtaining a home loan pre-approval before attending an auction is a smart move.
Know Your Budget
Knowing how much you can afford to bid for a property is of paramount importance when attending an auction. A home loan pre-approval provides a clear understanding of your maximum borrowing capacity based on your income, expenses, liabilities, and credit history.
This pre-approval helps you set a firm financial limit for your bid, preventing you from making emotional decisions that could negatively impact your finances for an extended period. By knowing your budget, you can guide your bidding process effectively and stay within your financial limits.
Increase Your Credibility
Having pre-approval documentation for home financing when attending an auction makes you more attractive to agents and sellers. It shows that your financial situation has been reviewed and approved by the bank, and that you are ready to proceed with securing a loan.
This positions you as a qualified buyer, giving you an edge over competitors who haven’t demonstrated their borrowing capacity. Your home loan pre-approval adds credibility to your financial ability to fund your bids, making you a stronger candidate in the auction.
Faster Loan Processing
After winning your dream home at auction, you’ll want to move quickly to complete the purchase. Having pre-approval for your home loan is crucial because it means much of the paperwork and credit checks are already done.
Pre-approvals helps you obtain formal loan approval more quickly and allows you to proceed with settling the property purchase faster. By completing some of the pre-approval steps in advance, you can save weeks of waiting to receive the keys to your new home.
According to Savings.com.au, here are some of the lowest-rate home loans on the market that offer pre-approval.
Lender | Interest Rate | Comparison Rate (%) | Monthly Repayment |
Reduce Home Loans | 5.84% p.a. | 5.89% p.a. | $2,357 |
Greater Bank | 6.04% p.a. | 6.05% p.a. | $2,408 |
MOVE Bank | 5.99% p.a. | 6.04% p.a. | $2,396 |
LCU | 5.95% p.a. | 6.06% p.a. | $2,385 |
Better Negotiation Power
Having a pre-approval letter that specifies your maximum loan amount can be a powerful tool during an auction. It can help you negotiate the final selling price of the property, both before the auction and during post-auction price discussions.
Knowing exactly how much you can borrow gives you a stronger bargaining position with the real estate agent, potentially allowing you to negotiate a better deal and make a more cost-effective purchase.
Avoid Disappointment
Many buyers are disappointed each year because they bid on homes at auction without having a suitable home loan lined up to fund their purchase. Sometimes, lenders conduct a more thorough assessment of applicants’ finances during the final loan approval process than they do when issuing a pre-approval.
In other cases, buyers might assume they can secure funding later, only to be let down after winning the auction. To avoid this potential stress, ensure you have a fully assessed pre-approval before bidding, and make sure it matches or exceeds your current financial position.
Lock in Interest Rates
Interest rates can change frequently. An attractive rate today might rise in the coming weeks before you finalise a property purchase. Getting pre-approved for a home loan can help you lock in the interest rate you want, eliminating uncertainty.
However, if the market rates decline after you lock in a fixed rate, you might miss out on potential savings. Some pre-approval letters include rate lock guarantees that allow you to benefit if rates go down. This approach helps you manage the market’s fluctuations and maintain financial certainty.
If you are looking for the lowest home loan interest rate, here are some of the lowest interest rates this August 2024 according to Money.com.au.
Loan Type | Interest Rate | Comparison Rate | LVR Limit | Lender |
Variable | 5.69% p.a. | 6.15% p.a. | 95% | Laboratories Credit Union (LCU) |
1-Year Fixed | 5.85% p.a. | 7.63% p.a. | 60% | Arab Bank Australia |
2-Year Fixed | 5.74% p.a. | 6.37% p.a. | 80% | Australian Mutual Bank |
3-Year Fixed | 5.69% p.a. | 6.37% p.a. | 90% | Bank Australia |
4-Year Fixed | 5.80% p.a. | 5.90% p.a. | 80% | Up |
5-Year Fixed | 5.59% p.a. | 6.16% p.a. | 60% | RACQ Bank |
Identify Financial Issues Early
During the home loan pre-approval process, any issues with your credit report or other negative factors in your financial status may be identified. Discovering these issues before auction day gives you time to address them.
Having this information in advance allows you to work on improving your credit score or resolving other obstacles. This extra lead time helps you tackle any problems early, ensuring that your dream of owning a home is not jeopardised. Being prepared in advance helps you avoid potential setbacks.
Streamline Your Search
Touring houses only to find they exceed your budget can be a waste of time. Instead, get a clear sense of your price range by obtaining a home loan pre-approval. This helps you focus on properties that fit within your borrowing limit.
Pre-approval outlines how much you can spend and what you can afford in terms of a mortgage. Knowing this information can guide you effectively through the home-buying process.
Peace of Mind
Entering a home auction without clear answers can be highly stressful. Having home loan pre-approval can significantly reduce this stress by addressing some of the uncertainties in advance.
While other bidders may hesitate or doubt their ability to increase their bids, you can confidently move forward, knowing your financial limits and capabilities. This clarity provides reassurance and allows you to make decisive actions with ease.
Plan Your Finances Better
With a clear understanding of your professionally assessed borrowing capability, you can better plan your overall finances. Knowing how much you can spend on a home helps you determine how much you have left for other important goals, such as retirement, your children’s tuition, vacations, and other personal expenses.
Your home-buying journey is just one aspect that should harmonise with, and fit into, an overarching long-term financial plan.
Finally, obtaining pre-approval for a home loan offers several key advantages. It helps you determine your maximum budget, streamlines your property search, allows you to lock in favorable interest rates, and boosts your bargaining power. These benefits highlight why it’s important for savvy home buyers to get pre-approval before bidding at an auction.
The saying ‘knowledge is power’ is especially relevant here: the more you know about your financial position, the stronger your bargaining position will be. To ensure you’re fully prepared for the auction, take the time to do your research and secure pre-approval.
Secure Your Dream Home with Confidence!
Don’t let uncertainty hold you back at your next auction with our professional advice. Get a home loan pre-approval with Mortgage Pros and bid with assurance. Know your budget, increase your credibility, and streamline your home-buying process with the help of our home loan specialists.
Contact Mortgage Pros today to get started on your pre-approval journey and make your dream property a reality!
Frequently Asked Questions (FAQs)
Does pre-approval affect credit score?
Applying for home loan pre-approval involves a credit check, which can temporarily impact your credit score. However, credit bureaus generally treat multiple checks for a home loan within a short period as a single inquiry, minimising the effect on your score.
What is home loan pre-approval?
Home loan pre-approval is a preliminary step in the mortgage process where a lender assesses your financial situation and credit status to determine the amount you can borrow. This approval is conditional, meaning you are approved for a certain loan amount and period, but you still need to find a specific property and complete additional documentation to finalise the mortgage.
Does pre-approval mean you get the mortgage?
Pre-approval indicates that you are likely to be approved for a loan up to a certain amount, but it does not guarantee final approval. You will still need to provide additional documentation and go through a final approval process to secure the mortgage.
Do you need a deposit for pre-approval?
Most lenders do not require a deposit to apply for pre-approval. They base their estimate on your financial profile. However, having a substantial deposit can improve your chances of getting pre-approved.
