The Ultimate Guide To Renovation Course - Module 5: Pre-Approval & Lenders Terminology

So where do you get the money you need a loan? Let's start at the beginning of the process, the pre approval. Now getting pre approved for a loan prior to putting in any offers is obviously extremely important. But what most people don't know is the different stats stages of actually going through and getting that loan approved. So I want to have a look at that for you. Essentially, many people believe that if their lender says that they have pre approval, which is sometimes called conditional approval, then the lender has done all the checks and balances and you can go with confidence and purchase a property. Now the reality is that many lenders will do a cursory evaluation and approve the loan. And in actual fact, all they've really done is they've registered your interest, they've typed in the information you've given them into a simple calculation and said yes, you can borrow that amount. This is not a full evaluation. And in actual fact, when it comes to getting a formal approval, you might be really, really upset to find that you can't get your loan. Now other lenders will do a full evaluation, even contacting your employer to verify your employment. Obviously their pre approval is worth more than the previous case. So you need to know what lenders are saying and what you need to ask of them. If a lender tells you you have pre approval, then ask if it has been fully verified or is it based on information that you've just given them. You need to know what you can afford so you can go with confidence and buy your property. A formal approval or being formally approved is when you have had not only your situation evaluated, but the property you're buying or refinancing has been validated as well. That is the valuation has been done and you'll be receiving the contract from the lender to sign so that the funds will be available at settlement. Thus, when you're told you have a pre approval, make sure if you go ahead with the purchase that your pre approval is really worth the paper it's written on. In addition, protect yourself by having a finance clause in your letter of offer. Now we'll go into that in the next module. This allows you to get the property off the market, but you have the seller agreed that the lender needs to give some time for you to get the final approval, I.e. get the valuation done before you formally exchange the contracts. Let's look at lenders terminology. Many people fall into the trap of thinking their loan has been or will be approved when a lender, or even worse, an online calculator indicates they have sufficient borrowing capacity. Based on this assumption, they naively go off and buy a property at auction, only to be told by the lender after the purchase that on close for assessment they can't borrow as much as they originally thought. This is why it's important you know the key questions to ask the lender when they're assessing your borrowing situation. Servicing Assessment the definition of servicing assessment varies broadly across lenders. Essentially, this is the first step step in the loan application process. It involves an estimate of your ability to service, I.e. pay back the loan. On the one hand, it could mean a mortgage broker or bank loans officer plugs your income and expenses into a calculator and gives you a she'll be right mate answer. Or the same person may look over your payslips, deduct your help or hecs additional super repayments and give you a more complete picture of what you can really afford. At this point, they may also make an inquiry on your credit file, but this does not constitute a full evaluation or verification of your circumstances and it's not considered in any way to be a loan approval. So let's look at that the pre Approval after the mortgage broker or lender has completed the servicing assessment, you need to submit the actual loan application. Upon submission of your application, the lender will verify your employment, your income and assess your credit file to see what other applications you've made for lending or finance in the past. They will then check that you actually have the funds available to contribute to the loan, that is the deposit and costs of buying. This comes from bank statements no more than four weeks old, but covering a period of up to six months. If you are accessing equity or refinancing an existing loan as part of this process, it takes at least six weeks to move a loan from one lender to another. So if you require funds to contribute as a deposit, you need to get this done well in advance. As stated earlier, do not be fooled by a pre approval. Some lender approval processes simply involve a computer check that the figures provided are correct. They may not check your actual documentation at this stage. It is not uncommon for people who thought they had a pre approved loan to go to auction on a weekend and purchase purchase a property. Imagine their shock when they visit the lender on the following Monday with a signed contract and the lender informs them that the loan was not actually approved. As if that isn't bad enough without considering the additional stress involved running around trying to find another lender. The worst thing is the first lender has probably hit their credit file. So any subsequent lenders will want to know why they were declined or why they have left that lender. These lenders may not even ask why the initial application was declined. They could just assume the worst and decide that they too do not want to take on the risk of lending to you because someone else didn't. So the process continues and the clock is ticking. Now there's only 30 days left to complete the purchase and there are two hits on your credit file. In fact, their first course of action after the initial pre approved misstep should have been to engage an experienced mortgage broker who knows where to turn and could have helped them avoid another declined loan application. To avoid this type of misunderstanding in the first place, it pays to know that if you have been given an approval and you have not had to submit proof of your income along with your expenses, credit card statements and payslips, then it is more likely than not that you have not been through a full approval process and you have not received an official pre approval. Here's a cautionary tale. The advertisements that have aired on TV in recent years claiming loan approvals in 60 minutes are not true for 90% of applicants. While the message infers an approval is given in 60 minutes, what actually occurs is a servicing assessment via a lender's calculator only. As we know, this is not a full and thorough assessment and does not equate to an approved loan application. Now, it is not uncommon for a buyer to be caught out with what they think is an approved loan, only to find out after they have been to auction that the loan approval process was not completed. You need to understand if the loan you've applied for has been fully approved or not. That's why it's important you get to know this terminology. So conditional approval. This is usually granted on the assessment process mentioned above. Once it's completed, conditional approval means the lender might put conditions on the loan during the approval process. The conditions usually relate to the property and the purchasing process. For example, the lender may require that the valuation comes in at the agreed