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What is a home loan pre-approval?
A home loan pre-approval, also known as conditional approval or approval in principle, is when a financial institution gives you an estimate of how much you could borrow for a home loan, provided you meet certain conditions. This is generally confirmed in writing with the conditions clearly listed.
Conditions could include paying off an existing debt, selling another home or providing further documentation (for example, a professional valuation of a property you would like to purchase), depending on your circumstances.
How do you get pre-approved for a home loan?
The process of getting a pre-approval typically involves applying to your selected lender, who will check your finances (such as checking your credit score) and assess whether you’ll be able to repay a loan.
If the lender offers conditional approval and deems you eligible, you’ll be granted conditional pre-approval to borrow up to a certain amount. Most financial institutions offer conditional pre-approval which lasts for three to six months.
Gaining conditional pre-approval can useful while you hunt down the perfect home, providing you insight into where you may stand with lenders and potentially making you more appealing as a buyer by demonstrating you are ready to proceed with the purchase.
However, it is important to note that conditional approval is not a guarantee that you will be approved when you find a property to buy and proceed to formal approval for a loan.
For example, your eligibility may change if:
- You (and/or any co-signatories of the loan you’re applying for) have had your income reduced for any reason.
- The lender alters its loan policies and procedures, such as changing approval conditions.
- There are major movements in market interest rates.
- If you are planning to borrow more than 80% of the property’s value (known as loan-to-value ratio, or LVR), and so need to receive approval from a provider of lender’s mortgage insurance.
So what happens in the home loan pre-approval process? How do you get it? And at the end of the day, is pre-approval actually worth getting? Read on to discover more.
Should I get a conditional pre-approval?
Home loan pre-approval is not compulsory: if you decide you’ve found your dream home and the right loan product for your needs, you can apply to your lender without asking for pre-approval.
That said, pre-approval can potentially be useful to have up your sleeve when house hunting. Some possible advantages can include:
- Pre-approval typically means you can go from open houses and inspections with a firmer understanding of how much you can afford to spend. You know what price range you can realistically consider, so you can potentially save time by only considering homes you can likely afford.
- Pre-approval gives you the ability to make a serious offer on a home on the spot, as both you and the home’s owners can be confident you’re the real deal.
- It means you have already done much of the legwork to secure finance and can potentially speed up the process once the offer has been accepted.
There are a few considerations that could be worth bearing in mind before you choose to apply for conditional pre-approval, however. For example, if you apply to a number of different lenders, applications generally involve a credit check, so making multiple applications could potentially negatively impact your credit score (more on that, below). A pre-approval is also generally only valid for a set time period (usually a few months), so it is a good idea not to apply too early.
Do all banks offer pre-approval?
Many lenders on Canstar’s database provide conditional approvals, however the definition of the pre-approval may be different depending on the institution. It could be a wise idea to speak with each lender you’re considering, or to seek external professional advice to help clarify the conditions of your pre-approval.
How do I know if a bank offers pre-approval on a home loan product?
By using the Canstar home loan comparison tool, you can see which lenders on our database are likely to offer the option of pre-approval. Our database compares thousands of home loan products from over 100 brands.
- Use our selector to nominate your loan amount, purpose and your state or territory, and press “Compare”.
- Click on the “Filter” box (located on the right hand of the screen on desktop, or at the top of the screen on mobile), and scroll down to the “Features” menu and select “Pre-approval” – (if you don’t see this as an option, press “More” if that option does not initially appear).
- The table that then appears on the screen will only include loan products lenders have nominated as having a pre-approval option.
How to apply for pre-approval for a mortgage
Here are Canstar’s three top tips to help smooth out the application process.
1. Review your current finances
Before applying for pre-approval, it could be a wise idea to do some initial research into your own finances. Consider your income, your typical household expenses, what assets you own and how much you owe. From there, it could be possible to get a rough idea of how much you can afford to borrow:
It could also be a good idea to consider how much you might be able to afford in monthly repayments, as this will affect how much you are able to borrow:
2. Research and compare home loan types
After reviewing your finances, it could be a good idea to look at different types of home loans and home loan features (fixed vs variable, ones with offset vs redraw and so on) and decide which one is right for your situation. It could also be wise to check what different lenders are offering in terms of interest rates and other factors, and compare to find the best deal. That could help you to narrow down a list of lenders you’d like to approach for pre-approval.
3. Fill in the pre-approval application with a lender
Having got an idea of the sort of loan you’re after, and from which lender, it’s then a matter of applying to your bank for pre-approval. Most banks let you apply online or over the phone. Your application will initially require some basic personal information in order to verify your identity – such as your name, address, and age.
In considering your application, your lender will typically assess several things, which may include:
- Your credit report, or credit history, which is a record of your loans, credit cards and other credit products over the past several years, including any defaults or bankruptcies. Your credit report determines your credit rating, a numerical score that rates your ability to pay back credit on time.
- Your current financial situation, as mentioned above, including how much you earn, the assets you own, your regular expenses and how much other debt you have.
- The loan you’re looking to apply for and the amount, and whether or not it’s suitable given your circumstances.
Having analysed your finances, your lender will typically then decide whether or not you’re eligible for the loan that you’d like to take out. If it thinks you’re capable of repaying the loan, then it will likely grant you pre-approval. It’s important to remember, as discussed above, that this doesn’t mean you will automatically be granted that loan when it comes time to buy.
If you’re currently considering a home loan, the comparison table below displays some of the variable rate home loans on our database with links to lenders’ websites that are available for first home buyers. This table is sorted by Star Rating (highest to lowest), followed by comparison rate (lowest-highest). Products shown are principal and interest home loans available for a loan amount of $350K in NSW with an LVR of 80% of the property value.
Before committing to a particular home loan product, check upfront with your lender and read the applicable loan documentation to confirm whether the terms of the loan meet your needs and repayment capacity. Use Canstar’s home loan selector to view a wider range of home loan products.
*Comparison rate based on loan amount of $150,000 and a term of 25 years. Read the Comparison Rate Warning
Main image source: Antonio Guillem (Shutterstock.com)