Is home loan pre-approval right for you? What is home loan pre-approval? These are questions that we’re sure you’re asking. Luckily, Monzi’s here to help you. Read on for our easy and insightful guide to all things home loan pre-approval. Let’s go.
Please note, certain ideas and products presented in this article may not be offered by Monzi nor the lenders we work with. This article presents only general information. Consider seeking professional financial, taxation, legal or other advice to check how the information and ideas presented on this website relate to your unique circumstances.
Home loan pre-approval explained
So you’ve found the dream home? It’s got a spacious kitchen, a pool, a decent backyard for the kids and the dog.
This is it, precisely what you’ve been looking for. So, you head to your bank to speak with your lender, only to have them tell you that you don’t qualify for a loan large enough to pay for the house.
How could this have been avoided? By first getting a home loan pre-approval.
What is a home loan pre-approval?
A home loan pre-approval is a financial institution’s estimate of how much you will be eligible to borrow when seeking a home loan.
Also known as a conditional pre-approval or approval in principle, these pre-approvals first seek to ensure that you meet certain conditions before running the required checks to produce your estimate.
What is unconditional approval?
Unconditional (or full) approval is granted to you when your lender has gone through all of your documents and has found that you satisfy all the set conditions. When granted unconditional approval, you are able to pop the champagne as this means your lender is offering you your desired loan.
Ensure you don’t mix up conditional and unconditional approval, as these are two very different things.
Why would you need pre-approval for a home loan?
Conditional pre-approval can be useful to have when house hunting as it may allow you to have a better idea of your limits are. This can make you appealing to lenders as it means you have done the groundwork and are aware of what you are looking for.
Having pre-approval also means that you won’t set yourself up to be disappointed as you will already be aware of what you will and won’t be approved for.
What conditions must you meet for pre-approval?
You can get pre-approval in two ways; online or directly from your bank’s branch. Regardless of the source of your pre-approval, ensure you meet the right conditions.
These conditions are most likely subjective to your lender. However, they may check to see if you have any existing debt that you need to repay. Moreover, you may need to provide a professional valuation for your desired property.
Typically, depending on your lender, the home loan pre-approval requirements are:
- That you may use the property you wish to purchase as security.
- You intend to use the loan to purchase an existing property.
- The property typically should be a house – meaning it can’t be unique accommodation, a group of flats etc.
- And you must be able to cover the extra fees connected to your loan.
When should you apply for a home loan pre-approval?
Before applying, you should do some initial research to figure out how much you can afford to repay and what you can put down as a home loan deposit. You should also investigate the types of home loans on the market and what their accompanying interest rates are.
An excellent way to go about this may even be observing the suburb and property market you’re interested in. It could also be a good idea to work out the details of your living expenses and income, as your lender will want to know that information.
Do all banks offer pre-approvals?
The majority of banks should offer a conditional approval service of some description. However, you can also find these services if you go through a mortgage broker. If you haven’t considered if a mortgage broker is right for you, it may be worth looking into.
A mortgage broker works as the intermediary between you and the bank, good brokers understand what you need, work out what you can borrow, explain the loans and their features, and manage the process up until settlement.
For more information on whether you should employ the aid of a mortgage broker, visit the government’s MoneySmart website for their guide to using a mortgage broker.
What does home loan pre-approval cost?
On the upside, pre-approval shouldn’t cost you anything. Typically any fees associated with your loan are paid when the home loan settles.
As conditional approval shouldn’t cost you much if anything at all, it may be worth looking into if you can benefit from a pre-approval.
How to apply for pre-approval?
As mentioned, most banks and brokers offer some form of pre-approval service. So once you know who you’d like to be your lender, it’s pretty straightforward from there.
If you choose to do so online, you should be able to locate a conditional approval form on their website. If you’d rather see someone in person for your pre-approval, the branch of your choice should be able to help you begin your application.
Once you have figured out where to obtain your pre-approval, you must apply. Following this, you will need to supply your bank or broker with evidence of your savings, income, and any debts.
Once you have provided all the required documentation, the rest will be up to your lender to generate.
What documentation do you need for a home loan pre-approval?
If you go through a branch and have your pre-approval done up by a person, the documents needed for home loan pre-approval are:
- A satisfactory assessment of any property you will use as security, this includes a valuation.
