Knowing where to start in your home buying journey can be confusing. Gaining a pre-approval or approval in principle is one of the very first steps in the process, so knowing what they’re all about will help you start house hunting.
Think of it as your safe guard to purchasing a property. For example, there is no point looking at mansions if you will only be able to afford a two bedroom home.
What is a Pre-Approval?
A pre-approval is where a lender has agreed to lend you an amount of money for the purchase of a property but hasn’t proceeded to a full or final approval.
It approves you for a set amount of money so you can narrow your search or make a bid at an auction with more confidence.
However, it’s not a requirement in the home buying process. Although having a pre-approval could make you more attractive to a potential seller, as it shows that if you make an offer the contract would be less likely to fall through because of finance if you have made an offer close to or under your pre-approval amount.
What is Approval in Principle?
An approval in Principle also helps you to understand what you can borrow and approves you for your maximum borrowing amount, rather than a set amount. It is also known as a borrowing capacity estimate.
This means that you will know the maximum amount a lender will lend you and exactly what deposit you’d need.
You’ll also be perceived as a serious buyer by a real estate agent.
Applying for approval in principle is free and should be done when you have an idea of how much you want to borrow, where you want to buy, what type of property you would like to buy and when you’re ready to buy.
What is the main difference between pre-approval and approval in principle?
Approval in principle vs Pre-approval: Unlike Pre-approval, In-principle approval requires a full credit assessment and responsible lending assessment. Your lender will look at your current financial situation and ask for formal identification, your income, assets, debts, your costs of living etc.
A pre-approval doesn’t go this deep and you can generally gain a pre-approval within 24-48 hours. An approval in principle might take a bit longer.
Do these options guarantee me a home loan?
Unfortunately, no. There is never a 100 percent guarantee until the property you want to purchase has been valued and a contract of sale supplied.
With a Pre-approval you’ll need to start the proof of income process and with an In-principle approval, provided your circumstances haven’t changed, your full approval should be pretty straight forward.