Buying a property can be a stressful time. It’s one of the biggest financial investments most people make. So it makes sense to be as prepared as possible before you go signing purchase contracts. That’s why as part of our process we suggest clients obtain approval in principle before they go looking for a property.
What is Approval In Principle (AIP)?
Approval in Principal the first formal step with a lender in the process. Up to this part everything else like borrowing capacity and funding positions that have been done is not legally binding.
If you’ve been to a mortgage broker you’ll have had a preliminary analysis done (you can request a copy if they haven’t given you one) which outlines the amount you want to borrow, your income and expenses and their recommendations of lenders (among other things) based on the information you’ve given them. But this document, nor any of your details hasn't yet been sent to a lender.
Approval In Principle is free and lasts for 90-120 days, and should be done as the next step in the process. This process requires all your info is sent to the lender and they perform a credit and responsible lending assessment. The lender will look at what your objectives and requirements are along with your financial situation and will ask things like;
- Who are you? Do you have valid ID & meet our residency/visa criteria?
- How much do you earn?
- What are your assets & liabilities?
- What are your living costs and other financial obligations?
- What product of ours are you applying for?
Does Approval In Principle Mean we're approved?
The lender will take all that info above and do an initial assessment. A lot of lenders do these through software with no manual review. This means AIP’s can be issued very quickly, and almost automatically. These approvals then have conditions attached like;
- Subject to full manual assessment of the financials & credit file
Manual assessment looks at whether everything has been disclosed (like the HECS debt you forgot about or that buy now pay later facility you opened once but didn’t close), that all the documents provided meet the lending policy (payslips within a certain time period etc) and that your credit history is good order. All of this info should be disclosed to the mortgage broker in the data collection stage and before the analysis is done as it can significantly affect your borrowing position and/or which lenders and products you may be eligible for.
- Subject to a suitable property
- Subject to a valuation on that property
So whilst you’re not 100% guaranteed to get the loan, you are given confidence that subject to all the information you provided is accurate, you’ve found a property that is suitable for the lender (unsuitable properties can be a lot of things. If you’re looking at anything out of the ordinary, you need to check the lender’s policy first), and you’re not paying more than the property is actually worth you should be ok.
What happens after you sign a contract?
If you’ve got an approval in principle, and then signed a contract, we contact that lender and advise them to move your AIP to a purchase, order a valuation of the property and provide them with a copy of the purchase contract.
This all then goes into the lender’s queue for full assessment. So going for AIP can speed up your finance process during the contract stage because the broker has already done the preliminary work and you’ve already done the leg work on payslips and financials, ID and product features/lender selection. This means it's less likely you'll need to ask for a finance date extension (or risk going to settlement without finance being approved or the contract not proceeding).
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This means less stress for you, and less rushing around trying to get all the stuff you need, whilst dealing with the conveyancer, finding removalists, and organising to vacate (and potentially sell) where you are.
You're Not Locked To That Lender
Approval in principle is not a commitment from you or the lender, both sides could not proceed with the loan, but be mindful that getting multiple inquiries on your credit file in quick succession isn’t a great look. It may raise more questions from lenders as to what is going on and why the other applications didn’t go ahead.
But because AIP's only last 90-120 days, you may find that by the time you actually find the property you want and get it a contract on it, that the AIP may have lapsed, or that the lender has changed their rate or features and now it doesn’t suit your needs and you want to go with a different lender.
That’s all good you can do that.
That’s the benefit of an approval in principle, it gives you confidence to go property hunting, but not the commitment to act.
If you’re serious about looking for a property, contact us to get the finance process started