APPROVAL IN PRINCIPLE
Having approval in place before negotiating or bidding on a property can substantially reduce risk and stress.
Approval in Principle (AIP) is a confirmation from a bank that they will lend you up to a specified amount, based on the financial evidence supplied.
A good broker will be able to quickly assess all lenders and recommend one that will let you know your maximum borrowing power and get you an AIP in advance of bidding on a property.
An Approval in Principle (AIP) is also known as “pre-approval” and it is always subject to a bank valuation on a property. This is to ensure that you don’t over-bid on a property, simply expecting the bank to lend to a buyer regardless of the true value.
In general, an AIP gives the buyer peace of mind going to an auction that they can purchase a property even though they may not have decided yet on which one.
To get a pre-approval, you will need to supply proof of ID, employment, payslips, bank account details for at least 3 months and various other documents as per the Loan Document Checklist.
HOW DO YOU GET PRE-APPROVAL?
To start the pre-approval process you’ll need to give your mortgage broker some key documents.
These should include proof of identity, details of your income – such as a letter from your employer or copies of your pay slips – and details of any assets you own.
Other paperwork might include details of bank accounts for at least 3 months, existing loan commitments and limits on credit cards.
Once the pre-approval is given, getting Full Approval – also known as Unconditional Approval or Formal Approval – is much easier.
WHY OBTAIN PRE-APPROVAL?
Certainty over affordability – you will know exactly what your limits are and you can calculate in advance the monthly repayments.
It saves time – knowing your limits will not only remove doubt over affordability, but will also help eliminate searches in areas and properties that you would otherwise have wasted time viewing.
More bargaining power – knowing your limit will enable you to make better and more forceful bids at auction or negotiating time.
Avoids auction risk – in NSW property auctions, most bidders must sign a waiver of their cooling-off period to be allowed bid by the Vendor. This means that the full 10% deposit is usually at risk if the loan cannot be approved to purchase. Having an AIP in place before bidding can substantially reduce this significant risk and stress.
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