Do we need a home loan pre-approval?
It's generally advisable to have home loan pre-approval before making an offer on a property. Pre-approvals can be called different things by different lenders: conditional approval, indicative approval or approval in principle. It all amounts to the same thing!
Pre-approval is a preliminary step in the home loan application process.
It's an indication from a lender that they will lend you a specific amount subject to certain conditions.
A pre-approval is not a guarantee that your application will be approved – it is simply an indication that your application fits the lender's credit policy criteria.
Pre-approval should be attained before making an offer on a property, as it is the best indicator that your financial situation will be acceptable to the chosen lender, giving you confidence to go house hunting, make an offer or participate in the auction process.
Types of home loan pre-approval
There are two types of home loan pre-approval. For both types, you will need to provide personal details and information on income, expenses, assets, liabilities and how often you have moved home or employment in the recent past. The main difference between the two types is what the lender does with the information that has been provided.
Full assessment
This is where the lender's credit department does a full assessment, including reviewing your documents and conducting a credit check. This type of pre-approval will take a few days to be issued and results in the lender running a credit check, which leaves an enquiry on your credit file. Multiple enquiries can negatively impact your credit score. As such, this type of pre-approval is less common.
Online pre-approval
Online pre-approval can often be received quite quickly, either on the spot or within a few hours. However, the finer details of the credit report and documents have not been evaluated by a credit assessor. This type of pre-approval will have more conditions attached based on the details included in your initial application.
While the full assessment-style of pre-approval results in a credit check against your file, the more common online pre-approval gives you an idea of how much you can borrow without the lender doing a credit check. This is a great way to get an initial indication of the loan amount you may be eligible for. After you have received pre-approval and made an offer on a property, home loan lenders will do a full credit check, which does leave an enquiry on your credit file.
What do I need to know about home loan pre-approvals?
A pre-approval indicates to sellers that you're serious about buying
If you have a pre-approval from a home loan lender, you have already started the process towards getting a home loan. You will be in a good position to move on a property quickly, proceed to full approval for your home loan and exchange contracts before others in the market. Real estate agents may also ask for a copy of your pre-approval prior to accepting your offer to ensure that you are a serious contender.
Pre-approvals are valid for a set period of time
For most lenders, pre-approvals are valid for between three and six months. This is because both a borrower's financial situation and the property market can often change over a few months. When applying for a pre-approval, speak with your Mortgage Broker about the expiry date and what will happen if you don't find a property within that timeframe.
If the property is unacceptable, your home loan may not be approved
A pre-approval does not include an assessment of whether the property is acceptable to the lender, as you typically don't make an offer on a property until after you have received a pre-approval.
This is why one of the conditions in the pre-approval will be 'subject to a satisfactory security valuation'. Certain types of properties may not be acceptable to some lenders, such as:
Small apartments or particular apartment blocks
Hobby farms
Certain suburbs
A property with large power lines close to it
A property that is not habitable or needs significant repair
A change in circumstance may affect your home loan application
If your personal or financial situation changes after you have been pre-approved, the lender will need to reassess your application. In a worst case scenario, it may mean that the lender considers you are no longer able to afford the loan repayments. Some examples include the following:
Changing jobs
Becoming self-employed
Going part-time or becoming a contractor
Taking on a new credit card or loan facility
Having children
Spending your deposit on an emergency expense
Lenders finding out about loans or credit cards that you did not disclose
A change in your circumstances doesn't necessarily mean your home loan application will be rejected.
Regardless of whether your circumstances change after pre-approval, lenders will always do a full assessment after you've found the property you want to purchase before approving your home loan.
Interest rate and credit policy changes could affect your pre-approval
There is always a possibility that interest rates and the lenders own credit policies could change. If the interest rate increases, the maximum amount you are able to borrow may decrease. If the lenders credit policy has changed, then you will need to discuss this further with your Mortgage Broker to identify if this affects your situation or whether an alternative solution is required.
Want to be ready to jump on the property of your dreams?
A home loan pre-approval means that you can start looking at properties that are within your borrowing limit. Pre-approved borrowers take comfort in knowing that a lender has looked at their application to make sure it meets the credit policy.
Speak to your Mortgage Broker about getting a home loan pre-approval in place, before you head to an auction or make an offer on a property.
Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.