Home loan approval: Should you try to get pre-approved?

Getting a home loan approved can take weeks. But a home loan pre-approval can typically be done in just days and provides the stepping stone many buyers need to confidently enter the property market.

The pre-approval process can also be beneficial in a number of ways: 

• It can help you become familiar with home loan applications
• It can show you how much you can afford to spend on a home
• It can indicate to sellers you're ready to proceed with a purchase.

Consider that in the eyes of real estate agents and vendors, all prospective buyers are not equal! They’re looking for serious offers from serious buyers and pre-approval can help with this.

Let’s get into it a bit more below.

What is home loan pre-approval?

When your home loan is pre-approved it means a lender is willing to lend you an amount of money to put toward your property purchase. This is basically a first step toward being fully approved as the lender is mostly satisfied with your financial position (though they’ll likely need some more information before fully approving your loan).

In other words, your home loan is agreed to ‘in principle’, which is a fancy way of saying the lender agrees generally to the idea of your home loan for a proposed amount.

Keep in mind that you’re under no obligation to take on the loan, nor is the lender obligated to lend you that amount. But this pre-approval phase can be very useful to both parties, borrower and lender. It strongly indicates that you fulfil the lender’s borrowing requirements and conversely the lender gets a prospective customer.

Focus your house hunting 

Pre-approval is a good first step to take because it means you can house hunt with a degree of confidence knowing how much you can afford. 

With pre-approval, your focus can turn to a specific type of property and to a preferred area where the price point is suitable. It equally means that if you're bidding at an auction, you can have a maximum bid in mind. So you see, without pre-approval, hunting for a home can be a lot of guesswork.

While it's not a requirement in the home buying process, pre-approval can give you the flexibility to better negotiate and in this way, put you ahead of other buyers going for the same property. 

What do I need to get home loan pre-approval?

Home loan pre-approval is sometimes called ‘conditional’ approval, which simply means the lender is mostly happy with your application for a home loan but still needs more information before giving you full approval.

For pre-approval, the lender will take into consideration your overall financial situation, and typically needs to verify the following:

• your identity
• your income 
• your expenses. 

This involves providing paperwork such as payslips and proof of any other income such as bonuses or rental income. You’ll also need to show details of ongoing expenses.

More specifically, a lender will likely ask you about:

• Your employment
• Your credit history and credit score
• Your level of savings 
• Your assets and debts.

When should I apply for home loan pre-approval?

You should be considering pre-approval only once you have these likely requirements in order. This means you’ve saved up a deposit that meets the lender’s expectations, can show genuine savings beyond this, have a good credit score and have a solid idea of your borrowing power and if it qualifies you for the loan you're after.

However, consider that each lender will have different loan-to-value ratio criteria for their home loans and it’s worth comparing these. For example, some may allow you to borrow up to 90% of the property value (e.g have a deposit of as little as 10%). 

Lower deposit loans are generally available to owner occupiers, and lenders may have stricter deposit requirements for investors.

Who offers home loan pre-approval?

Mortgage pre-approval is offered by everyone from the big 4 banks (CommBank, NAB, Westpac and ANZ) to the smaller online lenders, mutuals and credit unions. It’s worth shopping around. 

How long does pre-approval last?

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 during this period, you may be able to 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.

Let’s recap: What are the benefits of home loan pre-approval?

• Get confidence to make offers: pre-approval gives you an indication of your borrowing power and therefore what you can or can’t afford. With that information you can negotiate and bid on homes with more confidence.
• Stand out to sellers: some vendors will favour buyers who are pre-approved as they can potentially settle sooner. Real estate agents representing vendors will also look favourably on buyers who are more serious about making an offer. Pre-approval shows genuine buyer intent.
• It usually doesn’t cost you: there’s generally no fee to get pre-approved and so if you’re ready, it makes sense to take the next step. (Note: A few lenders might charge a small fee for the process).

Are pre-approvals limited?

When the provider pre-approves you for a home loan they will cap the amount you can borrow. The benefit of this that you won’t be tempted to spend beyond this limit. A capped amount can also help you budget better, giving you a clearer idea of the types of homes you can afford. This can really save you time and energy.

Okay, I’m ready. How do I get home loan pre-approval?

Here are 5 key steps to applying for home loan pre-approval.

Step 1: Get a copy of your credit report. Lenders use your credit score to assess you for pre-approval and whether or not you will be risky to lend to. So you’ll want to make sure before you apply that you’re a good candidate by getting a copy of your credit report for free online. Check it and also be sure to get on top of any debts by paying them off as quickly as you can. 

Step 2: Compare home loans. It’s smart to apply for a home loan that's the best possible match for you. There are many different types of home loans available, so it pays to compare and look for one with a good interest rate and that has the sorts of features you’d like.  

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 major lifestyle changes like switching jobs or moving house in the lead up to applying.

Step 4: Provide the lender with borrowing details. At the pre-approval stage you may not have found the property you want yet, but the lender will still want some information about your intent. This may include an estimated 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 signing onto the loan.

Step 5: Organise your documents. Providers will also ask you to provide several forms of documentation, such as your income (payslips, rental income) and expenses (credit card and loan debt), and your driver’s licence. They’ll also want to see a genuine level of savings.

In conclusion: Having earned their approval!

Once the lender is satisfied 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 and real estate agents when you’re ready to make an offer on a property. 

Keep in mind that the lender doesn’t necessarily have to give you final approval even with pre-approval accepted. Final home loan approval will come once the provider has checked the property you’ve made an offer on and is happy the price paid matches the market value. They might ask for a fully signed and dated contract of sale, or even extra proof of ongoing finances such as recent pay slips. 

If you’re ready to find your new home, the next step is to compare potential home loans. Mozo’s home loan hub is a good place to start.