When it comes to getting approved for a home loan, a loan pre-approval can be a game-changer. It not only increases your chances of getting approved for a home loan but also boosts your morale.
If you are pre-approved for a home loan, you have a 90% chance of being approved for the actual loan. In contrast, your actual home loan application will be subject to an underwriting process.
Before you start the pre-approval process, you should understand what a pre-approval is and how it will help you get the home loan you’ve always wanted.
What is a Home Loan Pre Approval?
A home loan pre-approval is a process that determines whether or not you are eligible to borrow money from a financial institution to purchase a home. Lenders gather information such as the borrower’s income, expenses, deposit amount, interest rate, lump-sum payments, home cost, and credit information to determine whether or not the borrower is eligible for a home loan.
A home loan pre-approval is a mock of what is likely to happen if a borrower made an actual home loan application. The results of a home loan pre-approval cannot be used as a claim for a home loan approval, but rather as an indication of what might happen if an actual home loan was to be applied for.
The following information is included in a home loan pre-approval:
- Breakdown of costs based on costs to expect which include
- Purchase price of the home,
- Loan amount,
- Deposit amount,
- Estimated monthly installments, and
- Loan term
- Additional expenses that will be incurred as a result of the purchase price of the home Information includes
- The estimated monthly service fee,
- Initiation fee,
- Estimated bond property transfer costs, and
- Estimated bond registration fee.
How does a Home Loan Pre – Approval Work?
A home loan pre-approval entails completing a home loan pre-approval application and providing your ID number so that the lender can run a hard credit check. The lender uses the same method that is used to apply for a home loan to determine whether the borrower qualifies or does not qualify for a home loan through a hard credit check.
The lender will investigate the borrower’s creditworthiness as well as his or her ability to repay the loan. A bank or a lending financial institution will consider several key factors, which include:
- The borrower’s credit history,
- Checking of the borrower’s credit score through a credit bureau,
- The employment history of the borrower. The average employment requirement is at least 6 months with the current employer,
- Income level. This is to find out whether or not you can repay a home loan if it is issued to you, and
- Assets and liabilities of the borrower.
The Pre-approval will have an impact on the borrower’s credit rating. As much as the pre-approval process is a mock, the lender pulls the customer’s credit information from the credit bureau. The lender that the borrower has conducted a pre-approval with will appear on the borrower’s credit requests.
Why do you need to get pre-approved for a home loan?
In contrast to applying for a loan, borrowers can benefit from a pre-approval. The following are some of the reasons why you should get a home loan pre-approval.
Help with understanding the costs
Because a pre-approval uses a hard credit check to assess the borrower’s creditworthiness, the borrower gains access to information about the costs he or she will incur during the loan’s term. Borrowers can view the instalments that they will be required to pay, including actual transfer costs and bond costs.
A borrower will be able to determine whether or not he or she can afford the costs that will be incurred during the term of the loan. If the borrower is dissatisfied with the costs associated with the pre-approval, they can easily shop around for better credit terms.
Borrowers know what they qualify for
A pre-approval, as opposed to a pre-qualification, is more realistic because it considers one’s credit information. The amount that the borrower qualifies for forms part of the pre-approval results. The borrower will know exactly how much they qualify for and whether or not the lender requires a deposit.
When shopping for a home you will be able to check houses that are within your limit range. Furthermore, when asking for an offer to purchase, you will be asking for an offer to purchase a home that you can afford. The chances of being declined on the actual loan will be slim.
There are no obligations
Obtaining a pre-approval does not obligate you to borrow the funds for which you have been pre-approved. As a result, even if it has an expiration date, a pre-approval is not legally binding. If you change your mind about the pre-approved amount, you can still apply for a higher or lower home loan amount.
Pros of a home loan pre-approval
- There are no commitments to a home loan pre-approval.
- Borrowers have a chance of looking for better loan terms and rates in the market if they are not impressed with the results.
- You have access to the rand value of the amount that you qualify for.
Cons of a home loan pre-approval
- The pre-approved loan has a limited offer period.
- It is not a guarantee that you will get approved for a home loan.
- A pre-approval affects your credit score since an inquiry will be added to your credit profile.
A home loan pre-approval is required to expedite the home-buying process. Without a pre-approval for a home loan, one may find it tedious to apply for a real home loan. You can apply for a home loan pre-approval to determine how much you can afford and begin the process of owning your own home.