Common misconceptions of Pre-Approvals

Myth 1: Pre-approvals are different from home loans.

I'm starting to see a perception that a pre-approval is something different from a home loan application. It's really not. A pre-approval is simply a home loan application where the property is still unknown. Everything else should be assessed like a full application otherwise the pre-approval is completely worthless. This includes a credit check.


Myth 2: If your pre-approval expires, you need another one.

Pre-approvals are typically valid for up to 90 days, never more. In my experience 50% to 60% of pre-approvals expire without the purchase of a property. Before getting a new pre-approval and further credit enquiries (which will start to damage your eligibility for a loan), the question needs to be asked, "What has changed?"
* Has the borrowers financial circumstances changed for the worse?
* Has the lenders policies changed for the worse?

If the answer is no, or if things have improved, then there's no reason to expect a different outcome from a previous pre-approval. Subsequent pre-approvals only create work, expenses and damage credit reports.


Myth 3: You must have a pre-approval to bid at an auction or make an offer on a property.

When negotiating with an agent, they'll often ask if you've got a pre-approval. What they're really asking you is are you pre-qualified to purchase this property. This has led many to the idea that if they don't have a pre-approval that they won't be allowed to bid at an auction.

There's no auction police that are going to prevent you from raising your hand if you don't have a pre-approval. Nobody is going to put a gag in your mouth and stop you from making an offer to an agent.


Myth 4: I went to the bank, they gave me a pre-approval on the spot, I'm good to go.

Not really. What you've got is an opinion, not a pre-approval. The people that you deal with in a branch generally don't have any authority to lend money, that's up to a credit department in the banks processing centre. The computer may generate a letter that says you're pre-approved but there's always caveats, including "Full assessment of your financial position". Until a credit officer actual authority reviews your payslips and other documents, all you've got is an educated opinion that you will get the finance.

This can be especially dangerous. I've seen multiple occasions where someone has relied on the advice over the phone or after a 20 minute appointment that they're pre-approved. They then purchase at auction only for the bank to later reject the final approval, usually only a few weeks before settlement. No finance and an unconditional contract can mean loosing your deposit.


What should you do?

Simply put, get proper advice and ensure it's properly qualified advice...

Have a finance professional perform a proper assessment. This includes checking your payslips, savings statements, tax returns and other documentation. Without seeing the evidence, all you've got is an educated opinion based on unreliable information. The option may be fine, but the information you've provided on which it's based may not be accurate.

Not everyone needs a pre-approval. If you've got a 40% deposit, huge PAYG income and clean credit, you're almost certainly going to be fine. A pre-approval is mostly a sales exercise to stop you from looking elsewhere. With a 10% deposit, casual job and a bunch of credit cards, it's probably high risk and you definitely need a pre-approval. You should still get this determination from a finance professional.

Proper pre-approvals take time. A real human in the lenders credit team is the only person that can approve a loan. A broker or bankers opinion may be qualified and well considered, but they don't have the authority to say yes. If the advice is to get a pre-approval, it will take time, it's not an instant process.

Finally ensure that you get advice from someone who's properly qualified. That's a banker or a broker. Your accountant, solicitor or financial planner are not qualified to comment on matters of credit.

 

For clarification

Direct through CBA bankers - majority of loans are approved without having to send to credit department.

I would suggest 80-90% of my loans currently don't need credit approval, they're approved on the spot the day of application.
The only reason that they need to be sent to credit for further assessment
- Self-Employed using Addbacks
- Company/trust structure
- Multiple guarantors
- Out of policy exception

 

It's a general CBA policy and applies to brokers as well as bankers. Unfortunately I do have a problem with how this methodology is applied.

Like all lenders the CBA runs a credit check and issues an automatic pre-approval on the basis of what the system thinks is a 'vanilla' application. For the most part it's fine, I don't have a problem with this.

But what about the applications where there is something unusual and it's not picked up by the broad criteria outlined? I've got plenty of applications that have been granted a fast pre-approval but I honestly felt they needed further verification. I've contacted credit and my BDM requesting someone actually assess the application but get no support. This puts these clients at significant risk.

From the CBAs perspective, it's a cost-cutting measure. Most pre-approvals are a wasted of time for the bank because they expire. The bank also knows that a lot of pre-approvals really aren't necessary so they cut corners.

