Make no bones about it, purchasing a home can be an incredibly frustrating and soul-destroying experience (unless you are cashed up and do not require bank funding!). The finance application process can be exceedingly difficult to navigate if you don’t go into it with your eyes open.
Following our financial fitness article, you’ve now got yourself ‘fit’ and you’re ready to take the next step with your broker – applying for finance. All the numbers have been crunched, you’ve got a good idea of what you can borrow, and you want pre-approval (conditional approval) so you can start doing the exciting stuff – i.e. finding a home!
The one thing we want to highlight is that pre-approval does not mean your finance is officially approved – it’s just that – pre-approval. It means the bank has taken a look at your current financial circumstances and have deemed that at that time, you meet their funding and serviceability criteria.
Some of the basic items you need for finance approval
Take the time to understand the situation in its entirety before you make any decisions, and as always, seek professional financial advice. Before we get into that, let’s just cover off the basic items that you should be aware of (and that your broker will help you navigate the onerous paperwork and verification requirements.
Some of this is going to be very common sense, but you would not believe how many times we find these minor aspects will slow down a finance application – sometimes to the point you miss out on homes you may have had a
red-hot crack at.
- Bank and credit card statements covering 90-days’ worth of transaction behaviour (see why being financially fit is so important?). Some brokers will give you a link that allows you to share all of your bank history with your broker (transactions and credit etc), via a secure portal. This makes the information gathering process very seamless (and paper-free).
- Three current payslips for all parties of the transaction with all key information on them (name, address, ABN number etc). We’ve seen banks reject payslips because they do not have an ABN, for example.
- You’ll need an accountant’s letter declaring the business has no debts or outstanding liabilities if you own a business. Sometimes this can be a frustrating document to attain, so planning to get it can save you some time.
- Evidence of your pay being deposited into the bank account and an employment letter stating that you work there (sometimes the bank will call to verify).
- You’ll need to provide the most recent Notice of Assessment from the Tax office for all parties.
- License and other identification information.
- If you have a car loan, a statement of the outstanding balance (six-month statement)
- Personal loan statements (six-month statement).
- Documentation identifying all other income, including but not limited to Centrelink, child support agreements, and dividend statements, for example.
As you can see, the bank’s requirements are demanding, and the sooner you begin gathering all of these documents and sharing them with your broker, the easier this process will be. Once this has all been supplied, your application will be lodged, and hopefully approved!
Don’t get too excited… you might need to do it again
One of the most frustrating experiences is that once the initial excitement of receiving your approval fades, you’ll have 90-days to find a property before your pre-approval expires and you must do it all over again. Why is this?
Well, the bank needs to be certain your financial circumstances have not changed significantly – so you do need to ensure your approach to spending and budgeting is consistent. All to often we have clients who get their pre-approval and lose their discipline, ultimately leading to finance rejection when they go to seek it again.
All MAW Money funding partners conduct proper pre-approval finance checks. There are some institutions who do not do proper checks and simply go with on-the-spot approvals or checks whereby the pre-approvals don’t even get to the credit department. Be careful about who you choose and whether the pre-approval carries any weight (especially in an auction environment).
With finance approval in tow, you’re now able to start looking at real estate knowing you can confidently put an offer on a property within your budgetary constraints and that you can realistically afford. Pre-approval gives you an accurate idea of your borrowing power.
Pre-approval isn’t formal approval – it’s conditional
Another thing we like to be very clear with our clients on is pre-approval. The banks have just done an initial assessment – in some cases, pre-approval has not even been fully assessed by the lender.
Many conditions need to be fulfilled before a bank issues formal approval and these could be subject to a valuation of the security property, verification of financial details, whether LMI is required, and the list goes on!
You might put an offer on a property, subject to finance, and despite having pre-approval, your finance is declined. There are many reasons for this – maybe the pre-approval was worthless, interest rates have gone up or if the loan is more than 80% of the properties value, your bank may need approval from the Lenders Mortgage Insurance (LMI) provider (who may decline it). It could even be as simple as they change their policy, or your situation has changed.
Once you’ve put an offer on your property, the process starts again, and you’ll be asked to supply all the above-mentioned documentation (less the annual items). It will be fully assessed and heavily scrutinised. Banks will usually order valuations and conduct their checks on the property and local market activity – this is where further issues can occur when the security property is not valued at the purchase price which can happen and impact your finance approval.
We always recommend keeping on top of your loan documentation – have a file where you regularly save new pay slips or documents and ensure it’s generally accessible.
One of the most important pieces of advice we can give is do not be pressured by real estate agents to agree to very tight and unreasonable finance clauses. Remember, your pre-approval is not final, and in some cases, the time the bank takes to do its due diligence can be lengthily – if you agree to a 7-day finance term, and that term is exceeded, you could lose your deposit.
So, there you have it – a basic overview of what you can expect if you’re looking to purchase property via bank loan. It’s also important to note that this advice is general in nature and would differ depending on your financial situation. We encourage you to seek professional advice before making any decisions.
Pre-approval isn’t formal approval – it’s conditional
So, there you have it – a basic overview of what you can expect if you’re looking to purchase property via a bank loan. It’s also important to note that this advice is general in nature and would differ depending on your financial situation. We encourage you to seek professional advice before making any decisions.