What is pre-approval for a home loan?
Pre-approval for a home loan, also known as conditional approval, assesses how much a lender is willing to lend a borrower to purchase a property.
While not mandatory, pre-approval can help you set a realistic budget before you start house hunting and speed up the process of applying for full approval when the time comes.
However, being pre-approved is not a guarantee that a bank or lender will unconditionally approve a home loan. There are other conditions you must satisfy before final approval is given.
How long does home loan pre-approval take in Australia?
Pre-approval can take anywhere from a few hours, to a single business day, to several weeks to process.
These are some of the factors that can impact how long you might wait for pre-approval:
How long does pre-approval last for a home loan?
Once granted, a pre-approval is typically valid for two to three months, depending on your lender.
When your pre-approval expires, you will likely need to present up-to-date documentation about your financial position, so your bank or lender can assess whether and how much your circumstances have changed.
Depending on your situation, a lender may be willing to pre-approve you for the same amount, more, or less.
What is the difference between pre-approval and unconditional approval?
As mentioned above, pre-approval is not a guarantee of finance once you’re ready to buy a home. Instead, a pre-approval is an estimate of your likelihood of being approved for a mortgage and what a lender may be willing to lend you.
On the other hand, unconditional approval is the point at which the lender is ready to loan you the money, meaning you can comfortably sign the contract and proceed to settlement without fear.
Why a home loan can still be declined after pre-approval
You can still be declined for a home loan, regardless of your pre-approval status, for the following reasons:
- Your financial circumstances have changed: If there’s been a change to your income, such as losing your job, switching to a new job, or experiencing a salary cut, your lender may reject your application, seeing this as an increased risk you’ll default on your loan.
- Your lender’s pre-approval was inaccurate: Some lenders may employ automated checks to facilitate the pre-approval process. Important information may have been missed in the pre-approval, but discovered in the actual home loan application.
- Your lender’s lending criteria have changed: If your lender has tightened their lending criteria after being granted pre-approval, you may no longer be eligible for that loan.
- Your credit score has dropped: Your credit score may have dropped if you’ve taken on more debt or failed to make repayments on other loans. Your lender may then choose to deny your application.
- Interest rates have increased: If your lender increases the interest rates on their loan products, they may no longer consider you able to service the now-higher repayments.
- You provided false information in your pre-approval application: If any information you submitted in your pre-approval was found to be fraudulent, future home loan applications may be automatically denied. You may also be blacklisted by that lender.
How do you apply for pre-approval for a home loan?
When you apply for pre-approval, as with applying for any home loan product, a lender will want to get a picture of your financial position.
Each lender is likely to have slightly different criteria, but to apply, you will generally need to provide:
- Identifying documents, such as photo ID, a Medicare card, or a copy of an Australian passport.
- Bank statements showing your spending habits and the amount of money you have saved for a deposit.
- Information about assets you own (such as cars or other properties) and liabilities (such as HECS-HELP balances or other home loans).
- Credit card statements, if any.
- Proof of income, such as payslips.
- A breakdown of your monthly living expenses, such as grocery bills, school fees and discretionary spending.
Lenders will want to see these documents to get a picture of your spending habits and earning capacity, to judge how much money they might be willing to pre-approve you for.
Likewise, when you apply for pre-approval, lenders may also ask you about the price you’re expecting to pay for a property, as well as the type of property and location you want to buy, to help them get an idea of your particular needs and requirements.
Pros and cons of home loan pre-approval
Home loan pre-approval pros
Obtaining pre-approval for a home loan can have several advantages, including:
- Letting a seller know you’re serious: Being pre-approved can give you stronger negotiating power during the house-hunting process. If you were to make an offer, real estate agents may see you as a more credible buyer compared to someone who hasn’t been pre-approved.
- Shorter conditional period: Because your lender has already assessed your financial health, it may take you less time for your bank or lender to give the final sign-off.
- Confidence in your budget: Knowing how much you can borrow can help narrow down homes you can realistically afford, which may make the house-hunting process easier.
Home loan pre-approval cons
However, there are some potential disadvantages to think about before applying for a pre-approval:
- Impact on credit score: When applying for a pre-approval, the bank or lender will run a credit check to understand your credit history. Too many checks can affect your credit score.
- Short time period: As pre-approvals are only valid for two to three months, you may wish to hold off on obtaining one until you’re certain you’re ready to buy a property.
- Risky when bidding at auction: Unlike private contracts of sale, you generally can’t include a subject to finance condition when bidding at auction. Since pre-approval isn't a final guarantee of funding, bidding at auction can be risky if you need a mortgage to complete the purchase.
Given the risk of multiple applications impacting your credit score, it is recommended to apply to one bank or lender for pre-approval.