I've no doubt CBA bankers do a great job of assessing borrowers circumstances. Of the 80%-90% that don't get a full credit-reviewed pre-approval, there is definitely a percentage of people that really did need the full review and didn't get this.

I know this for a fact because these cases end up on my door hoping I can save their deposit because the bank didn't honour the pre-approval.

There simply needs to be a process where the pre-approval is properly reviewed when the broker or banker really feels that it is necessary.

 

And not all broker/bankers are equal. Often the incentives of the broker/banker are not aligned with that of the clients to get an airtight pre-approval, and this is where I see the issues coming in. People (even Credit) make mistakes on pre-approvals, I have had loans go through a full pre-approval process and then Credit tries to play silly buggers when going for the formal approval.

 

I'm not just referring to pre-approvals but actual approval.

I was was lead to believe that approvals / loans being doc'd go to credit assessors prior for brokers

Not sure on brokers process - but I can send any application to credit for further review

 

@Peter_Tersteeg any experience with Suncorp pre-approvals?
They see they will only issue them on their standard variable product but when you go formal you can change it to the basic, FHB or fixed product.

Have you found this to be the case?

 

I have a few suncorp pre approvals current and I am sure they are on the back to basics product.

 

Pre-approvals are general done on a variable product. When you actually purchase the property, the loan gets customised to the specific requirements, such as variable and fixed splits, etc. The product itself usually has little bearing on the outcome of a pre-approval. The point is to verify that the lender will give you the money within certain parameters, not necessarily to finalise every last detail.

 

I have to agree with this.
One of my loan was approved by CBA system instantly, and loan contract signed all within 1 hr at the branch.
Only branch lenders have the authority to do this, not brokers tho.

 

I wish I'd known this a few years ago - we didn't put an offer on a place because we knew we would have the loan application done in time. It ended up going for much less than we'd anticipated too, so it would have been a great purchase.

But can you please clarify the following for me @Peter_Tersteeg - If someone doesn't have pre-approval, and they bid at auction (successfully), then it turns out that they can't get the loan, where do they stand? I thought buying at auction was a 100% commitment purchase (ie. not subject to the usual finance clause in a purchasing contract).

 

They are contracted to buy the property. They stand to lose 10% deposit and be sued potentially.

 

That is a significant risk. You would likely loose your deposit. At a minimum you should speak to a finance professional prior to bidding at an auction.

Put it this way. If you've you have enough funds to cover a 20% deposit and purchase costs, and you've got clear payslips which show you have enough serviceability to cover twice the loan amount, I'm fairly confident that I could get you a loan. Just let me check those documents first to verify this.

With a 10% deposit and serviceability that barely covers the loan amount, it would be only prudent to get a pre-approval before bidding at auction.

In all my purchases, I've only ever once actually had a formal pre-approval in place.

 

I'm going to add another one to the list...

Myth 5: A pre-approval is a guarantee of finance.

A pre-approval always comes with conditions. Generally the conditions are that your financial circumstances don't change and that the property you purchase is suitable (the valuation needs confirm the purchase price and the property has to meet the lender's suitability criteria). Sometimes something changes then the lender is under no obligation to give you the money.

This leaves you with three options. Either you find alternate finance with another lender, you exit the contract if you have a way out, or you default on the contract with all the consequences that come with this.

There's another reason why lenders may not honour a pre-approval. The lender decides that they no longer want to fund the loan. Earlier this week we had a very rude reminder of this. A pre-approval was put in place, but in the 6 weeks between the pre-approval and the purchase, the lender had a change in their risk tolerance.

The pre-approval should have locked in the lenders policies at the time of application and in their announcement the lender actually confirmed that this would be the case. When the time came, the lender simply found reasons to decline the application.


How to protect yourself from this:

There's really no way to protect yourself from this situation as a borrower. A finance clause can help, but not at an auction. Your banker or broker should be on top of lenders risk tolerance or policy changes, but on one hand we get an assurance only to have it proven false later on.

The best insurance is to simply have a backup plan. If you're stretching your financial resources to the point where only a very small sample of lenders will deal with you, you're putting yourself in a position where there's no backup plan if things go wrong. A backup lender might not be the cheapest or have the best features, but they can get you out of trouble when you really need it.