Home loan pre-approval, also called conditional approval, is confirmation from a lender that an applicant is eligible for a home loan of a specified maximum amount. They don’t have to take the loan, and the lender doesn’t have to lend that amount, but, in principle, the conditional approval shows sellers the applicant is a serious buyer and can afford the property.
Many people who go and view an open house might not really be interested in buying that particular house; they may be doing their homework, or just trying to get a sense of the market. But with conditional approval of a home loan, you’re one step ahead of the rest, as real estate agents and vendors can see that you’re potentially ready to buy and are someone worth negotiating with.
We’ll discuss everything there is to know about a home loan pre-approval, from how and when to do it, to the following steps to take thereafter.
How Does Conditional Pre-Approval Process Work?
The pre-approval application lending criteria is quite similar to applying for a standard home loan: the lender will need to verify your identity, and then look into your overall financial situation, such as income and expenses.
You will need to provide paperwork such as:
- Identification documents
- Proof of other sources of income (bonuses, rental income)
- Details of ongoing expenses
- Evidence assets (savings, superannuation, investment properties)
- Evidence of liabilities (personal loans, debt, credit card statements)
Lenders will perform a check on your credit history to get an understanding of how you work with money, such as if you have good repayment behaviour or if you’ve defaulted on debit orders. This will show the lender whether you are likely to honour the loan repayments. Remember, your credit file could still show things like old credit card debt that occurred within the last 2-7 years, depending on what it is.
If the lender is happy with your credit history and decides you’re a good loan candidate, they will issue a written pre-approval. The conditional approval home loan document will clearly outline the conditions of the agreement.
The duration of this process will depend on the lender, but they should keep you updated on your application’s progress.
When In My Home Buying Journey Should I Apply For a Home Loan Pre-Approval?
The journey usually begins by house hunting and doing some research, so that you know what the price ranges are of the homes you are interested in buying. This should be based on the current property market, and the amount of deposit you are prepared to pay (and can afford).
Tip: You can get an approximation of your borrowing capacity by using one of our online home loan calculators. This will provide the potential maximum loan amount you can borrow.
To start, think about the loan term you’re comfortable with and the different types of home loans that lenders offer. Look into things like fixed or variable interest rate home loans, and determine whether certain features will benefit you, such as an offset account or redraw facility.
You can begin the application process whenever you’d like, and you can even apply online. In general, a pre-approval expires after three months and can typically be renewed after the 90-day period, if your financial situation hasn’t changed.
If you apply to be pre-approved for a home loan, it gets put down in your credit history, and this can influence your credit report down the line. If you apply multiple times within a short timeframe, it can reflect badly on your credit rating and make lenders concerned that your financial situation isn’t stable. So, try not to apply too early if you’re not serious or not ready to buy. Applying for multiple pre-approvals from different lenders simultaneously can also negatively impact your record.
The best time to apply to be pre-approved is:
- When your credit accounts are well serviced
- You’ve saved up enough deposit, and
- You’re actively looking.
Why Doesn’t Pre-Approval Guarantee Being Approved For a Home Loan?
Approval in principle doesn’t guarantee that your home loan application will be approved. Remember, conditional approval is just approval ‘in principle.’
Your final loan application may differ from your pre-approval if:
- Your financial position changes
- Market conditions change
- The lender’s home loan policies and procedures change significantly
- Valuation of your property comes back lower than you originally purchased it for.
Full or final approval will also depend on the lender’s property valuation. If the sale price is a lot higher than what the lender valued the property to be, it could affect how much you can borrow.
So, final approval of your home loan will probably involve more rigour and paperwork, but at least pre-approval gives you a good, informed start.
What Happens After Getting Pre-Approval?
Once you’ve got home loan pre-approval, you can start house hunting with a clear and realistic budget.
When you find the perfect property, you can start the process of unconditional approval or full approval for your home loan.
This will involve things like:
- The lender doing a property valuation
- Sorting the property insurance
- Finalising the contract of sale
- Verify that your financial circumstances haven’t changed
- Filling in First Homeowner Grant papers, if applicable
- Doing building or pest inspections.
If the lender is satisfied with your application, you will be granted final approval for your home loan and you can buy your dream home.
Applying for home loan pre-approval will help you determine whether you’re in a financial position to be approved for a standard agreement.
When you apply for pre-approval, the lender will do a credit check to ensure you have a good history of honouring payments.
While you can apply for conditional approval at any point, keep in mind that approval in principle is only valid for 90 days. If you’re not intending on applying for a standard loan during that time and you need to do another pre-approval later, it will reflect poorly on your credit record.
When you do find the home you’d like to buy, you can apply for final approval. This isn’t guaranteed, but will likely be approved if your financial circumstances haven’t changed.
To help you along the way, The Mortgage Agency has experienced brokers on hand to walk you through every step of your homeownership journey. We can assist with the application process and provide professional guidance along the way.
Contact our team today to get started.
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property buyers and investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal, tax or investment advice. You should, where necessary, seek your own advice for any legal, tax or investment issues raised in your affairs.