A Quick Guide to Approval for Home Mortgages or your Real Estate Property
Pre-approval for home loans, or mortgage prequalification, are conditional approval.
Pre-approval can be sought for loans of private residential properties or real estate property. Such loans are known as pre-approved loans.
During this period, financial documents have to be submitted to obtain a formal offer.
After which, a Letter of Offer will be issued if the loan is approved.
Having a pre-approved real estate home loan lets you know the loan quantum you are eligible for and the monthly repayment amount.
A pre-approved home loan is non-binding for both the applicant and the financier; therefore you are allowed to change financiers even after obtaining an approval for a pre-approved real estate home loan from the financier.
You may even change loan package with the same financier that you have obtained the pre-approved home loan from.
Why you should have a pre-approved real estate home loan?
1. Narrow down the property search
Having a pre-approved home loan lets you know the amount you can spend on a real estate property you know you can afford to buy.
Thus you will not be wasting time viewing properties that you later find to be out of your budget when you apply for that loan.
This also explains why some real estate property agents only work with buyers who already obtained a pre-approved home loan.
It also gives you better bargaining power with the seller.
2. Fast commitment
Being certain that you can afford that property you have found allows you to commit immediately when you have found your ideal property, again it gives you more power to bargain with and maybe obtain that property at a lower price, therefore saving you a bit of money, also there is no waste in time between obtaining the loan and closing the transaction.
Indeed during that interval, some other buyers may beat you in buying the property.
3. Forfeit of Deposit
It also allows you to beat other buyers from buying, you may choose to sign the option to purchase (OTP) and lay down the deposit immediately giving you a better chance at purchasing that real estate property.
You should be very cautious though as this may not be the best course of action for you, as you may not be able to obtain an ideal loan with a favorable rate, or even if you do it may be with a lower loan quantum. In the latter case, the deal may fall through if you do not have sufficient cash.
Should the deal fall through, you will have to forfeit part or the entire deposit.
In another scenario, you may be able to obtain the maximum loan-to-value ratio (LTV), but the valuation of the property has fallen during the interval in which you had signed the option and obtained the loan.
For example, the purchase price you agreed on is $1.5m, but when you have obtained the loan the valuation of the property has dropped to $1.2m. Assuming that you are eligible for an 80% LTV, you thought you could obtain financing up to $1.2m, but because of the lower valuation you can only secure $960,000. If you do not have the means to make up for the $240,000 difference, you cannot seal the transaction. However, such situations are extremely rare and only happen during financial crises.
Things to be cautious about
As a pre-approved loan is provisional, the bank still can reject the application if there are any changes to your financial status.
So avoid taking other loans or changing jobs before the Letter of Offer is issued.