A pre-approved home loan is a valuable tool for homebuyers as it indicates how much they can afford when purchasing a property.
However, how do you get pre-approval on your home loan? And what exactly do you need for your application? This guide will explain everything you need to know so you can prepare yourself for your application for a pre-approved home loan.
What is Pre-Approved Home Loan
A pre-approved home loan, also known as conditional approval, is simply when a lender provides you with the maximum amount of money you can borrow from them to purchase your home, even if you haven't found it yet. Essentially, the pre-approval acts as an estimate for the amount you're eligible to borrow from the lender.
As a result, the pre-approval makes it easier for you to understand your financial limits when searching for your new home.
However, it is important to note that the agreed borrowing amount is conditional. This means that the lender still has the right to decline your final loan application if there is an unforeseen change in circumstance.
Why is Pre-Approval Important?
One of the most significant benefits of pre-approval is having a set limit in mind when searching your home. This can save considerable time and stress looking at properties that you aren't even sure you can afford.
Furthermore, having pre-approval provides you with the confidence to make offers with greater ease while also portraying yourself as a serious buyer to real estate agents.
Pre-Qualification vs. Pre-Approval
A common misunderstanding is the difference between pre-qualification and pre-approval. Pre-qualification is the first step in determining your creditworthiness for a loan, this is typically achieved by completing a credit application.
The best way to describe pre-qualification is to think of it as the first hurdle in qualifying for a pre-approval. If you can't qualify yourself as a trustworthy credit recipient, it's unlikely that your lender will pre-approve your home loan.
When Should You Get Pre-Approved for a Home Loan?
Although pre-approval is not compulsory for a home loan, there are certain instances where it can benefit you. This is particularly true if you're unsure how your financial situation will influence your borrowing capacity. In return, pre-approval can provide you with realistic expectations when looking at homes instead of selling yourself short or overstretching your financial capabilities.
Furthermore, you can shop around for pre-approvals from different lenders to compare offers. However, it's crucial to remember that each inquiry will likely show on your credit report, which can lower your score.
If you are looking for comparisons across multiple lenders without sacrificing your credit score, Joust online mortgage marketplace can provide you with various offers in one location.
Pre-Approved Home Loans at Auctions
The most critical time to ensure you have pre-approval is during an auction. Once the hammer drops on the winning bid at auction, that is the final committed price (often with no cool-off period either).
Therefore, having a pre-approval at auction is a safe way to ensure you're operating within your borrowing capacity and ensure that you can commit to the final price.
Home Loan Pre-Approval Requirements
If you are thinking of applying for a pre-approved home loan, you will need to meet specific requirements established by the lender.
Such requirements include:
- Proof of identification
- Evidence of income and employment
- Evidence of assets
- Credit report
Proof of Identification
Your first step in preparing your application should involve organising identity documents. Legally you are required to provide at least 100 points of identification documents.
Such documents can include:
- Birth certificate (70 points)
- Citizenship certificate (70 points)
- Current Australian passport or a valid passport from another country (70 points)
- Australian driver licence (40 points)
- An identification card with a photograph and name (40 points)
- Land Titles Office record (35 points)
- Current telephone, water, gas or electricity bill (25 points)
- Medicare card (25 points)
- Lease or rental agreement (25 points)
Evidence of Income and Employment
Lenders will require you to provide evidence of stable employment with regular income to prove that you're financially capable of paying back your loan. To prove this, you can submit bank account statements that show three or more months of salary.
If your lender requests more proof, you can also provide payslips, tax returns or a letter from your employer that confirms your salary. In ideal circumstances, lenders generally want to see that borrowers have had consistent work and income for at least two years.
In instances where you are self-employed, you can provide either a tax return or ATO Notice of Assessment no older than 18 months old to prove your employment status. Or, if you receive your salary from the government, you can submit a letter from Centrelink that explains your payments.
Evidence of Assets
Your lender may also verify your financial position by assessing the value of your assets. Assets refer to anything that you own that has a cash value.
Asset types that you can use to verify your financial security can include:
- Financial investments (cash, term deposits accounts, managed investments or securities)
- Home contents, personal effects (such as jewellery) or vehicles
- Managed investments and superannuation
- Real estate
- Annuities (income streams and superannuation pensions)
- Shares (whether private, publicly listed or unlisted companies)
- Sole trader, partnerships, private trusts and private companies
- Deceased estates
- As it's unlikely that lenders will request proof of all your asset types, it's best to check what specific evidence they would like before starting.
