So you’ve found the house of your dreams, checked for mould and strange designs and now you’re placing your first bid.
The numbers quickly increase until - “SOLD”. You’ve bought the house.
You’re just about ready to pop the champagne when you realise - you haven’t got pre-approval, and that mistake is going to sting.
“Generally, sellers will require a 10 per cent deposit once the post-auction contract is signed, and you will lose this in full if you can’t secure finance,” Finder.com.au insights manager Graham Cooke told Yahoo Finance.
“In Sydney, that could be over $100,000 down the drain, so it pays to be sure.”
However, outside of helping you out when you do make the purchase, having pre-approval also helps you make the winning bid in the first place.
“Pre-approval does a number of things for you: it effectively sets your limits, allows you to bid and negotiate with confidence, and makes you look like a more serious buyer,” Cooke said.
“Having it can also give you more bargaining power. The estate agent will take you more seriously, and the vendor may be more willing to accept a reasonable, but below expectation sale price if you’ve secured finance – especially if they’re looking to sell immediately.”
Typical loan pre-approvals are valid for three to six months, beyond which new applications are required.
But, it’s important to remember that pre-approval doesn’t mean the lender is obligated to approve a loan application, only that they’re willing to loan that amount of money.
“If you have all the necessary documents ready, most lenders will be able to provide pre-approval within 48 hours. Bear in mind that the bank may require a lot of documents, including up to six months of payslips and bank statements, so don’t leave gathering them to the last minute,” Cooke said.
How do I get loan pre-approval?
There are a couple of things you can do. It’s a good idea to regularly review your credit file as this will help you understand where you’re standing financially.
Additionally, paying off debt is a critical step.
“Be proactive about trimming any existing debt that you have. For instance, if you have three credit cards with different providers, you may want to consider consolidating this debt,” Cooke said.
Comparing loans will also help buyers figure out what the best deal is for them, as will consulting a broker.
And, borrowers should be careful not to over-apply.
“Making multiple pre-approval applications can harm your credit position and your ability to qualify for finance. Multiple enquiries are a red flag to lenders, as they may assume you’ve been rejected for other loans,” Cooke said.
Cooke’s advice comes as auction clearance rates - or the rate at which properties sell at auction - rebound in Sydney and Melbourne, following a 12 month slide.
While 55.2 per cent of homes in Sydney sold at auction this time last year, now 81.5 per cent are selling.
In Melbourne, that number has increased from 59.9 per cent to 70 per cent.
Make your money work with Yahoo Finance’s daily newsletter. Sign up here and stay on top of the latest money, news and tech news.