If you’re ready to start your property search, how can you confidently attend auctions and submit offers when you’re unsure about your borrowing capacity?
That’s where home loan pre-approval comes in. If you want to avoid wasting time looking at properties out of your price range and have a better idea of how much you’ll be able to borrow, it may be helpful to get pre-approved.
What is home loan pre-approval?
Home loan pre-approval (also known as conditional approval) is when a lender agrees, in principle, to lend a borrower a specified amount of money for a home loan. Lenders assess various factors under their lending criteria before granting pre-approval, including financial documentation and credit history.
Borrowers will typically seek home loan pre-approval when they’re ready to search for a property.
Are you curious about your borrowing power? Find out an estimate using Aussie’s Borrowing Power Calculator.
What are the benefits of getting pre-approved for a home loan?
Confidence to make offers: pre-approval gives you an indication of your borrowing power and therefore what you can or can’t afford. It also helps you understand your maximum loan amount, which can guide your property search. This way, you can have the added confidence to make offers on properties or bid at auction.
Favoured by vendors: some vendors will favour buyers who are pre-approved as they can potentially settle sooner.
Extensions are possible: pre-approval is valid for 3-6 months but can often be extended if you talk to your lender or broker before the end of this term.
It’s free: there’s generally no cost to get pre-approved.
When to apply for pre-approval
Timing is everything when it comes to your home buying journey. Applying for pre-approval at the right moment can significantly impact your experience and success. Here are some key factors to consider before you apply for pre-approval:
Research: Begin by researching the real estate market to get a sense of the price range for properties that interest you. This will help you set realistic expectations.
Budget: Utilise online mortgage calculators to estimate your borrowing capacity. This will give you a clearer picture of how much you can afford to spend on a property.
Financial Situation: Ensure that your financial situation is stable. This means having a clear understanding of your income, expenses, and credit history. A stable financial position will make you a more attractive candidate for pre-approval.
Timeframe: Consider your timeframe for house hunting. Pre-approvals are typically valid for 60 to 90 days, so it’s crucial to apply when you’re ready to start looking for a home. This will ensure that your pre-approval is still valid when you find the right property.
By strategically planning when to apply for pre-approval, you can streamline your home buying journey and increase your chances of securing the home you desire.
You might also be interested in: Can my home loan application be rejected if I have pre-approval?
What are the potential downsides of pre-approval?
You’ll need to submit multiple documents: pre-approval applications typically requires you to submit a lot of documents. These include ID verification, recent payslips, PAYG summaries and existing assets and liabilities – just to name a few.
Applications are recorded in your credit history: every pre-approval application you make will be recorded in your credit history as a credit enquiry. Each application involves a credit check, which is a standard procedure for verifying your financial history and eligibility for the loan. It might be best to avoid applying with multiple lenders at one time as they might assume that you’ve been rejected for a pre-approval before, which could raise red flags. Additionally, each pre-approval application results in a 'hard' inquiry on your credit report, which can negatively affect your credit score if multiple applications are made.
Limited pre-approval period: pre-approval only lasts 3-6 months if you’re not able to extend it or miss the deadline for extension. If you aren’t planning on buying a property soon, you may need to reapply for pre-approval.
Pre-approval is conditional: While a fully assessed pre-approval is based on current financial circumstances, any significant changes may require re-assessment, and lender policy changes typically only impact conditional approvals if they expire; however, system-generated approvals, which are not manually verified, may also need re-assessment in the event of financial or policy changes.
What documents do you need to get pre-approved for a home loan?
You’ll need to submit several documents to your lender in order to apply for pre-approval.
Keep in mind that you may need to provide slightly different documents depending on your situation, for example, if you’re a full-time employee vs self-employed.
Proof of identity documents: valid ID verification such as a passport, Australian drivers licence, or birth certificate.
Proof of income statements: for example, your recent payslips, bank statements, tax returns or a letter of employment.
Proof of assets: your savings, superannuation, shares or managed funds as well as any vehicles or properties under your name.
Proof of liabilities: credit cards, car loans, other personal loans, student debt and any other unpaid debt.
Living expenses: for example, groceries, bills (gas, electricity, water and internet), recreation and dining, transport and so on.
Types of pre-approval
When it comes to pre-approvals, not all are created equal. There are two main types of pre-approval: system-generated and fully assessed. Understanding the differences between them can help you choose the right one for your needs.
System-generated pre-approvals
These are generally quicker to obtain and are often issued based on automated assessments. While they can provide a fast indication of your borrowing capacity, they may not be as reliable or comprehensive. System-generated pre-approvals might not take into account all aspects of your financial situation, making them less accurate.
Fully assessed pre-approvals
These involve a thorough assessment of your financial standing by a lender. They provide a more accurate indication of your borrowing capacity because they consider all relevant factors, including your income, expenses, and credit history. Although fully assessed pre-approvals take longer to obtain, they offer a more reliable foundation for your home buying journey.
Choosing the right type of pre-approval depends on your specific needs and how quickly you need an indication of your borrowing power.
Is there a chance my pre-approval could be rejected?
Like any home loan application, there is a possibility your application to get pre-approved could be rejected. Some of the reasons this could happen include:
There were inaccuracies or gaps of information in your application
You have a low credit score or poor credit history.
Your lender changes their lending policy and you no longer fulfil their requirements.
Your financial circumstances suddenly change.
The property you’d like to buy isn’t approved by the lender (i.e. a studio apartment, a property with major structural defaults, serviced apartments and so on).
The loan amount you request is over 95% of the property’s value.
Can you extend your pre-approval?
If your pre-approval period hasn’t yet expired, chances are your lender will be happy to extend this period for you.
Pre-approval extensions come at no cost to you. You can either reach out to the lender who granted your pre-approval or your broker to request an extension on your behalf. This way, you won’t need to reapply and resubmit all the documents from your first application.
In some cases, you may need to provide some additional documentation if your financial situation has changed.
What happens when your pre-approval expires?
Your home loan pre-approval will typically last 3-6 months, but if you haven’t found the right property in this time or haven’t successfully obtained an extension, your pre-approval will expire.
Once it expires, you will be able to reapply for pre-approval with the same lender or another lender if you wish.
You will be required to submit updated versions of the same documents you used when you applied the first time.
What do you need to do with your pre-approval when you’ve found a property?
After you’ve made an offer on a property and it’s been accepted, it’s time to get in touch with your broker to let them know. Your broker will get the wheels turning and help you finalise your home purchase.
It’s crucial to start the process of receiving a formal home loan approval as soon as possible to help prevent delays in settlement or the chance of another buyer’s offer being accepted.
You will need to send a copy of your contract of sale to your broker, as well as pay your deposit once the cooling off period, if applicable, is over.
You will also need to arrange relevant inspections for the property, such as building, pest or strata reports. If you have a conveyancer or solicitor, they will be able to do this on your behalf.
If you have any questions about pre-approval or the home buying process, an Aussie Broker can help. Simply get in touch and book time to chat whenever it’s convenient for you.