- Repayment history
- Total amount of debt
- Credit history length
- Credit mix
- New credit
You will also receive a score in your report that lenders will use to assess your credibility. There are multiple credit reporting bodies, each with its own scoring system. If a lender were to use Equifax, they would prefer to see a credit score of 800 or higher.
When applying for pre-approval, your lender will complete a credit check for you. However, it's also a good idea for you to check your credit report to ensure the accuracy of its information.
Typically most lenders will ask for the listed documentation. However, it's always a good idea to do your due diligence and check what your lender exactly needs to avoid delays in your pre-approval.
Home Loan Pre-Approval Process
Although there are multiple lenders across Australia, the process of getting your home loan pre-approved follows a similar pattern.
Here's what you can expect:
The first step in getting pre-approved for a home loan is reviewing your finances. This is when you'll gather all information about your income and expenses to get an idea of your home budget. An online mortgage calculator is a useful tool that can help you decide how much you can borrow based on the monthly payment you're able to make.
Research Home Loan Types
The next step is to think about what type of home loan is suitable for your financial circumstances. For example, home loans can either have fixed or variable interest rates. They can also vary on their term, with the most common types being 15-year and 30-year mortgages.
Commonly, homebuyers prefer to use their current bank for a home loan. However, this is often an ill-advised decision as you could be missing out on better loan deals from other lenders.
Each lender also has varying fees, down payments or additional expenses that can quickly add up. That's why we recommend using a home loan comparison calculator to help find the best loan that fits into your financial expectations and goals.
Apply for Pre-Approval With a Lender
Once you have organised all your finances and have an idea of the type of loan that's best suited, you can start your application for pre-approval.
When applying, your lender will ask you to submit all documentation to prove your finances, assets, and employment situation to get a pre-approval.
The loan officer will also talk with you about your loan options and ask about the amount you'd like to borrow. You'll likely also need to give the lender permission to access your credit report.
Following this, it could take a few days for the lender to complete a full assessment of your pre-approved loan application.
How Long Does Pre-Approval Take?
Depending on your lender, you should expect your application result anywhere between four hours to 2 weeks.
You typically have around 2 to 3 months before your pre-approval expires. It’s a good idea to check the length of time of the offer’s validity with your lender.
What Happens After Pre-Approval?
Once you have the green light on your pre-approval, you're free to shop for your dream home with confidence. If you have a real estate agent helping you in your property purchase, show them your pre-approval so they can help you find homes within your budget.
After choosing the house you want to buy, your lender will transition your information to the formal approval process.
Common Pre-Approval Mistakes
Nobody expects you to be a home loan expert, so it's okay to make mistakes every now and then.
One of the most common mistakes with pre-approvals is that people make several applications at one time. While shopping around is a good idea, you should limit your applications as these inquiries can negatively impact your credit score.
Another common mistake is that people often overlook the expiration date of their pre-approval offer. Most pre-approvals are valid for 90 days or less, so you'll need to purchase your property within that window.
Finally, some people fail to notify their lenders when their financial circumstances change. Such changes can include losing a job or a significant asset of value. Unexpected changes can prompt your lender to revoke your pre-approval, even if you have already purchased your home. That's why open communication with your lender is key to avoiding unnecessary financial stress.
How Far in Advance Should I Get Pre-Approved for a Mortgage?
Begin the pre-approval process when you're ready to start looking for your new home. Most pre-approvals are valid for a maximum of 90 days, so you won't want to seek pre-approval too far in advance of your purchase date.
Is it Hard to Get Pre-Approved for a House?
If you have all the documents your lender needs at the ready, pre-approval on your home loan can be a relatively quick and straightforward process. However, less-than-ideal financial or credit situations could hold some homebuyers back from getting pre-approved for a loan.
How Long Does Pre-Approval Last?
Most home pre-approvals last between 60-90 days. Your pre-approval is valid during that time for you to base your home buying power on. If you need more time, your lender may require you to go through the pre-approval process again.
Could Pre-Approval be Declined?
Yes. If your financial situation or credit history does not meet a lender's eligibility criteria, they could deny your pre-approval application.
Does Pre-Approval Guarantee Me a Loan?
No. Lenders still hold the right to deny your full loan application even if you have pre-approval.
Does Pre-Approval Affect my Credit Score?
Each time you apply for a home loan pre-approval, your credit report records it. Unfortunately, each inquiry on a credit report can lower your score. Therefore, homebuyers should avoid requesting several pre-approvals from multiple lenders.
Do All Banks Offer Pre-Approval?
If a bank offers home loan products, it will likely accept pre-approval applications. Pre-approval helps lenders pre-qualify candidates who might be eligible for a home loan, saving time on the underwriting process.