A mortgage pre-approval is often an important step in the home buying process. It can give you, as the homebuyer, a sense of security when making an offer on a property. It also indicates to sellers and real estate agents that you’re a serious contender who has the ability to repay a home loan. And if you’re buying at auction, it’s really a non-negotiable, so you know you have the funding you need to complete an unconditional contract.
But not all pre-approvals are the same. Some may be a real indication of how much a lender will ultimately lend you, and some might only be a system generated indication of your general borrowing power for a particular lender.
And the terminology of mortgage pre-approvals can often be confusing for homebuyers as well. Pre-approval vs approval in principle? System-generated vs fully assessed?
What may seem to be minor linguistic variations are actually very different concepts and can make a huge difference to your home buying journey.
So what do they each mean? Let’s take a closer look.
In general, all mortgage pre-approvals are a preliminary tick from a lender that they have looked at your financial situation and are likely to approve you for a loan.
Pre-approvals are a great way to get an idea of how much money a bank or lender is willing to lend you, so you can have some parameters in your property search. But make no mistake – a pre-approval isn’t a promise. Even after a lender has granted you a pre-approval, they’re under no obligation to give you full mortgage approval.
One thing about pre-approvals which can make them a bit tricky is all the variations in terminology. Different lenders often use different terms to describe the types of pre-approvals they offer. And these terms can mean very different things between lenders.
It’s important for you to understand exactly what you are getting and what it means for your home buying process.
Let’s explore some common terms and what they might mean.
Borrowing power is not pre-approval. As an aspiring home buyer you will want to know how much money you can borrow. You’ll find many borrowing calculators available online that can help you to get a rough estimate of how much a lender might be willing to lend. But this doesn’t mean you have any kind of pre-approval.
It’s also important to keep in mind that if an advisor or broker gives you a loan amount without you filing an application, this is still not considered pre-approval.
The terms conditional pre-approval, system pre-approval or indicative pre-approval all tend to mean the same thing. Essentially, the lender is indicating that you are likely to gain full unconditional approval (a stronger pre-approval) if specific conditions are first met. These usually include verification of certain information, property appraisal, etc.
Conditional pre-approvals are often system-generated. This means that you usually receive the results much faster, but the assessment process isn’t as thorough. In addition, your pre-approval may come with more conditions and you may have a greater risk of failing to secure loan approval.
While many people use the terms mortgage pre-approval and approval in principle interchangeably, they are very different.
An approval in principle or a fully assessed pre-approval requires a full credit and responsible lending assessment. It’s also almost always a manual assessment by a loan agent who looks at all your data and documentation and has made a full assessment to determine whether or not you’re a good candidate for a loan.
This usually takes a lot longer than a system-generated pre-approval and demands a lot more paperwork from you. But with this type of pre-approval you can feel secure knowing that your situation has been thoroughly evaluated by the lender.
Remember that every lender will have their own terminology for this type of pre-approval. So make sure you really understand what each particular lender might be offering you no matter what it’s called.
It’s also vital to remember that, regardless of what it’s called, a pre-approval is never a guarantee of funding. But depending on how the assessment is made you can be more or less confident that you will be able to rely on that lender and that loan amount for your home purchase.
Put your new terminology to good use by applying for a mortgage pre-approval today. This is one of the first steps we recommend in your home buying journey.
As experienced Brisbane mortgage brokers, we can assess our extensive panel of lenders to find the right pre-approval fit for you.
Get in touch with a member of the Stapleton Finance team today. We’re here to help!
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