Is  ‘pre-approved bond/home loan’ a misnomer?

Is ‘pre-approved bond/home loan’ a misnomer?

Private Property South Africa
Kerry Dimmer

Agents are increasingly being viewed as the faulty party when a buyer, who makes an offer based on having a ‘pre-approved’ bond, is unable to secure a home loan from a financial institution. Is this fair? Obviously not because it is not the role of the agent to perform due diligence on a buyer’s ability to qualify for a loan, and nor is it within their jurisdiction. It is, however, their duty to present ALL offers to their seller-client irrespective of whether there is a pre-approval or not.

Carol Reynolds, Pam Golding Properties area principal for Durban Coastal confirms that agents do tend to become scapegoats for this type of issue (and others) that unfolds during the course of negotiation. “This problem is compounded by the increasing pressure we are under to respect privacy, and the POPI Act. As agents we are therefore navigating a delicate balance between maintaining client confidentiality and attempting to undertake sufficient research to ensure we are working with quality buyers.”

An agent is also not privy to changes in the circumstances or credit risk of the buyer since acquiring a pre-approval, nor their credit score ratings as such can only be disclosed to authorised financial institutions, home loan originators, or the individual, at their discretion, as pointed out by Tiaan Pretorius, manager for Seeff Centurion. “While the seller may be frustrated, it should not be forgotten that a formal pre-approval is usually a far better indication that a home loan application will be successful.”

While agents agree that pre-approvals do provide the best security to sellers within the current system, I suggest the negative sentiment that results in sellers’ blaming the agent for a buyer’s failure to secure a home loan, actually lies in the terminology. ‘Pre-approved’ suggests to sellers that a bank has ‘approved’ a loan, in other words there is a guarantee of an approved amount, which is not the case at all.

This is also the reason why ooba Homeloans does not use the term ‘pre-approval’ but rather ‘pre-qualify’, which makes better sense because pre-qualify indicates that a basic review has been done, to determine whether an individual is likely to qualify for a bond. Linda Rall, ooba’s Provincial Sales Manager KZN & Eastern Cape says that ‘pre-qualify’ prevents any misunderstanding.

Whether pre-approved or pre-qualify is used, the agent has a responsibility to provide knowledge to the seller about the practice and process, which first and foremost, in Rall’s opinion, is to ensure that agents position the pre-qualification as a guide and not a guarantee of finance. “There are many reasons for this but most important is the fact that there are so many different pre-qualification products available from various service providers, all following varying degrees of interrogation or processes, and which result in varied results.

“Another reason is that the only guarantee of finance is achieved from a fully submitted bond application to a finance house, which is when the bank scoring system is applied to the application. This part of the process is not available at pre-qualification stage.”

It must also be made clear that even reputable organisations like ooba, Homeloans that issues pre-qualification certificates based on thorough application interviews and assessments of a buyer, cannot guarantee a successful home loan application, although generally ooba has a high approval rate at 93%, of home loan application success.

“Agents should therefore be mentioning to sellers that a buyer who has gone through such a rigorous pre-qualification process, especially one that includes credit bureau checks, is a sure sign of a serious buyer,” says Rall. “However, such a pre-qualification certification is only valid for 90 days, and it is in the best interests of the agent to encourage the certificate holder not to enter into any new debt or miss any payments on contractual debts to ensure the pre-qualification remains as per the assessment outcome.

“The agent is also entitled to ask if anything has changed in the financial circumstances of the buyer since the issue of the certificate that may impact their credit worthiness.”

Pretorius concurs, adding that any certificate issued should have a reference number that can be used to verify the information provided. “There should also be the inclusion of what is referred to as the 72-hour clause, which enables the seller to continue to market the property even though a pre-approved offer has been presented. This may open the seller to an even more favourable offer, such as a cash offer, which may be more favourable than securing a mortgage loan.

“The original buyer then has 72-hours to either comply with the contingency requirement by securing a loan, remove the contingency, or simply walk away from the deal.”

Reynolds adds: “The best way to mitigate risk for the seller is for agents to continue marketing until the final grant is secured, and to take back-up offers, especially candidates that are salaried because their income is stable, as well as buyers who have personal bankers as they are usually able to secure bond approvals quite quickly.”

I believe that agents should be advising their seller-clients that continued marketing is imperative. In a very small survey of four parties within my own circle of acquaintances selling their properties, two accepted offers based on pre-approval and endured four weeks of waiting for those home loans to be approved. In both cases the home loan was not granted, and nor was their home marketed during that period by the sole mandated agents.

So where do the shortfalls between pre-qualification and actual eligibility for a home loan lie?

Other than the changes in financial circumstances, Rall says that most often there are internal conducts on bank accounts that are not detectable on other platforms available to the pre-qualifying service provider. “Also if a score outcome is lower than is required by a particular bank, there may be a need for a higher deposit, which may not be possible causing an outright decline of the loan. Bear in mind that pre-qualification affordability is only calculated on the client’s net surplus earnings after income and expenses have been verified against salary slips and bank account information as well as credit bureau debts.”

Rall also provides advice to agents to really punt to sellers that buyers with proper pre-qualification certificates achieve a much quicker bond approval turnaround time and should not be the cause for taking a property out of the market for any long period of time. “The gathering of supporting documents is a massive time-consuming activity but much of the bond-processing time is absorbed here, so you should make the home loan application sleek and much quicker. Ooba’s experience is that banks give preference to our certifications because they know that much of the vetting has already been done, making the chances of a successful conversion that much higher.”

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