Pre-approval is the first step for many when starting their house hunting journey.
While not necessary, pre-approval can help reduce stress and give you an indication of your borrowing power, giving you confidence to make offers on properties within your budget.
So, how can you get pre-approved for a home loan? What does pre-approval mean and how long will it take? Here’s everything you need to know about obtaining pre-approval before you start scanning the property market.
What is Home Loan Pre-Approval?
Home loan pre-approval, or conditional approval, is a lender’s approval in principle to loan you a certain amount of money for the purchase of your home. It can be sought before formal approval of your loan. It is a less detailed process that looks at the basics of your financial situation without thorough investigation.
Pre-approval gives you an idea of your borrowing power. It can give you confidence to make offers on property, feeling assured that you have a reasonable chance of being approved for that home loan amount formally in the near future. Getting pre-approval does not place you into any kind of loan commitment.
Pre-approval is not a guarantee that your home loan will be approved; it is subject to certain loan conditions being met. Your application could still be declined for reasons such as you unexpectedly take on significant debt, or additional information was discovered during the application process that changes the circumstances of your loan.
How Do You Get Pre-Approved
for a Home Loan?
There are a number of steps involved in a pre-approval application, including:
Apply for pre-approval online with your lender
Your lender will get in touch with you about proceeding
Verify your application by submitting all of the relevant documents. Be sure to answer any questions from your lender promptly to speed up the process, and ensure your information is as accurate as possible to get a valid answer
If you have been pre-approved, you will likely receive a letter detailing the conditions of the loan. Review these details, including the interest rate and loan term
You are now pre-approved for your home loan!
What Documentation is Required for Pre-Approval?
Your lender will review your documentation to determine the maximum loan amount and assess your borrowing capacity. Each lender will have different requirements of what documents need to be collected. As a general guide, you may be expected to provide:
Proof of employment and income which could include payslips, payment summary, ATO assessments or statements from Centrelink.
Information on your expenses to assess your ability to make the repayments. This could be provided through bills and/or bank statements.
Current debts including a student or personal loan, car loans, or credit cards debts.
Current assets including property, investments, superannuation, vehicles etc.
At What Stage Should You
Get Pre-Approval?
When you’re serious about buying property, it’s time to think about home loan pre-approval. Have a look at the property market, current interest rates and the amount you can put down as a deposit and use this to create a budget. Use this online mortgage calculator to give you an idea of what repayments you could afford and how this could change based on fluctuating interest rates.
Pre-approval expires between 3 to 6 months after it has been given, as your financial situation and property market may change. Note that pre-approval applications, regardless of the outcome, may be recorded in your credit history and will appear on your next credit check, (depending on your lender) so it’s best to time your application for when you’re ready to begin your house hunt. If you’re not quite ready to buy yet, use this time to consolidate any debt you may have, or build up a larger deposit.
Pre-approval can give you confidence at the beginning of your home buying journey without entering into a formal loan commitment. It can also speed up the formal approval process down the track.
The Different Kinds of
Mortgage Approval
There are three stages of mortgage approval; approval in principle (AIP), conditional and unconditional. Conditional approval is not a requirement of the home loan process, but it can be helpful when budgeting for your dream home. Let’s compare the stages:
Approval in Principle
AIP is an initial assessment by the lender indicating how much they may be willing to lend you based on your financial situation. AIP does not generally involve a full application and assessment, and is not a formal offer.
You will provide basic information to your lender which may include your income, expenses and will include an assessment of your credit history. Your lender will then perform a preliminary review and provide you with an estimate of how much you may be able to borrow. AIP can help you to understand your budget and demonstrate to sellers that your are a serious buyer.
Conditional Approval
Conditional approval means you have fulfilled your lender’s basic home loan requirements. Your loan has been assessed and your lender agrees to the home loan, subject to certain conditions being met, and has outlined your likely interest rate and loan term with the maximum amount you may be able to borrow.
Conditional approval gives you an idea of your borrowing capacity. It allows you to continue your property search with greater confidence, and make offers on properties. Having conditional approval can help you to present as a serious buyer to real estate agents, and allow you to make confident bids at auctions.
Conditional approval is not a guarantee that your home loan will be approved. It can however, speed up the formal application process down the track, as your lender has already begun to assess your financial position and some documentation has already been submitted.
Unconditional Approval
Your lender has formally approved your home loan; all of the paperwork has been assessed and the bank has signed your loan application. As long as pre-approval conditions have been met, your lender will likely send you a notice of unconditional approval, meaning your lender has had a more detailed look into your financial position, credit history, income and any debt you may have. The approval will be subject to a suitable security, factoring in the Loan-to-Value (LVR) of the property and the property type.
How long it takes to get unconditionally approved depends on different factors including the loan complexity and how promptly you respond to questions from your lender.
Once you sign and accept your unconditional approval offer, your home loan journey officially begins!
How Long Does Pre-Approval Usually Take?
You can complete your home loan pre-approval application in as little as a few minutes with Homestar Finance.
From there, processing your application can take anywhere from a few hours up to several days. This can be sped up by ensuring you complete and submit all of the relevant documentation correctly and promptly.
Speak to your lender to get an idea of how long pre-approval may take.
Does Pre-Approval Guarantee Formal Approval on Your Home Loan at Time of Purchase?
No; A pre-approved home loan is an agreement in principle, subject to several conditions. It gives you an idea of your budget, but it is not a guarantee that your final loan application will be approved.
Although unlikely, the loan can still be declined at this stage if certain conditions are not met. These could include:
- Your financial circumstances change dramatically
- The lender finds error or fraud in the application
- You have failed to provide proof of income or employment, or your employment has changed
- A significant reduction in the score on your credit report
- Your lender’s home loan policies, procedures or lending criteria have changed
Final approval also depends on your lender’s valuation of the property; if the purchase price is significantly higher than the lender’s valuation, it can affect your borrowing capacity. If your Loan-to-Value Ratio (LVR) is higher than 80%, you may require lender’s mortgage insurance.
Your unconditional approval offer letter may have some conditions that are subject to further lender requirements; the offer is not finalised until you have formally signed and accepted the offer.
Summary
Pre-approval indicates that you are eligible to apply for a home loan up to a predetermined amount from your lender, subject to certain conditions.
While it’s not a guarantee that your loan will be formally approved, it can give you confidence to budget and know what you could realistically afford. Get in touch with Homestar Finance today to complete your pre-approval application and enjoy shopping for your dream home with ease!
If you’re not quite ready to apply for pre-approval, complete an enquiry form or chat with us online and our team will go through the details with you. Submitting an enquiry will not affect your credit rating.
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