Article by Mozo
If you’ve made it to the pre-approval stage of the property buying process it means you’re nearing the finish line. Congrats!
But if you want some more info on how pre approval works, including everything from how long it will last to the process you’ll follow, this guide is for you.
Let’s start by answering some of the commonly asked questions around pre approval home loans:
The name is pretty self explanatory as home loan pre approval is generally the “conditional” approval before you are formally approved for a mortgage.
The reason many home buyers apply for home loan pre-approval is because it strongly indicates you fulfil the lender’s borrowing requirements and are likely to be approved for the home loan. However, it’s important to remember that most pre approvals are “conditional”, which means even if you make an offer on a property the lender isn’t obligated to follow through and approve you for the loan.
Pre approval is offered by everyone from the major banks - CommBank, NAB, Westpac and ANZ - to the smaller online lenders, mutuals and credit unions. When choosing which provider to go with here are two major things to ask yourself:
Am I comfortable with banking online? Often smaller lenders offer more competitive home loan deals with lower interest rates (comparison rates) and fees, as they don’t need to pay for the cost of bricks and mortar branches. So if you are the type of person who is comfortable with managing your mortgage from the comfort of your home, then you may be better off taking out a home loan through an online only player.
Do I want to bundle my banking products? While online lenders generally offer lower rates, there are some positives to taking out a home loan with a major. For example, many big banks offer bundling, which means if you bundle say your credit card and home loan together, the bank may wipe the establishment fee and offer you a better interest rate.
For more info on the differences between the major banks and smaller players, read our choosing a home loan lender guide.
Each provider will have their own cap on the number of months pre-approval will last for but generally it is around 3-6 months. If you haven’t found a property that takes your fancy in this period, you can ask your lender to extend the pre approval term, however they will reassess you at this point to ensure your financial situation hasn’t changed.
Home loan pre approval is one of the last stages on your journey to purchasing a property and should only be taken out when you’ve saved up a deposit that meets the lender’s requirements, can show genuine savings, have a good credit score and you know that you have the borrowing power to be approved for the loan.
Each lender will have different loan to value ratio requirements for their home loans. Some may allow you to borrow up to 95% of the property value (e.g have a deposit of as little as 5%). These days low deposit loans are generally only available to owner occupiers, and lenders may have stricter deposit requirements for investors, only allowing you to borrow up to 80% of the property value.
When the provider pre approves you for a home loan they will put a cap on the amount you can borrow, which means you won’t be tempted to spend beyond this limit. It also means you’ll have a clear idea of the types of properties that fall within your budget and narrow down your real estate search for a property that falls under this amount.
From knowing your credit score to organising your paperwork, there are a number of steps you’ll need to take when it comes to getting your home loan formally approved:
Step 1. Get a copy of your credit report. Lenders use your credit score to assess you for pre approval and whether you will be risky to lend to. As a double whammy if you are rejected it will show on your credit report and will hinder your chances of being approved by other home loan lenders. So you’ll want to make sure before you apply for home loan pre approval you’re a prime candidate by getting a copy of your credit report for free online. Check for any mistakes that shouldn’t be there and if you find some red marks against your name, rectify them by paying back any credit card or personal loan debt before you apply for pre-approval.
Step 2. Compare home loan deals online. Before you apply for home loan pre approval, you should also ensure that the provider’s home loan package is the best possible match for you. There are many different types of home loans available so it pays to compare home loan deals online and look for a mortgage with a great headline rate, comparison rate and features to boot. You can kick off your home loan search here.
Step 3. Don’t make any lifestyle changes. When the lender assesses you for pre approval they will want to see that you have income stability, so avoid making any big ticket purchases like a new family car or making lifestyle changes such as switching jobs in the lead up to applying.
Step 4. Provide the lender with borrowing details. Once you’ve found a home loan that ticks the boxes for you, you can begin your home loan pre-approval application by either going into the provider’s branch to speak with a bank manager or apply through their online application facility. At the pre approval stage you may not have found the property you want to buy yet but the lender will still want an estimate figure of how much you want to borrow, what the property value might be, whether you’re buying as an investor or owner occupier and the number of borrowers.
Step 5. Organise your docs. Providers will also require you to provide several forms of documentation, such as your income (payslips, rental income) and expenses (credit card, loan debt), so they can assess you for their home loan pre approval. They will also want to see genuine savings through your savings / bank accounts and identification like your driver’s licence and or passport.
Step 6. Home loan pre-approval. Once the lender is happy that you meet their lending criteria they will send you a form that outlines your pre approval, including the amount you can borrow up to. You can then show this form to sellers/real estate agents when you’re ready to make an offer. However, it’s important to remember that just because a lender approves you for pre-approval they don’t necessarily have to give you final approval.
Step 7. Lender assesses property. Final home loan approval will come once the provider has assessed the property you have made an offer on and are happy that the amount you have paid matches the market value (i.e you haven’t overpaid). They will then send you a contract to sign and send back to them. After this they will pay the amount to the seller (minus the deposit you have already made).Now pop the bubbly! Home buying guides