purchase price or that the mortgage insurer is happy to insure you. Be aware that addressing these conditions can create hurdles that take time to work through. Now I want to move on to mortgage insurance because this is something that's factored into your purchase and some costs of purchase. LMI lenders mortgage insurance I believe is an opportunity cost. Now, unless you have a 20% deposit, you're required to pay mortgage insurance. This should be factored into your overall purchase costs. Although many lenders will allow you to build it into the loan amount, the amount that you're borrowing. Put it on top they call it capitalising. At Today's prices, a 20% deposit represents years of savings for a first home buyer. Therefore, it's not uncommon for the first time purchase purchasers to consider LMI as an opportunity cost. In other words, it's a cost they're happy to pay for now if it means that they can get into the market sooner and build up equity in that property faster. Property investors are also often prepared to buy with a higher loan to value ratio because they want to keep their funds available for future deposits or renovations or a buffer. Extra funds will help them cover the difference between the income and the cost of the property. Or it might act as a buffer just in case one of those unusual life situations comes up, like losing a job. The cost of mortgage insurance premiums varies between lenders and it's generally not negotiable. So make sure when you're comparing different loan products, you include this cost in your assessment. Remember lenders, mortgage insurance is there to protect the lender, not you. It is a once off fee that the lender charges you for having less than a 20% deposit. It basically takes the risk out of their investment in you. Remember lenders, mortgage insurance is the fee that protects the lender, not you. When you have less than a 20% deposit, however, they often let you put that amount on top of the loan. If you need mortgage insurance, the provider will not typically assess your application as part of the pre approval process. The application to the mortgage provider will be submitted after you have made an offer on a property submitted the contract of sale for the property that you are purchasing, the lender has verified that you can still afford the loan and the valuation is returned. The approval process can take another two days. Even then the mortgage provider may the approval process can take another two days. Even then the lender mortgage insurance provider may not accept you, your income or your property. This is another potential hurdle in the approval process. As mentioned previously, some lenders have a delegated underwriting authority. This means that up to a certain amount their policy is the mortgage insurer's policy and they can sign off on this. So if in doubt, a lender that actually has a DUA up to a million dollars for instance, could actually be a lender that you want to be with because you want to make sure that their pre approval assessment of you actually has incorporated everything and you will get the loan. Look your mortgage broker will be able to advise you on which lenders have this authority or not. It's important to Note that in 2011 Genworth, one of the mortgage insurers reported that 60% of applications that they assessed from lenders were not complete and many applications were delayed due to the need to collect additional information from the customers. This therefore adds further delay to the application process. This is because the mortgage insurer provider has disappeared different supporting document requirements and different policies to most lenders. Therefore, even though one lender might accept the fact that you are on probation if you have less than a 20% deposit and require mortgage insurance, it is still possible that the lender's mortgage insurance provider won't accept the application. Alternatively, if you get approved based on your current employment conditions and you decide to change jobs before purchasing the property, your current pre approval with that lender may not be sufficient. If this is the situation you think you might find yourself in, check with the lender's and the mortgage insurance provider's requirements before you change a job. You can also check with your mortgage broker. They will know which lender uses which provider and what their lending policies are. Some lenders have access to both mortgage insurers Genworth and QBE and your broker can request that your application is submitted to the mortgage insurance provider that is best suited to your situation. Now once you've found a property it's time to get your skates on. If you have a loan pre approved you need to get the contract of sale to the lender or the mortgage broker asap, especially if you're under a five day cooling off period. You may also provide your most up to date payslips and if you don't have a confirmed pre approval then a full assessment of your loan application will be required. This depending on the lender this can take anywhere between two hours and two weeks. Now your valuation is also required. On most purchases the lender has to order a valuation. The valuer has to accept the order. Then they contact the seller's agent who may have to contact a tenant or owner to organise a time to visit the property, usually within two days from the time of the initial contact. After visiting the property, the valuer then researches comparable sales and compiles a report. The report needs to be approved by the valuation company internally. It is then sent to the lender who looks for adverse factors and if there are none, accepts the valuation. The valuer works for the bank but is not part of the bank. These are usually independent contractors. You do not get to choose who your valuer is. And often you don't get a copy of your valuation. Only then, if all the boxes are ticked, do you get a formal approval. What's more, often the valuation for an actual purchase is not ordered until all your details are substantiated. And depending on the lender, this could take a day or a week. If a lender happens to be offering a short term promotion for a super duper fixed interest rate, for instance, they will be overwhelmed with business, which means their processing times could blow out and you may miss your finance clause deadline or even have to delay settlement, which could incur penalties to you. You might be thinking that won't happen to me, but believe me, it can and it does happen. It's happened to me even. These are real examples of my experience with lenders and buyers and they should serve as a reminder to get all your ducks in a row and to allow time for things to take longer than than imagined. So when we go into putting clauses into your contract a little bit later, putting in extra time to get everything done is so very important. So let's look at formal approval. This is what you really, really want and you don't get to sleep until you get it. This means the lender has verified your loan application and that the property is worth what you've agreed to pay for it. It also means the property has been accepted accepted by the lender as a security that fits their policies and those of the mortgage insurer if needed. If you have a finance clause in your letter of offer, then you are finally ready to exchange and formally agree to buy the property or move from the cooling off period. If you bought at auction, you can now just relax.