Application to settlement: What is the home loan process?

The very thought of applying for a home loan is enough to send shivers down the spines of many Australians looking to enter the property market for the first time. But with a pinch of patience and a healthy dollop of organisation, the affair breaks down into a few neat steps that should serve to demystify the home loan approval process. 

Depending on which state you live in, it will generally take between four to six weeks from the time that you submit your application to when you reach a settlement. There are a few factors at play that will influence this timeline, like which lender you use, what your financial situation is, and how quickly you return all the mortgage documents.

In short, the home loan process is as follows:

1. Pre-approval
2. Property valuation
3. Formal approval
4. Signing the Contract of Sale
5. Settlement

Hopefully, by the end of this guide you'll have renewed confidence in yourself and maybe even a little motivation to start saving up that deposit if you haven't already.

Pre-approval is essentially a way for lenders to gauge what size loan you could comfortably afford to repay by establishing what your financial position is. 

While not a guarantee of your borrowing power (or a lender’s unconditional willingness to loan you the money), it’s a great tool to have in your arsenal come the day when you’d like to drop the auctioneer’s hammer on a new home.

It isn’t always necessary to get pre-approval, but it will give you a leg up on the competition, as well as show both the property owner and your lender that you’re serious.

How to get pre-approval for a home loan

To get pre-approval from your prospective lender, you’ll need to submit a full mortgage application, which includes the following:

• A completed and signed application form
• ID documents (like a drivers licence, passport, Medicare card, ATM cards)
• Evidence of your income (think payslips, tax returns, or a Notice of Assessment if you’re self-employed)
• Evidence of your savings and/or your house deposit in the form of a bank statement 
• Evidence of your current debt status (credit cards, personal loans, and other home loans).

Once you have submitted the complete mortgage application, you’ll have to wait for the lender to assess it. The time this takes will depend on the complexity of your situation and your choice of lender, but it could be as quick as three days (for smaller lenders), or as long as 24 days (if you opt for the bigger ones). 

The time it takes to get approved is usually influenced by how much you’re borrowing. If you’re borrowing more that 80% of the property value, then lenders see that as higher risk.

Other factors which could contribute to the length of your pre-approval application process include:

• Borrowing with a guarantor 
• Buying a unique property (rural/regional)
• Unusual employment circumstances (contract work, if you’ve just started a new job)
• If you’re borrowing through a trust, company, or Self Managed Super Fund (SMSF)
• You’re a non-resident living overseas or living in Australia on a temporary working visa.

Pre-approvals generally last up to three months, but some lenders offer ones that last for 110 days too.

After you’ve got your pre-approval and found your dream home, you’ll need to request a property valuation from your lender. 

A property valuation will allow a lender to decide whether the value of the property in question meets their lending criteria. 

How is property valuation calculated?

Lenders determine a property’s value by considering the condition of the property and how much houses in that suburb are usually worth. A bank valuation will also take into account recent market movements and environmental factors. 

The cost of a property valuation varies depending on your lender, and the overall time it takes will depend on the kind of valuation process they decide to use.

How is a property valuation done?

There are different kinds of property evaluation, including:

• Full valuation: a comprehensive inspection of the property inside and out, a written report for the bank including photos, the age of the property, its condition and zoning restrictions
• Kerbside valuation: an external inspection of the property that mainly looks at recent sales in the area
• Desktop valuation: based on relevant sales data and involves no inspections of the actual property
• Automated valuation: a stats-driven valuation using the property’s attributes (like number of bedrooms and bathrooms) and recent sales data.

Once your property valuation is complete, you should hear back from your lender. If it meets their requirements, then you will receive final approval for your home loan request.

Once formally approved for the home loan by your lender, your conveyancer will receive the Contract of Sale. From there, you’ll meet with the property’s seller and their conveyancer to discuss the terms outlined in the contract.

What is a Contract of Sale? 

In essence, a Contract of Sale is a legal document that binds an agreement between the parties involved in the transaction. The contract terms are negotiated by either party’s solicitors or conveyancers. 

While you may be recommended a conveyancer by the vendor, it’s a good idea to hire your own. That way you ensure the contract terms work as well for you as they do for the seller.

After the terms are negotiated and all parties sign on the dotted line, you’ll discuss the settlement date. Generally, it’s four weeks after the contract is signed.

We recommend champagne.

• Compare home loan deals online, taking the time to make sure it’s the best possible match for you
  Read the mortgage documents carefully
• Be prepared by providing all the documents the bank asks for the first time around
• Make sure that all of your supporting documents and ID are the most recent ones
• Lenders look upon evidence of steady employment favourably 
• A bad credit history might turn a lender off, so make sure you pay off any outstanding debts and avoid applying for personal loans and credit cards in the 12 months prior to applying for a home loan 
• Show good payment history when it comes to debts like credit cards, rent, and personal loans 
• A larger deposit means a cheaper loan, so if you haven’t already, get saving!