Pre-approved finance – read the fine print

Many house hunters arm themselves with pre-approved finance offers from their bank to assist their chances when hunting for their dream home or investment property bargains.

What many purchasers don’t realise is that the fine print in the pre-approved finance offers requires the bank to be satisfied that the house being purchased will provide adequate security for the lending.

The finance offer may require a registered valuation and/or a Building Report in order to have the final finance application approved.

The more the bank lends on a property, the more cautious the bank will be about the state of that property and its true value.

As a result, a purchaser that thinks of themselves as having pre-approved finance may find that the finance is not available after the contract is signed.

This can happen if there is work required on the flats plan for a cross lease property. For example, if an extension to a building has been permitted by Council, but the flats plan has not been updated, the cross lease property is seen as defective until the additional survey work is carried out.

Properties which may potentially leak or which have not been excluded from the possibility of leaking may need further reports before a bank will confirm its lending.

A bank may not withdraw its entire lending offer but may reduce the level of lending it is prepared to provide if there are actual potential difficulties with the property being purchased.

Purchasers need to take care that pre-approved lending offers are taken as indicative only. Purchase contracts still need to be made subject to finance if the finance is going to be secured on the property being purchased unless the bank has already approved that property.

Purchasers also need to make sure that their contracts allow them the opportunity to obtain any valuations or Building Reports or other reports which the bank may require in order to confirm lending on that property.

In the case of an auction, it will be important for the purchaser to complete due diligence on the property and to have the bank’s approval of the property for the purposes of finance before the auction takes place.

An indicative pre-approval for lending is still a useful process for a purchaser to have undertaken. However, the limitations of that pre-approval must be understood and purchasers should not enter into unconditional contracts on the strength of pre-approved finance unless the property is not going to be used for mortgage purposes.