Home Loan Pre-Approval

Home loan pre-approval is a must to simplify your property search and put in an offer with confidence. We cover the pre-approval process and tips to increase your chances of securing the loan you want.

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, updated on August 7th, 2023       

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Home loan pre-approval simplifies your home buying journey.

Knowing the dollar amount a lender is prepared to offer in finance helps you refine your property choices and gives you confidence to make an offer.

What does home loan pre-approval mean?

Home loan pre-approval means a lender conditionally agrees to fund your mortgage. It is not a guaranteed loan offer.

You go through the pre-approval process when you’re ready to begin house hunting before applying for mortgage finance. 

Pre-approval helps you determine the amount of money you can afford to spend on a property.

Lenders consider your income, credit score, debt and assets to see how much you may be able to borrow and at what interest rate.

Home loan pre-approval may also be referred to as conditional approval or approval-in-principle.

Do I need home loan pre-approval?

Home loan pre-approval isn’t compulsory but it offers perks in the buying process.

You know what you can afford to borrow

Shopping for your dream home is difficult when you’ve got no idea how much you can afford.

Home loan pre-approval gives guidance on what you can spend and peace of mind that you’re likely to be approved for finance.

It shows sellers you’re serious

The Australian property market can be very competitive.

With home loan pre-approval you demonstrate to a seller and real estate agent that you’re serious about buying the property. You can bid with confidence at auctions.

Securing finance may be quicker

Pre-approval can speed up your mortgage application process.

You’ve done most of the leg work already and may only need to provide updated information when the seller accepts your offer.

What is the difference between “system-generated” and “full assessment” pre-approval?

Some lenders offer a quick system generated pre-approval process.

You complete the online application form and upload the required documents. This allows you to receive a fast assessment on the amount you may be eligible to borrow.

However, no credit analyst reviews your application at this point.

While this option can give you an idea of your borrowing capacity, it’s not advisable to make an offer based on a system-generated approval.

On the other hand, a full assessment involves a credit analyst thoroughly evaluating your application, running a credit check, and reviewing your documentation.

This process will take longer, usually a few days, but it gives you a stronger idea of whether you will qualify for a mortgage.

What is the process for home loan pre-approval?

The best time to apply for home loan pre-approval is when you're ready to begin home hunting.

Let’s look at the steps to take when applying.

Step 1: Take stock of your current financial position

Get your credit score

Having a good credit score can increase your chances of pre-approval on a loan with a competitive interest rate.

Your credit score is a number from 0 – 1200. Scores are categorised as follows:

Below average Average Good Very good Excellent

If you have a low credit score, it’s a smart idea to hold off on any pre-approval applications.

Instead, focus on improving your score. This will put you in a more favourable position for a competitive rate and loan product.

We cover how to improve your credit score further along.

Request your credit score report through credit reporting bodies like Equifax, Experian, or Dun & Bradstreet. You can access the report for free once every 12 months or if you have been refused credit in the past 90 days.

Calculate your debt-to-income ratio (DTI)

Your DTI is your total debts and liabilities divided by your gross income (before tax income). It’s worked out as a percentage.

For example –

Monthly bills and repayments = $2000

Money gross income = $6000

$2000 / $6000 = 0.33%

Your debts and liabilities take up 33% of your gross income.

Many lenders look at your DTI as part of the assessment process – adding in your potential mortgage repayment. It indicates how comfortably you could handle mortgage repayments on top of current debt commitments.

The lower your DTI, the less of a risk you pose to lenders. As a general rule of thumb, you don’t want to exceed more than 30 – 40%.

Calculating your DTI before applying for pre-approval allows you to pay down debt and reduce your DTI.

Step 2: Compare home loans

Research lenders and loans you’re interested in. Compare offers and take note of the following:

  • Interest rate
  • Monthly repayment amount
  • Fees in addition to interest
  • Can you repay the loan early?
  • Additional features. For example, redraw and offset account options
  • Can you choose your payment frequency – fortnightly, weekly or monthly?

Step 3: Apply to your preferred lender

Visit the lender website or call to find out how you can apply for a full assessment home loan pre-approval.

Some of the most common documents and information lenders will ask for during the process include:

  • Proof of identification: Passport, drivers license, birth certificate, or Medicare;
  • Proof of income: Usually payslips (at least 3 months) or if self-employed, your tax returns from the last 2 years;
  • The size of the deposit you have saved: Provide bank statements to demonstrate your savings habits;
  • Your general living expenses: For example, transport, accommodation, food, utilities, and health care;
  • Current debts: For example, credit cards, personal loans, and car loans;
  • Proof of other assets: Including real estate, shares, car, etc.

Compile these documents and any other information required by the lender then complete and submit the application form.

You should have an outcome within 3 – 7 days of submission.

What do lenders consider?

A credit analyst will be assigned to review your application. Factors they will consider include and are not limited to:

Credit score

With a “very good” or “excellent” score, chances are you’ll get access to the most competitive interest rate and mortgage products.

Below average or average scores are likely to attract higher interest rates or have a lender decline your home loan pre-approval.

Financial position

Lenders assess your debt, income, expenses and assets to get a bird’s eye view of your financial situation.

