Much like ordering everything off the menu at a Michelin star restaurant without checking your wallet, searching for properties without understanding your true borrowing power can leave you with a bill that you can’t afford (or get out of).
Whether you’re a first-home buyer or looking to upsize or downsize, speaking to a lending specialist should always be your number one priority. They’ll help you estimate your borrowing power so you can search, bid and buy with greater confidence that your loan will be approved.
There are many steps to the house hunting and buying process. But before you start browsing on your favourite real estate site, you’ll need to know what to set the price filters to. Calculating your borrowing power (also known as a Borrowing Capacity Estimate) – an estimate of what you could afford to borrow based on your current income and existing financial commitments – will help you search for properties within your budget.
What’s a borrowing capacity estimate?
As the name suggests, your borrowing capacity estimate will let you know what you could potentially borrow so you can begin the search and start looking online.
Despite confusion, this estimate is not a legally binding document and there is no guarantee you’ll be approved for a loan or for that amount. In fact, Borrowing Capacity Estimates are not financially assessed by the lender and haven’t been to their credit department – they’re not fit for bidding.
That’s why sometimes just having a quick meeting with a mortgage broker who is not actually fully assessing your loan may not be in your best interests.
So, why get a borrowing capacity estimate before approval?
There’s no point looking at mansions if you can only afford a unit. An estimate will give you an approximate figure of how much you could borrow so you can begin your journey.
Successfully winning at auction with just a borrowing capacity estimate is extremely risky business. If you can’t get a loan approved in time – or at all – you’ll lose your 10% deposit.
Related post: How to secure a low deposit 98% home loan
So what’s approval in principle and why is it vital?
Approval in principle (AIP) is the first step to getting an approved home loan – it’ll also help you be seen as a more serious buyer, which is a massive plus when you could be up against some serious competition.
And even more importantly, it can save time once you’ve negotiated or bid successfully – when the finance clause clock is ticking!
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. It’ll help you determine your budget, repayments and the type of properties you should be looking at (e.g. apartments or stand-alone houses).
And unlike a basic borrowing capacity assessment, approval in principle (AIP) requires a full credit assessment and responsible lending assessment.
A lending specialist will help you achieve this and will also have your loan assessed by a mortgage insurer if applicable – so you can be even more confident!
A lending specialist will also look at your requirements and objectives, along with your current financial situation and will ask:
- Who you are? You’ll need to provide formal proof of ID.
- How much you earn? This includes your salary, investments or rental income.
- How much you own? They will evaluate all of your assets, including cars, jewellery, shares and savings.
- Do you owe money? From a car lease to credit cards, you’ll need to declare any debt or loans you currently have.
- What are your living costs? They will look at your monthly expenses groceries, bills, transport and lifestyle to help estimate your loan.
- What type of properties you’re looking at? They will need to know the suburbs you’re looking at, property type and size to ensure it’s a good investment for them too.
And the good part is – if some or all of the above is not clear, they will devise a plan with you and also help with your property buying research to make everything even simpler.
Does approval in principle mean I’m approved?
Put simply, no – but you’re a long way there. There is never a 100% guarantee you’ll be fully approved until a lender knows exactly what property you’re buying – and at what price. But providing your financial circumstances haven’t changed and you bought a similar style and priced property to the ones your loan is based on (and in the same or close suburb), there’s a much better chance you’ll be approved.
To obtain formal approval your lending specialist will need to see:
- The property you purchased. The property may need to get valued and will need to meet Loan to Value Ratio (LVR) requirements.
- The contract of sale. This is to assess the legal conditions of the contract, including outgoings, permits, zoning and previous works.
Will the approval in principle expire?
Approval in principle is only valid for 90 day, so if your circumstances change, you get a new job or even a promotion, you must let your lending specialist know – it could hugely impact your potential borrowing power.
Buying your first home, upsizing or downsizing are always exciting moments in life. Before you start the search, always engage with a lending specialist to ensure you’re financially stable and your application is low risk. Failing to do so could leave you severely out of pocket.
So, if you’re looking for a home, let a LJ Hooker Home Loans lending specialist help you with the paperwork and the loan approval process.
Our team are available for in person, web, or phone based chats. We offer full, no obligation approvals in principle – without the requirement for an in person meet if needed.
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This article is prepared based on general information. It does not take into account individual financial objectives or needs and is not financial product advice. Credit criteria applies to any loan application. Terms and conditions, fees and charges apply to any loan application.