How to get pre-approval for a home loan
If you’re well on your way to going finding a house to buy, then it’s time to get your home loan “pre-approved”. A formal pre-approval from your bank tells you how much you can borrow, and is a common sales and purchase agreement condition.
TSB's General Manager of Customer Solutions and Service, Sean Edwards, recommends that all buyers get pre-approved. It gives you some certainty and allows you to move forward and make a conditional offer when you’re ready to buy a house. “Then we’re all poised and ready to finalise the loan details and get them into their new home,” says Edwards.
Banks don’t pluck a figure for pre-approval out of the air. By law they are required to ensure your mortgage is suitable for your needs, that you can comfortably afford it, that you understand the key terms of the loan, and that the agreement is not oppressive, says Edwards.
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Starting the home loan approval process
When you’re ready to take the pre-approval step and to apply for a home loan, contact your bank’s mobile mortgage manager or an independent mortgage adviser., Independent mortgage advisers work with multiple banks and other lenders, and it can be helpful to have this wider pool to choose from.
They will ask you for information so they can fully understand your financial situation, says Rupert Gough, chief executive of Mortgage Lab.
As part of your home loan application, you will need to outline the nitty-gritty of how much you earn, any outstanding debts, how many credit cards and overdrafts you have access to and other financial details. Some examples of paperwork that you’ll need to supply are:
- Pay slips
- Bank statements (usually three months’ worth)
- Utility bills
- Any other important documents relating to your financial situation
The mortgage pre-approval also requires evidence of your deposit and how you came by that money, says Gough. Lenders prefer borrowers who have proved they’re good savers over those who borrow from the bank of mum and dad, they’re less risky.
Each lender has its own criteria for assessing your finances and how much you can afford to borrow, says Gough. They each have standard calculations for living costs. However, each places different weight on various types of income such as salary, bonuses, commission, self-employed earnings, and rent from flatmates. They will also look at incoming or outgoing child support payments as part of these credit checks.
Don’t try to hide anything from the bank says Gough. Lenders go through bank statements with a fine-tooth comb. They’ll also check your credit record carefully to ensure you always pay your bills on time.
The banks tend to be conservative in their number crunching. Most first home buyers will have seen a version the meme: “The bank says I can’t afford a $650 a week mortgage, so I’ll have to continue paying $850 rent”.
The issue here is that the bank stress tests your ability to pay a mortgage. Floating interest rates may be 2.5 per cent, but the bank will do its numbers assuming you’re paying say 6 per cent interest. That ensures you can afford to pay the mortgage if economic conditions worsen and interest rates rise.
Most banks are still asking questions around Covid-19, says Gough. They will want to know if your income dropped during lockdown, if you were on a wage subsidy and so on. When your lender is satisfied that you’ll be able to finance your mortgage based on their specific criteria, then they will be able to grant you a pre-approval letter.
What’s next after you get pre-approval letters?
One thing to be aware of is that pre-approval is an offer with conditions, not a guarantee that you’ll get the money. If your personal situation changes, such as losing your job, the lender can pull out.
The lender might not renew the offer if the New Zealand economy went through a sudden shock in the meantime. Also don’t expect approval overnight, says Gough. The pre-approval process will take a week or two.
Always make sure your lawyer checks the LIM, title and mortgage paperwork before you make an offer. Think of pre-approval from your lender as a type of conditional approval. Your lender could backtrack on pre-approval if the property has problems such as unconsented works, for example. Alternatively, pre-approval may not apply to a leasehold property or shoebox apartment under a certain size.
Pre-approval usually lasts three months. It can be renewed for a second three months, says Gough. Beware, however, that if your circumstances have changed the lender can pull out of the deal. Don’t be that person who has taken out buy now pay later deals in the meantime and no longer qualifies for the pre-approved loan.
Rules can change quickly, especially in the wake of major crises such as the global financial crisis (GFC) and now Covid-19. So don’t make assumptions that you will get pre-approval for the sum you want. This is just one portion of the house hunting puzzle but it's a crucial one - make sure that you have all the documentation together for home loan application forms so that you can engage as needed even if circumstances change.
Wanting to know a little more about buying a home, or about alternative financing for real estate like using your KiwiSaver withdrawal? Check out our first home buyers hub - we've got the lowdown on everything from LIM reports to what to buy when you're moving into a new place.
