Securing pre-approval for a home loan is an important step in the home buying journey. If you have all your documents prepared and your lender isn’t too busy, it may take less than a day for you to receive a pre-approval outcome after submitting your application. However, in most cases you will receive a response within 2-3 business days.
What is a home loan pre-approval (aka conditional approval)?
Home loan pre-approval (sometimes called conditional approval, approval-in-principle, or letter of comfort) is an indication that a lender is willing to lend you the money for a home loan but has not yet proceeded to final approval.
The pre-approval process
Your lender will take a look at your financial situation – your regular expenses, any debts you may have, the assets you own, your credit rating – and assess whether you’re a good candidate for a loan.
The lender will also want to know what kind of property you’re looking for and what area it’s in to establish whether it’s in your price range.
You’ll need to provide evidence of your employment and wages as well as recent bank statements in order to get pre-approval for a loan.
The stages of getting a home loan
There are certain steps that you need to take before obtaining home loan pre-approval. You’ll need to make sure you have an understanding of how much you can afford to spend and what area you’d like to live in, because once you have pre-approval, it’s only valid for 90 days.
Research
Before you consider making any applications, it’s important to do some research into the property market, the types of home loans on offer and your own financial capacity.
You’ll need to consider how much of a deposit you have and how much is feasible to save, how much you can afford to pay back each month and how soon you want to pay off the loan. It’s helpful to do some preliminary budgeting and use a borrowing power calculator.
You should also look at current interest rates, home loan features that you might want and the average price of homes in the area you’d like to live in.
Pre-approval
Your initial application will be assessed and you may be offered pre-approval. This is not the same as full, unconditional approval and does not guarantee you a home loan.
There are different types of pre-approvals, so their reliability will also differ. Automatic (or system generated) approvals can be quicker and easier to get but aren’t very strong indications of eligibility. They usually just involve an online application and will often provide you with an outcome the same day.
Full assessment pre-approvals will require that you have all your documents evaluated by a credit expert and that they arrange a credit check. This kind of pre-approval will usually take a few business days but will give you a better chance of getting final home loan approval when you apply for your loan.
Application
Even if you have don’t have a pre-approval the next stage will be to submit a full application.
In some cases you will be able to fill out an application online, but in many cases you will need to make an appointment with your lender who will guide you through the application process and give you a brief on documents that will be required
You may be asked to present the following documents:
- Proof of identification
- Bank statements
- Credit card statements
- Proof of income
Note: each lender will have their own documentation requirements, this is just a guide.
You should only ever apply for one home loan at a time because applying for multiple may hurt your credit history.
Valuation
Once you’ve found the property you want to purchase, your lender will perform their own valuation of the property. They will want to make sure that it matches the amount you were pre-approved to borrow. This valuation will usually take 3-5 business days.
If you bid on a house that is more expensive than the amount you’ve been pre-approved for, you run the risk of not having your loan approved.
Unconditional approval
You will receive unconditional or formal approval once the lender has assessed all of your documents and declared that you meet their eligibility criteria, as well as their terms and conditions. This also means that the value of the property is an amount they’re confident you will be able to repay.
Formal documents stating that the lender has agreed to loan you the funds will be arranged.
Settlement
Once you’ve received full approval, made an offer on the property and been approved, you’ll reach the settlement stage. At this point, you’ll need to sign a Contract of Sale and choose a settlement date.
Settlement can take 4-6 weeks to finalise. You will then receive your home loan details and repayment schedule.
How long does pre-approval take?
It will usually take 1-3 business days to receive a home loan pre-approval outcome after submitting your application.
If you have a very straightforward case or you are able to submit an online application, you may receive your answer on the same day.
You should thoroughly review all your documents before submitting, to ensure the information is accurate.
Why is your pre-approval taking longer than expected?
There are a few reasons why your pre-approval might take longer than expected. These include:
- You’re borrowing a significant amount of money (e.g. more than $2 million)
- Your loan-to-value ratio is higher than 80% – in this case, the lender would need to assess the risk of the loan or ask you to pay Lenders Mortgage Insurance (LMI), which takes longer to process.
- There are discrepancies in your documentation or you haven’t provided all the necessary information.
- You’re purchasing a property with the support of a guarantor.
- Your employment is unusual (e.g. you’ve just started a new job)
- You’re in Australia on a temporary working visa or you spend a great deal of time overseas
How long does it take to get unconditional approval?
Once you’ve received pre-approval for your home loan, you’ll need to find the property that you want to make an offer on. From there, the time it takes for your lender to perform their own valuation of the property and then offer unconditional approval will be 1-2 weeks, if everything is in order.
How long does a pre-approval last?
Pre-approval will usually be valid for 90 days from the date that you receive it. This timeframe may vary between lenders, as some lenders may allow validity for up to 6 months. You may be able to renew your pre-approval at the end of this period, provided your financial circumstances are still the same, but in many cases you will be required to reapply.
Check our borrowing power calculator
You may wish to use a borrowing power calculator to get an idea of how much you could borrow and establish your limits.
Disclaimer: This article is not intended as legal, financial or investment advice and should not be construed or relied on as such. Before making any commitment of a legal or financial nature you should seek advice from a qualified and registered Australian legal practitioner or financial or investment advisor.
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Understanding more about getting a pre-approval
Does pre-approval guarantee a loan?
No, pre-approval does not guarantee that you will get a home loan. It is an indication of what your lender is willing to lend, but it does not guarantee final approval.
Many factors can affect whether or not your final loan application is approved, including changes in your financial position, significant changes in the property market or changes to the lender’s policies.
Additionally, the lender’s valuation of the property may affect the outcome of your application, if it’s significantly higher or lower than the sale price.
How much does pre-approval cost?
You will not be charged any upfront costs when you submit an application for mortgage pre-approval. However, you may be charged an extension fee if you wish to extend your pre-approval after the period of validity has expired.
Some lenders may also charge a withdrawal fee if you decide not to proceed with your loan application after obtaining pre-approval.
Approval in principle vs pre-approval: What is the difference?
These terms are often used interchangeably so it’s important to check with your lender about their specific process.
In some cases, pre-approval might refer to system-generated approval while approval in principle would refer to the more in-depth evaluation required for formal pre-approval.
The home loan specialists at Homestar Finance can clear up any confusion and help you start the pre-approval process today.
