Pre-Approval vs. Formal Approval—What’s the Difference & Why It Matters

Jaimi Tarbotton: Welcome to Home Building Like a Boss, the podcast dedicated to helping first home buyers in Perth build their dream home with ease and excitement. I’m Jamie, your host and go to building broker. Are you ready to feel empowered, in control and excited about your building journey? I’ll help guide you with expert advice, insider tips and tricks and real life stories to help you navigate the confusing world of home building.

Tune in as I take you on the journey to building your home like a boss. Hello and welcome back to another episode. I’m your host, Jamie, as always. And this week I have Tanya joining me again for another finance episode. 

Tania Mondon: Hi again. I feel like I’m going to be on a few. We just keep filming these 

Jaimi Tarbotton: things. Yes, we are.

We’re batch creating today. All right, Tanya, let’s start off with another 

Tania Mondon: fun finance fact. Fun finance fact of the week is if you have a second job, the banks will not always take into consideration a hundred percent of that income because a lot of people get a second job just to increase their income so that they can borrow more for a home loan.

And if you are generally working over. The full time hours of, you know, 38 or 40 hours a week. The bank don’t see it a sustainable thing for you to have, you know, like two jobs over the next 30 years. They don’t think it’s sustainable, so they won’t always consider 100 percent of that second jobs income.

Hope that made sense. But yeah, they just don’t see it as like a consistent. thing. Yeah. I mean, 

Jaimi Tarbotton: that’s fair enough. I don’t think 

Tania Mondon: anyone’s going to want to do jobs for 30 years. Great idea though, but the banks are onto it and they’re not going to, yeah, lend you what you think they might. Oh, that’s funny.

Jaimi Tarbotton: Cool. Well, today we are going to chat about the difference between. Pre approval and formal approval. So Tanya, can you tell us a little bit about pre 

Tania Mondon: approval? Yeah, so pre approval is the initial assessment from the bank to determine whether you’re likely to qualify for a home loan and If they’re happy with the amount that you’re asking for.

A formal approval is when they have formally approved. There’s no outstanding conditions. They’re super happy to proceed. And usually this is when you have your contracts ready to go as well. And evaluation has been conducted and it’s come back satisfactory. That’s when they’ll issue you with a formal approval.

So it’s like, we’re ready. We’re ready to settle now. Ready to give you the money. So that’s basically, in very basic form, the difference between both of 

Jaimi Tarbotton: them. Okay, cool. And if you have pre approval, it doesn’t necessarily mean it’s set in stone. So I think a lot of people think, oh, I’ve got pre approved and they go get a car loan or a credit card or change jobs or do something and that changes, messes the 

Tania Mondon: whole thing up.

Yes, so the pre approval is just based on the information that you provided. The banks can also issue you with a pre approval even though you don’t even have the funds. For settlement yet. So you’re still saving. Yeah, you probably don’t even have your full deposit ready to go yet They’re just giving you a letter to give you the peace of mind that they might be willing to lend you the money Might but it just depends on the property that you’re going to be building.

It depends on if your circumstances don’t change in between when you applied to when you’re ready to go formal. So there’s a lot of factors involved, but yeah, it’s just a letter to give you a little bit of peace of mind. You might get it. Yes. So pre approval is a might. Formal approval is. We’re ready.

We’re ready. It’s a hundred percent. Yeah. 

Jaimi Tarbotton: And you can get pre approval without a land contract and a build contract. Yeah, yeah, you can. Yeah. Perfect. Cause I think that’s always good for people to know that they can start the process and get ready and then for formal you need your land contract and your build contract.

Tania Mondon: Yes. I always like to say to my clients, just get a pre approval done. gives you peace of mind. It means the bank already has all the information that they need about you. And it’s just a quicker process so that they can just focus on the house and land stuff. Yeah. So you’ve done half of 

Jaimi Tarbotton: it. So they only need to do a 

Tania Mondon: little bit more, not the whole thing again.

Yes. Yes. Cause finance sometimes can be, uh, quite lengthy depending on how easy or complex the application is. So it was always good just. Get it out the way to begin with. Yeah. Get it done. Yeah. 

Jaimi Tarbotton: Do pre approvals 

Tania Mondon: expire? Yes, they do. They usually expire within 90 days. However, some lenders, if you are building and your titles aren’t issued yet, they’re not going to make you reapply.

Only with some lenders. Yeah. Okay. So check with your finance broker. Whereas other lenders, they will just lapse the, the application if nothing’s been received in over the 90 day period. Yeah. If you’re not ready to request formal approval over that time. Okay, 

Jaimi Tarbotton: cool. And what kind of documents do you usually need to provide throughout the process for pre approval and formal approval?

Tania Mondon: Pre approval, we need your income, so your pay slips for any debts you might have. We need Sometimes we need the statement. Sometimes we need the contract instead of, you know, if you’ve got a car loan, we’ll usually ask for the car loan contract, not the statement, because we can see the repayments on your credit report.

We would also need just a rough estimate of how much you would like to borrow or how much your house and land package is going to be so that we can make sure. We’re actually applying for the correct amount. We can make adjustments, but it’s better to go the higher amount so that you are not asking the bank later on to increase the loan because then they have to reassess everything on the new loan increase that you’ve asked for.

For formal approval, you would need to give. You have your land contract, your land deposit receipt, your build contracts, and your build deposit receipt, and once we have all of those contracts in place and you’ve signed them, we order a valuation, and then once we receive the valuation report, we send that to the bank.

If they’re still happy with everything, they’ll give you the formal approval. Yay! So, a few documents there. Yeah. Yay for formal! It means they can finally build. Yes. Yeah, 

Jaimi Tarbotton: yeah, amazing. Okay, cool. Is there any other important info people need to know about pre approval or formal 

Tania Mondon: approval process? Yes, don’t change your jobs.

Don’t make new credit inquiries like for Buy now, pay laters, or don’t get a new car loan. Don’t change your job thinking that, oh, but I’m going to a job that pays higher. Like I’ll be fine. You might not be. It depends on the industry. It depends on your pay. It depends on if you’re just on a base salary or you’re trying to include overtime.

There’s so many factors involved. So if you have any, anything that you need to make drastic decisions on, just notify. But your broker before you make big decisions because it could really stuff up your, your finance application and cause a lot of delays. Yeah. 

Jaimi Tarbotton: People do that more often than not. 

Tania Mondon: Yeah. Yes.

I think they get confused with the pre approval. Yeah. And they think, Oh, we’re fine now. So I can go get that car. No, you can’t. No, it’s a might. Perseverance 

Jaimi Tarbotton: is a might. It’s a, yeah, it’s a, we might give you a 

Tania Mondon: house. 

Jaimi Tarbotton: Okay, cool. Well, thanks for joining me on today’s episode. If you guys have any questions, as always, just flick us a message on Instagram and we’re happy to help.

Thank you so much for tuning in to the Home Building Like a Boss podcast. I hope you enjoyed today’s episode and learned something. Remember, you’ve got this and I’ve got your back. Until next time, stay inspired, stay informed, and stay confident on your building journey. I can’t wait to chat with you on the next episode.

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