If you’ve been shopping for a home loan for the first time, you may have encountered the term pre-approval. Some banks use the term unequivocally, while others use conditional approval and other terms.
Let’s take a deep dive into what loan pre-approval is and why prospective homeowners need to grasp it before applying for a home loan, and the advantages it provides.
What is loan pre-approval?
Loan pre-approval (also known as home loan pre-approval and conditional approval) is a preliminary assessment conducted by a lender to determine how much money they are willing to lend you for a mortgage or home loan.
Getting pre-approved for a home loan gives you the green light to look into the property market and explore your options within the pre-approved budget.
To determine the maximum loan amount you are qualified for, pre-approval entails a detailed analysis of your financial condition, credit history, and other relevant factors.
It can also increase your appeal as a buyer to a prospective seller because it shows that you’re committed to buying the home and that you’re less likely to cancel your offer due to insufficient finance.
In a nutshell, loan pre-approval is a key step in buying your first home and a crucial element for a smooth home-buying process.
How does pre-approval work?
Securing your financial records and proof of income is the first step to getting pre-approved for your home loan. Talk to our mortgage brokers about your unique financial situation to know how you can better prepare for your home loan application.
Next, your lender will evaluate your total financial condition when you apply for pre-approval and will often need to confirm your identity, income, and expenses.
This entails presenting documentation, such as pay slips, evidence of any additional sources of income, such as bonuses or rental income, and specifics on recurring costs.
Documentary proof of all your assets and liabilities, such as personal loans and credit card balances, must be provided to meet the lending conditions.
Banks may also perform a credit check to determine your credit history and score. Your financial standing significantly influences your pre-approved loan amount and interest rate.
Financial statements, checks, and balances could uncover financial concerns, like an existing credit card debt or anything similar you may have forgotten about in the past.
But having signs of previous financial hardship isn’t generally a dealbreaker. Your lender may need you to explain the missed repayments and confirm your ability to repay the loan.
You will receive a pre-approval letter from the lender if you satisfy their requirements.
The letter serves as official documentation outlining the parameters of the pre-approval as well as the loan amount you have been pre-approved for.
The length of this process often varies on your particular circumstances, but the lender will keep you informed as to how your application is doing. Additionally, no expense is associated with this, and neither party is under any duty.
What are the benefits of getting pre-approved?
Pre-approval for a home loan comes with various advantages for prospective homebuyers. It’s an important step that gives you financial transparency and an edge in the housing market.
Here are a few key benefits of being pre-approved:
- You can confidently look for properties within your price range after you have a pre-approval. This targeted strategy speeds up your search and makes it easier for you to locate the ideal house.
- You can get a realistic idea of how much you can afford to spend on a property by pre-approval. This helps you to save time and effort looking at homes out of your price range.
- When pre-approved, sellers are more likely to consider your offer seriously. They are aware that you are capable of purchasing because you have already obtained financing. Negotiating the sale’s price and terms may provide you with more leverage.
- Pre-approval is good for 3-6 months; however, you can frequently extend it if you speak with your lender or broker before the end of this period.
- Any potential problems with your credit history or financial condition can be found and fixed throughout the pre-approval process. This guarantees a quicker loan approval process in the future.
Are there drawbacks to pre-approval?
Pre-approval for a home loan has many advantages but also some possible downsides and considerations.
The lender typically does a credit check when you apply for pre-approval. Multiple credit checks from various lenders over a short period will affect your credit score, although a single credit check often has no effect.
This is why submitting a manageable amount of pre-approval applications is advised.
Pre-approval letters have a validity period typically between 3-6 months. You might need to reapply if you cannot find a property within that time frame, and the terms might vary if your financial status changes.
Your present financial circumstances determine pre-approval. The final loan approval terms may vary from the pre-approved terms if your circumstances change (for example, if your income drops or you make a significant purchase).
What are the requirements?
Depending on the lender and the sort of loan you’re considering, different loans may have additional pre-approval requirements. But the usual conditions that lenders often make throughout the loan pre-approval procedure are as follows:
Valid identification documents, such as a passport, Australian driver’s licence, or birth certificate, serve as proof of identity.
Proof of income statements, such as a letter of employment, paychecks from recently, bank statements, tax returns, and your salary.
Your savings, superannuation, shares, managed funds, and any vehicles or properties registered in your name prove your assets.
Credit cards, auto loans, other personal loans, college loans, and any other outstanding debts are evidence of your liabilities.
Living expenses include food, bills (such as gas, electricity, water, and internet), entertainment and eating, transportation, and so on.
Does getting pre-approved mean I’ll get the loan?
Although pre-approval increases your chances of authorising a loan, it doesn’t offer 100% assurance. However, several factors could influence whether you are genuinely granted the loan:
Your eligibility for the loan may be affected if your financial condition changes between the time of pre-approval and final loan approval, such as an unexpected layoff or a significant increase in debt.
Additionally, the pre-approval process may be impacted by changes in laws and regulations in some ways, including documentation requirements, eligibility requirements, disclosure guidelines, and more.
The lender may also demand an appraisal if you’ve selected a specific property to determine its value. This is important in determining whether the valuation of the property matches the loan amount you are requesting.
An estimate of the loan amount you might be eligible for is given to you at the pre-approval stage of the loan application process based on the information you’ve provided to the lender.
Once you get pre-approval and your lender approves of the home you wish to purchase, they will issue a final approval, or conditional approval. This will come as a 5-page letter or a booklet indicating the home loan terms, policies, and interest rate.
Our senior mortgage brokers will comb through the fine print and ensure nothing changes in the home loan policy without your proper awareness. We’ll also guide you every step of the way and help you get the best terms for a property that suits your financial goals and unique needs.
When should I apply?
We recommend applying for a home loan before scouting or making a purchase offer for a property.
That way, you’ll have a budget to work on and guide you in researching the property market. Our senior mortgage brokers at Mortgage Pros will also take you through several home loan options that match the current real estate market and how much down payment you can afford.
We also advise saving for a decent loan deposit or researching first-home guarantees and grants in your suburb. Government incentives and home loan concessions will help you crack the property market for as low as a 5% deposit and with no LMI.
Consult with our mortgage brokers for approval and whether you qualify for a first-home guarantee and LMI concessions.
Get started with our hassle-free loan pre-approval process today. Gain financial clarity, enhance your bargaining power, and streamline your home-buying journey. Contact our mortgage brokers at 1300 030 388 or email us to discuss your path to homeownership.