Also called Approval in Principle (AIP) or Conditional Approval. Essentially this means the lender has assessed your income, liabilities and credit history and is confident to lend you a sum of money. This is conditional to the valuation of property you find being equal to or more than the contract of sale price. This is also conditional to your financial situation not changing adversely since assessment. Once given pre-approval, you will have between three and six months to look for a property.
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Finding a house in this current market can be very frustrating. The key is building relationships with your local real estate agents so you remain in their view when homes do come up for sale.
While looking for a house, it would be prudent to know your maximum limit. You will need a buffer to accommodate a seller's market so set your pre-approval amount to your maximum (You can always reduce the borrowing amount if purchase price is less, but it's a lengthier process to ask lender for more money if you're short). When you find the property you want, it can come down to that 20-30k buffer that will get you over the line. For a 30 year investment you will need to weigh up the pros and cons of more expensive properties.
When you find your house you will need to make your intentions known by placing a small holding deposit with the vendor (seller). You will then be given a 5, 7 or 10 day cooling off period. Ask your solicitor for 10 days so you have necessary time to complete the many tasks before you.
You will have to place a 10% deposit when cooling off expires. If you need to rely on the bank's lending amount for some of the deposit on your home, your mortgage broker has this period of time to organise a deposit guarantee to be given in place of a cash deposit (see Deposit Power website for full details). Your solicitor or conveyancer also has this period of time to do necessary checks on the house, pest, structure etc.
Then the lender brings your pre-approval to a formal approval. A Contract of Sale is presented to you with the purchase price when you place the holding deposit and you sign the contract of sale (exchange of contracts). This is given to your broker, who sends to your lender and organises a valuation on your property. A valuation is returned and if it is in line with the contract price, the formal approval is given, which in turn gives you confidence to place the 10% deposit on your new home.
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There are generally 42 days from placing the 10% deposit to the settlement of your loan. Within the first week of receiving formal approval, your loan documents will be sent to you for signing. Once they are signed and returned they are certified by the lender and documents prepared for settlement and the dispersing of funds.
This involves the transfer of deeds into your name, the dispersing of funds etc. Generally it means you can move in!
Remember though, this is a generalised process for purchasing an established home and not advice. House and land purchases vary slightly regarding the timing and loan structure. Refinances have a different process. Every home loan is different.
About the author: Mark is a Lendi Home Loan Specialist. He specialises in refinance and new purchase loans. He really enjoys helping young couples get into the market, taking them through the loan process step by step, particularly through the sometimes difficult stages of construction.
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