Why You Cannot Always Rely On Pre-Approvals From Banks
It is common for people to phone their banks to check what they can borrow (to get pre-approvals) and while this may seem like the right thing to do this can also result in problems for you.
The Key Problem With Over The Phone Pre-Approvals
You can phone your bank and be assessed for a mortgage over the phone, but you probably shouldn’t.
There are some very good reasons why most New Zealand mortgage brokers do not provide over the phone pre-approvals and here are some of the key reasons;
Income is key to any bank pre-approval so when you are asked over the phone how much you earn you need to know the exact amount of income that the bank will allow for finance assessment purposes. Where this gets difficult is where income is not just a regular salary and this is the case for lots of people. Many people may receive allowances within their pay, do overtime or have penal rates, be paid bonuses and commissions, have use of a company vehicle or receive a vehicle allowance and for anyone that is a contractor or self-employed then the way income is calculated is more complex. Some people will also receive some income (or benefits) that is net of tax such as the Working for Families benefit, some allowances are not taxable and boarder income.
Generally with over the phone pre-approvals you will just be asked what your income is.
The type of employment contract can trip people up as banks treatment of different situations can mean that not all income can be used for assessing lending. Banks prefer full time permanent roles. If you have been in your employment for less than 90-days and have a probationary period then many banks will deem you as not being in full employment. Casual and part-time roles can be problematic and there are also some industries that the banks have problems with.
Generally with over the phone pre-approvals you will not be asked enough questions to determine your type of employment.
All your expenses need to be allowed for and this means ALL your expenses and outgoings. When you are asked about your expenses it is easy to forget a few, mis-calculate the expenses or you may not include something as you do not consider it an expense. At the time of the final bank assessment they will review your payslips, bank statements and credit card statements to identify your expenses and this is where they will pick up expenses like child maintenance, day care costs, schooling costs, lease costs, gym fees, superannuation contributions, regular donations etc.
Most people are surprised to learn that regular donations need to be treated as an outgoing when assessing a loan application.
It is easy to genuinely miss something that the bank consider an expense or outgoing.
Putting a value on your existing home if being sold can be problematic. What is your home worth and more importantly what would you be able to sell it for within a set timeframe. Some people will rely on the Council Valuation (CV) which is on their rates notice, an online tool or they may have seen a similar house for sale and estimate their houses value based on that. Banks tend to use the online tools to assess values of houses and while these do give some guidance they are statistical and therefore by no means give an accurate value that can be relied on. The most accurate way to get a value is to get a qualified valuer or a knowable real estate agent to assess the value for you. Even then we would suggest that you take a conservative approach and also do not forget to deduct the selling costs (not forgetting GST) to give you a net figure to work with.
Most banks will assess your house value using online tools which can be inaccurate.
As mortgage brokers we may give a quick assessment over the phone, but we need to get all the supporting information before we will be willing to provide a pre-approval. But when we do provide you with a mortgage pre-approval you can be confident that it has been assessed properly so there will be no surprises which may leave you in an awkward situation.
It is quite common for us to get calls from people in a panic because they have relied on a banks pre-approval only to find out that the bank will not honour it because some of the information used when assessing it was inaccurate.
The Banks Pre-Approval Was Wrong
Hamish and his wife Sarah had contacted two banks and been pre-approved by both. Like many people they were selling their existing home and looking to purchase a new larger and more expensive home. Hamish is working full-time and Sarah is a stay at ho me mum so they were reliant on one income at this stage.
They had seen a house that they both liked and decided it would be prudent to check with the bank to make sure that they could afford it.
A quick call to two banks (their existing bank ANZ and Westpac) and they had pre-approvals from both. The “best” of the pre-approvals was from Westpac for $377,000 so with the expected sale of their existing home and after paying off the existing mortgage they were in the market to buy for up to $750,000.
Fortunately for them the pre-approval was not quite enough for the house that they were looking to purchase and so they contacted our mortgage broker Tracey Topp to see if she could arrange a bit more money for them. They were looking for another $50,000 to allow them to buy for up to $800,000.
When Tracey assessed the application fully she found that Hamish had not included all of his income when he was speaking to the bank. He receives a salary of $76,000pa but also an allowance which pushes his income up to approx $95,000pa.
Tracey could get the mortgage pre-approved with Westpac to $470,000, or over $90,000 more than the bank had approved!
This allowed Hamish and Sarah to go ahead and buy the new house, when if they had relied on the advice from the bank they would have needed to remain in their original home or find a cheaper new home.
It was a good result for them.
Get A Pre-Approval That You Can Rely On
Buying a new home is a big decision and you need to work with the correct information, including a pre-approval for a mortgage that you can rely on. Finding the new home is often the fun part and you do not mind taking your time to get exactly what you want; whereas getting the finance to allow this to happen is the necessary but mundane part and you just want the answer that you need.
We know that it is quicker and easier to phone your bank and they will provide an approval over the phone and then email you the one page letter known as a pre-approval but with a bit of fine print too.
The most reliable method of getting a pre-approval is to contact a mortgage broker.
A mortgage broker has access to a number of banks which all have slightly different criteria and treatment on what income can be used and what expenses must be deducted. The difference in what the various banks can offer can be the difference in being able to buy the house that you want,making a compromise or not being able to buy at all.
Your mortgage broker will get you a pre-approval that you can rely on.