For most Kiwis, buying a home is one of the biggest financial decisions they’ll ever make. The process can be daunting, especially if you’re navigating it for the first time. One of the key steps to simplify your home-buying journey is securing mortgage pre-approval. In this article, we’ll explore what mortgage pre-approval is, why it’s crucial, and how you can obtain it.
What is mortgage pre-approval?
Mortgage pre-approval is a conditional commitment from a lender stating the maximum amount they’re willing to lend you for a home purchase. It provides clarity on your borrowing capacity and demonstrates that you’re a serious buyer. While it’s not a guarantee of a final loan approval, it gives you a strong indication of your financial standing in the home-buying process.
Pre-approval typically involves a detailed assessment of your financial situation, including your income, expenses, credit score, and employment stability. Once granted, pre-approval is usually valid for 60 to 90 days, giving you a timeframe to search for a property within your budget.
Why is mortgage pre-approval important?
- Know your budget One of the primary benefits of mortgage pre-approval is that it establishes your budget. Instead of guessing how much you can afford, you’ll have a clear limit, making it easier to narrow down your property search.
- Stronger negotiation power Sellers are more likely to take your offer seriously if you have pre-approval in hand. It shows you’re financially prepared and less likely to face financing issues, giving you an edge in competitive markets.
- Faster loan approval process With much of the groundwork already completed during the pre-approval stage, the final loan approval process can be quicker once you’ve found a property.
- Avoid disappointment Without pre-approval, you risk falling in love with a property that’s outside your financial reach. Pre-approval ensures you’re only considering homes you can realistically afford.
- Plan for additional costs Beyond the property’s purchase price, buying a home involves additional costs like legal fees, insurance, and moving expenses. Pre-approval helps you factor these into your overall budget.
The mortgage pre-approval process
Securing pre-approval involves several steps. Here’s a breakdown of what to expect:
1. Evaluate your finances
Before approaching a lender, assess your financial situation. This includes:
- Income: Ensure you have a stable income, as lenders will want proof of your ability to make repayments.
- Expenses: Review your monthly expenses to understand your disposable income.
- Debts: Pay off or reduce existing debts where possible, as high debt levels can affect your borrowing capacity.
- Savings: Aim to have a deposit of at least 10-20% of the property’s purchase price. Using your KiwiSaver can also help boost your deposit.
2. Choose a Lender or Mortgage Broker
Decide whether you want to approach a lender directly or work with a mortgage broker. Brokers can provide access to multiple lenders and help you find the best deal, saving you time and effort.
3. Gather Necessary Documentation
Lenders require a range of documents to assess your application. These may include:
- Proof of identity (passport or driver’s license)
- Proof of income (recent payslips or tax returns if self-employed)
- Bank statements (showing savings and spending habits)
- Details of existing debts or financial commitments
4. Submit Your Application
Once you’ve prepared your documentation, submit your application to the lender. Be prepared to answer questions about your financial history and plans.
5. Lender Assessment
The lender will review your application, considering factors like your income, credit score, and the stability of your employment. They may also perform a stress test to ensure you can handle potential interest rate increases.
6. Receive Pre-Approval
If your application is successful, you’ll receive a pre-approval letter outlining the loan amount, terms, and conditions. Keep in mind that pre-approval isn’t a guarantee of final approval. The property you choose must meet the lender’s criteria, and your financial situation should remain stable.
Tips for a successful pre-approval application
- Be honest: provide accurate information about your income, expenses, and debts. Misleading details can result in your application being declined.
- Maintain financial stability: avoid taking on new debts or changing jobs during the pre-approval process.
- Save a larger deposit: a higher deposit can improve your chances of pre-approval and may result in better loan terms.
- Work with professionals: consider seeking advice from a mortgage broker or financial advisor to streamline the process.
What happens after pre-approval?
Once you’ve secured pre-approval, you can start searching for properties within your budget. When you find a property, you’ll need to:
- Negotiate an offer with the seller.
- Provide the lender with details of the property for final approval.
- Meet any additional conditions outlined in the pre-approval.
Common pitfalls to avoid
- Letting pre-approval expire remember that pre-approval is only valid for a limited period, usually 60-90 days. If it expires, you’ll need to reapply, which may involve updated documentation and financial checks.
- Changing financial circumstances major financial changes, such as taking on new debt or reducing your income, can jeopardize your pre-approval. Maintain stability until your loan is finalized.
- Overestimating your budget while pre-approval gives you a maximum loan amount, consider your comfort level with repayments. Borrowing to the limit can leave you financially stretched.
Mortgage pre-approval is an essential step in the home-buying process, offering clarity, confidence, and a competitive edge. By understanding the requirements and following the steps outlined above, you can position yourself for success and move closer to securing your dream home in New Zealand.
If you’re ready to take the first step toward home ownership, get in touch with Lendal Mortgages today. Our experienced team is here to guide you through every stage of the process, from pre-approval to settlement.