Home Loan Pre-Approval Explained

Pre-approval, sometimes referred to as conditional approval or approval in principle, is an indication from your lender of how much you may be able to borrow. You do not have to have found the house you intend to buy. Rather, pre-approval can help you to narrow your search and eventually place an offer with confidence.

It is imperative to note that home loan pre-approval is not unconditional; meaning that the amount your lender pre-approves you for is subject to change. Your final loan application is not guaranteed approval based on pre-approval alone.

There are several benefits to obtaining home loan pre-approval, the most significant of these is that you will receive your approximate borrowing capacity figure. Borrowing capacity is calculated on your debt-to-income ratio and outlines the amount that you can borrow. Knowing approximately what you might receive then enables you to refine your search to match your budget. When you do find a home that you love in your price range, you have the peace of mind to proceed to auction or make an offer.

Home loan pre-approvals, in some instances, also fast-track the closing period of your loan. This is as part of the application process gets completed during the pre-approval process. While a pre-approval does not always guarantee a faster application, it is more likely to inspire vendors to accept any offers you might place. The reason pre-approvals are prevalent at auctions is because they provide evidence to the seller that you are serious about the purchase, and they allow you to bid with awareness of what you can afford.

You do not need pre-approval for your home loan, and not all lenders offer pre-approvals. However, there are many benefits to obtaining one, as mentioned above. Because pre-approval is only an assessment of your borrowing capacity, if you are an established property investor or on your third or fourth home, you may already have strong comprehension of your purchasing power. Additionally, if you have a thorough grasp of your budget, and are not pressed for time, there may be no value in the conditional approval step.

If you are planning on applying for a pre-approval, keep in mind that they are only valid for approximately three to six months. After this time you will have to apply again.

Home loan pre-approval can either be obtained directly through your lender, or with the help of a mortgage broker intermediary. Each financial institutions’ process will look slightly different; however, you will typically meet for a discussion with your lender or broker, and all your necessary information will be recorded. At the conclusion of this meeting, your home loan professional will take your disclosed information and conduct their assessment. It can take anywhere from several hours or days to a couple of weeks to receive your pre-approval. Then, once you receive this conditional approval, you have the green-light to commence your property search with confidence.

It may be smart to avoid any pre-approvals that are non-formal and non-written, completed over the phone or with a ‘less than 30 minutes’ claim, or any lenders who won’t assess your loan application while completing your pre-approval. A pre-approval that includes a bank assessment is likely to provide you with a more concrete estimation of your borrowing power.

You must bear in mind that pre-approval is conditional, which means it is not verification that your loan application will be accepted. There are several instances where your loan application my be rejected despite a positive pre-approval, these include:

• A career change
• Rising interest rates
• A change to your lender’s criteria
• A change to your financial circumstances – positive or negative
• An issue arises with the property you were eyeing
• The discovery that your initial pre-approval was unreliable by lender fault
• Your lender discovers you lied or omitted details for your pre-approval, or
• A sudden impact on your credit score

If your loan application is denied post pre-approval it may be best to withhold from immediately placing another application. Each time you apply for pre-approval, or a loan, this will be marked on your credit report as an enquiry. Frequent enquiries may be considered a red flag by lenders.

Instead, speak to your lender or your broker about the reasons for your rejection, and your options moving forward. It may also be beneficial to search for a more affordable property, maintain your new or current work role for a longer period, or work on improving your credit score. Always speak to a financial advisor if you are unsure of your options.