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Bank vs Broker Pre-Approvals – What’s the Difference?

Getting a pre-approved loan is an exciting move towards your next big purchase, whether that’s buying your first home, upgrading your current home or investing in a new property. Having a pre-approved loan will be an advantage to your purchasing journey because real estate agents and sellers gravitate towards certainty, especially when the seller needs to liquidate their property quickly. A pre-approved loan will demonstrate to the sellers that you’re ready to make a serious purchase and will put you ahead of the game amongst other applicants. Below, are more perks that come with your pre-approved loan:

  • Efficient home selection: A pre-approved loan will give you a clear indication of how much money you can borrow upfront, giving you a better idea of what you’re capable of buying. This helps narrow down your options and make your purchasing journey more efficient as you won’t be wasting your time inspecting properties that are out of your budget.
  • Shop with confidence: Armed with a clear budget derived from your pre-approved loan, you can confidently participate in auctions and bid for your dream property without the fear of placing a bid that’s outside your borrowing capability. This will open up more opportunities for you to grab a great deal on a property.
  • Serious buyer: Having a pre-approved loan often means that you are in an excellent financial position. This shows the real estate agent and sellers that you are unlikely to be denied financing when it’s time to seal the deal. In some cases, the seller might offer you discounts or additional benefits to quickly move the transaction forward.

Now that you know the benefits of having a pre-approved loan, below, are some options that will help you determine your borrowing power.

Online Home Loan Borrowing Calculator

When you Google “how much money can I borrow?” your search will be flooded with different mortgage calculators offered by banks, credit unions, financial comparison sites and more. These online mortgage calculators have become popular because they are free, simple to use, and require no interaction with the bank or a broker. However, they will not provide you with an official pre-approved loan; they only offer a general estimate of your borrowing capability.

In most cases, the results attained from these online mortgage calculators will be inaccurate as they do not take into account your financial circumstances, make allowances for a lender’s policy and are open to interpretation. To get an official pre-approved loan, you’ll need to approach a bank or speak to a broker.

Approach a Bank

You can obtain an official pre-approved loan directly from the bank of your choice. When you approach a bank, you’ll often speak with the branch employee or the Mortgage Lending Officer. Generally, they will take the information you provided, which include your income, your deposit and any other essential details and enter them into their system. This system will automatically assess your eligibility and provide you with a pre-approval letter.

Suppose your financial circumstances are not complicated, and you have access to all the required information. In that case, approaching a bank can be a quick and effective way to obtain an official pre-approved loan. See below for some benefits a bank can offer you:

  • Banks generally have a large selection of products, and bigger banks will have loans to suit most borrowers.
  • A bank can explain their mortgage offers and suggest one that best suits your needs. In some cases, they can provide detailed advice similar to a Mortgage Broker.
  • A lending specialist from the bank will help you with your loan application.

The downside of approaching a bank is that often your loan application won’t be reviewed by a Credit Assessment Officer (who determines the outcome) until you locate your property and apply for a formal loan. In this case, there is a possibility that your loan application can still be rejected even if you have a pre-approved loan. Have a read of the example below.

You’re working in the mines earning $100,000 per year, and so this is what you advise the bank. The loan is then pre-approved, and you find your dream home. The loan is now sent off to the Credit Assessment Officer to make their final decision.

They will review your income documents and will break it down into categories including base wage, allowances, overtime, deductions and more. In this instance, the bank’s policy is to accept 50% of overtime and allowances – suddenly that $100,000 per year income is reduced to $60,000 a year in line with the bank’s current income policy.

You’re now at the crucial moment when you need to have the finance to meet your contract of sale conditions, and the bank is now advising you that you are not eligible. View original source here.

This situation often happens when your financial circumstances are more complex and cannot be critically analysed using the bank’s automatic assessment. In this case, the safest option is to speak to a broker who can assess your full financial circumstances before approaching a bank.

Speak to a Broker

A broker will work with you to obtain an official pre-approved loan. They will assess your overall financial circumstances, taking into considerations the finer details like the structure of your income. Using the information you provide, your broker will reach out to their network of lenders and find a policy that is best suited to your needs.

As mentioned previously, the automatic bank assessment might interpret your financial circumstances significantly different from how the Credit Assessment Officer interprets it, and this can result in a rejected loan application. Your broker can reduce this risk because in the process of obtaining your pre-approved loan, in most cases, they would need to approach the Credit Assessment Officer and have them review your information and ensure they agree with the broker’s recommendation. This will produce the best outcome as there will be no surprises at the final stage of your loan application.

Suppose there are changes to your financial circumstances during the lifespan of your pre-approved loan (typically three months). In that case, your pre-approved loan can become invalid for your new circumstances. Instead of reproaching multiple banks yourself, you can provide the updated information to your broker, and they will help you search for another policy that best suits your new financial circumstances. In addition, a broker can offer you some guidance in maintaining your finances while you are on pre-approval. They can also help re-assessed your financial situation and check if you are still on the right track. Having a broker will give you the peace of mind as you progress along your purchasing journey.

Below are some more advantages of having a broker:

  • A broker can guide you through different mortgage options and help you compare rates, fees and features.
  • Brokers have access to hundreds of loans from a panel of 20-30 lenders.
  • A broker can give you expert advice as they have experience and knowledge across a large section of the market.
  • Some experienced lenders can turn a declined application into an approval based on their investigation.
  • The broker’s service is usually free.

If you require assistance with your loan application process, the team at FutureNow Finance are here to help. We can help assess your current financial position and assist you with a pre-approval home loan application. Call 1300 013 730 or email hello@futurenowfinance.com.au.