PRE-APPROVAL CARNAGE: A FIRST HOME BUYER TRAP
Make 2022 The Year You Start Your Journey As A First Home Buyer
Hey guys, this is going to be a quick podcast today, but it’s one of the most important podcasts I’ve put up all these years and that is the “Pre-approval Carnage” we’re experiencing out in the home loan market, and it is a massive first home buyer’s trap. Let’s, jump straight into it!
Hello, and welcome to the First Home Owner Concierge Podcast, where our sole target is to get you into your first home. Now, onto today’s topic!
What is a Pre-Approval?
All right, before I go into the current situation, I want to explain “pre-approvals” because it can mean a lot of different things as it vary from lender to lender – how the lender looks at it can actually tell how strong that pre-approval is.
What generally happens is you go to the bank, you get pre-approved, and that way, it gives you peace of mind to know what your budget is for when you buy a home.
When you go to buy a home, what happens is you’ll sign the contract, you’ll send that contract to the bank, they’ll have it valued, and then they’ll assess the loan. Ideally what would happen is they would approve it based on the pre-approval they’ve issued.
What a lot of people are learning now is that, that’s not always the case. That’s because different pre-approvals mean different things.
So in my mind, a proper pre-approval should basically be the lender saying, “Hey, we’ve looked at your credit file, we’ve looked at your income, your bank statements, your expenses – everything we’ve looked at, and we’re happy with everything. We just want to make sure that you go out there and buy a property that’s worth what you’re paying for.”
Unfortunately, that’s not all of the approvals out there and actually not many lenders approve like that.
Because interest rates have been raising fast, people’s borrowing power has been dropping below what they thought they were pre-approved for, and this means a lot of potential first home buyers are falling over right at the last hurdle.
Now, I’ll just touch on a few ways that lenders pre-approved things.
Firstly, you’ve got the lenders that give you a pre-approval, but it’s actually just an electronic pre-approval. Basically, you’ve put an application in, but the bank has not looked at any payslips or any of your documentation. It has just gone through the computer, then the computer’s basically checked your credit file, ticked that off (sometimes they haven’t even ticked that off). They’re just saying your credit file’s clear but the assessor still has to go over it.
So, if you say you are preapproved for $500,000 and the bank hasn’t even looked at your income, I can tell you that’s very risky.
Another situation is, some people think they are pre-approved when they’re actually not. Believe it or not, some mortgage brokers find this quite unbelievable, but some people just go online and might do a lender calculator, a borrowing capacity calculator, and already think that’s a pre-approval! Again, those calculators are not accurate most of the time.
Banks reneging on the pre-approvals
Another way banks do pre-approvals (and this is the hard way), is they give out these pre-approvals and then they just turn their back and say, “Oh no, we’re going to assess that loan now at the current interest rate”, and that’s because interest rates might have risen. Say it might have been two months since the pre-approval went in and interest rates went up 1%.
That’s very hard because in some cases you can turn the lender around and the lender will say, “Yes, we’re happy to honour our original pre approval.” But in a lot of situations, they don’t. Now this leaves people in a sticky situation because if they bought a property then all of a sudden at the last minute the bank’s kind of pulled the rug out from under them, then it’s going to be an incredibly stressful and incredibly painful experience.
What you’ll be left with is trying to extend the finance clause. Most times when you buy the property, you have two weeks to sort the finance out. Within that two weeks, the bank should be able to come back and tell you, “No, we’re not going to approve the loan”. That means you have to extend the finance but then put in a loan application somewhere else, if the loan application can get approved somewhere else.
All in all, it’s an incredibly stressful experience and you definitely want to avoid that because at the end of the day, there’s an elevated chance that your purchase might fall over.
How to avoid a stressful experience from pre-approvals
So, what’s the workaround here? The workaround is that you work with a really good, experienced Mortgage Broker and have open lines of communication.
A good Mortgage Broker is going to know which lenders are going to honour the original pre-approval amount or they’re going to constantly call the lenders.
I’m kind of in that boat of just confirming and calling lenders unless I’ve literally just done another pre-approval with the same bank and I know that they’re going to honor the existing pre-approval and your borrowing capacity.
So, a good Mortgage Broker is going to do that. They’re going to keep the lines of communication open because it’s incredibly important more than ever since there’s just so much scope for things to go wrong at the moment. Until things calm down for quite a bit, this is just the way it’s going to be.
Unfortunately, it happens in banking all the time. No one really expected the rates to go up half a percent per month for I think, four months.
Now, when these unexpected things happen, then the bank’s abilities to deal with it become harder, therefore they clamp down on their rules.
Unfortunately, this is just the way things are for now and they’re going to be like this for a little while, so beware of the first home buyer trap.
Get in touch with us
That’s the episode for today. If you are looking to get into your first home, then I suggest to book a time with the team here at Will Bell Mortgage Broker. We’ll be happy to assist you if you are having questions about getting into your first home.
Because the market is very negative at the moment, I suggest you watch some of the other episodes that I’ve put out around because I still believe, based on my 15 years’ experience in the finance industry, first home buyers should just get into the market as soon as they can because if you ask right now first homeowners that bought at the top of the GFC, they’ve got no regrets.
That’s all I wanted to leave you with today. Again, feel free to chat if you got any questions. Cheers!
Thanks for listening to today’s episode of the First Home Owner Concierge Podcast. If you’ve got any questions or you would like to get into your own home, or you just want to stalk me online, you can search Will Bell Mortgage Broker on either Google or Facebook.
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