This helps determine whether the loan amount you want to apply for is reasonable for your situation.

Employment status

Mortgage lenders will want to know how capable you are of meeting your repayments.

They’ll check if your employment and income has been stable over at least a 6 – 12 month period.

Savings track record

A diligent savings habit will be looked upon favourably.

Lenders want to see proof that you’ve been stashing away money on a regular basis.

We cover how to improve these factors further along in our top tips section.

You’ve been pre-approved for a home loan - what’s next?

Once you’ve been pre-approved, you’ll receive a letter from the lender stating the amount they are willing to lend, the interest rate and any other specific conditions.

Now it’s time to get out there and find your dream home!

Research property prices, contact real estate agents and attend inspections and auctions.

When you find the property you want to buy and the required inspections (building, pest, electrical, etc) have been completed, put in an offer.

Offer accepted? Contact your lender to move ahead with the full loan application.

What do you need to know about home loan pre-approvals?

Understand how things can change even after receiving pre-approval.

1: Pre-approvals expire

Pre-approvals have an expiry date and are usually only valid for 3 to 6 months.

For this reason, it’s important to apply when you’re ready to start looking at properties, not before, so you don’t waste any of the ‘valid’ period.

Lenders may not go ahead with the same pre-approved conditions once the validity date has passed.

2: Your mortgage application may be declined after pre-approval

Pre-approval isn’t a guarantee that you will receive finance for your home loan.

There are several reasons a lender might decline your mortgage after pre-approval:

  • Your income decreases – A loss of income may mean the lender isn’t confident you can keep up with your repayments;
  • A change in employment – Save any career moves until after the mortgage is locked in;
  • You incur more debt – Increasing your debt-to-income ratio on credit cards or with other loans may negatively impact the lender's decision;
  • A surge in living expenses – Aim to keep your spending steady and avoid any big purchases or shopping sprees for your new home until after you’ve moved in;
  • Not meeting lenders property criteria – Your lender will assess the home you want to buy on size, location, type of property and title against their own criteria. For example, some lenders have restrictions on the postcodes and types of properties they will lend for.
  • You left out information – You must disclose all aspects of your financial situation during the pre-approval process. If the lender discovers information you didn’t provide initially, even if it was accidentally overlooked, your loan may be declined.

3: A change in interest rate may affect your pre-approval

During the period between receiving pre-approval and being ready to apply, interest rates can fluctuate.

If interest rates rise, the monthly repayment you were pre-approved for will increase. This may affect the lender’s initial decision on how much you can borrow.

Top tips for getting home loan pre-approval

Improve your credit score

As we’ve mentioned, a good credit score can improve your chances of securing the loan amount you want at the most competitive interest rate.

How to improve your credit score:

  • Keep up to date with loan and bill repayments;
  • Lower your credit card limit;
  • Pay your credit card in full each month. If you can’t pay the full balance, pay more than the minimum repayment;
  • Limit credit applications.

If you spot something in your credit report that doesn’t seem right, contact the credit provider. They can check it and make any corrections.

Work on building a solid savings history and deposit

Lenders want to see that you have the discipline to save regularly.

Being able to present a record of your saving history for at least 6 – 12 months could improve your chances of pre-approval.

This has two major benefits in the home buying process; it shows you’re a diligent saver while simultaneously building your deposit.

It’s a smart idea to set up a separate account just for savings so you can easily present the transaction history.

Have stable employment

Stable employment is a big tick for lenders.

Having a steady, stable income makes your application less risky as it’s generally the source for mortgage repayments.

Most lenders look favourably on applicants who have been with the same employer for at least 6 – 12 months.

Focusing on improving these areas may take time, but it’s worth it. Securing the loan product you want can have positive financial implications for decades to come.

Frequently asked questions about home loan pre-approval

Can applying for pre-approval hurt your credit score?

It depends. If you just apply for one (or even two) pre-approvals over a 12-month period it won’t have a big impact on your credit score.

However, if you apply with multiple lenders in a short period of time, it can hurt your credit position. Lenders generally view applicants with more than one or two enquiries over a 6-month period as higher risk.

Do all lenders offer home loan pre-approval?

Many offer pre-approval but conditions may vary between lenders. It’s a good idea to contact each of the lenders you’re considering to understand more about their pre-approval conditions.

Do I need pre-approval before making an offer on a property?

A pre-approval letter isn’t required. However, it puts you in a better position to negotiate with a seller when you can prove a lender is willing to finance the loan.

Do I need the full deposit amount available before going for pre-approval?

Not necessarily, you can get an indicative pre-approval and then come up with any remaining funds required between pre approval and finalising settlement.

Is home loan pre-approval available for investment loans as well?

Yes, a pre-approval can be put in place regardless whether it's for invesment or owner-occupied property. The process is the same.

If interest rates change between pre-approval and finding a property will my pre-approved rate be applied?

No, if the RBA (Reserve Bank of Australia) changes the rates and your lender decides to pass on the rate cut or increase before you have finalised your purchase and sign your final loan contracts your rate will reflect the new interest rate at the time of signing your contract.

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