- All required documentation to verify your assets, liabilities, security, deposit, and income.
All information provided should be complete and accurate. You should also know whether you are planning to pay a lender’s mortgage insurance, incurred on low deposit home loans when your deposit is less than 20%.
What is the home loan pre-approval process?
It is a given that the process may be different depending on your lender. However, a typical pre-approval generally follows a similar approach to the following.
You will most likely have to complete an application form and provide most of the previously listed documentation. Once you’ve done this, your lender will complete their assessment of your situation and present you with a possible pre-approval provided you, and your property, meet the necessary conditions.
It is best to avoid any pre-approval sites that advertise ‘30-minute over-the-phone’ approvals as these may come with features that could hinder rather than help.
Home loan pre-approval online
If you decide that you would like an online home loan pre-approval, as previously mentioned, you will have to visit your bank’s website.
Online conditional approvals can be beneficial as they allow you to obtain them promptly, either within a few hours or on the spot. The problem with these approvals, however, is that they can neglect the finer details as a credit assessor does not usually evaluate them.
If you were to obtain a full assessment instead, all your documents would be evaluated and a credit check would be carried out.
Typically, this would take a few days for the details to be examined, and for the credit check to be run against your name. This will display as an inquiry on your credit report. Multiple inquiries may negatively impact your credit score, meaning this type of assessment is not as common.
Circumstances that may make your online pre-approval application complex
You may be ineligible for an online assessment if the lender deems the circumstances of your future loan as complex. This varies by lender, and if your circumstances are complex this doesn’t mean you can’t get a pre-approval, rather it may just have to be in-branch instead.
If you are under 18, you don’t currently live in Australia, or you are applying with three or more applicants you may be a complicated case. On top of this, if you require a guarantor, are refinancing, applying on behalf of a company or trust, or are chasing a split loan, you may too fit this category.
Don’t relent in your application for pre-approval. Instead, give your preferred lender a call or operate through your broker.
How reliable are pre-approvals?
Conditional approvals are excellent for giving you an idea of your financial position; however, they are not fixed. There are many aspects included in progressing from pre-approval to loan approval.
The property or the market could change, your income and spending habits could change, or something may go wrong on the lender’s end. All this means is that it may be better to view your pre-approval as an idea rather than confirmation that your loan will be approved.
Can you go to auction with a pre-approval?
Pre-approvals can be quite useful at auction as it may help you bid with confidence, knowing what you can borrow. This is as you will have a close idea of what you are capable of, and stops you from the unwanted result of you being the highest bidder on a property you cannot afford.
Will real estate agents value your pre-approval?
Yes, in most cases having a pre-approval will put you in a better position in the eyes of the real estate agent. As previously stated, having the pre-approval means that you have already taken the required steps to obtain a home loan successfully.
Agents may ask for a copy of your pre-approval before your offer is accepted so that they can gauge whether you are serious about proceeding.
Beyond this, the seller is typically also interested in selling their property promptly. As a result, showing the seller that you’re serious may give you an advantage over other buyers.
Placing an offer ‘subject to finance’
Despite successfully achieving a pre-approval, when you make an offer on a potential property, it may be worthwhile making this offer ‘subject to finance’.
Doing so means that if for whatever reason, your lender declines your application, you may be able to withdraw your offer easily. It may be wise to first speak with your solicitor to find out if this approach is right for you.
If you are buying at auction, keep in mind that the ‘subject to finance’ condition is generally not allowed.
Can interest rate changes affect my pre-approval?
Yes, if there are changes to the market, your interest rates may increase or decrease. This may void your pre-approval as, for example, if your interest rate increases then the maximum amount you will be able to borrow could decrease.
If you do experience an interest rate change, speak with your lender to determine if this impacts your pre-approval.
Pre-approvals for securities other than property?
Mortgage pre-approvals are only one form of pre-approval available. You can also get pre-approvals on car loans if required.
This is less common considering the average price of a car loan isn’t as extreme, yet it can be done nevertheless. However, remember that if you apply for a car loan, then a credit inquiry will be listed on your report.
Finally, lenders who offer car loan pre-approvals are also uncommon. So, keep this in mind if you are seeking one.
If you are selling to buy, will this impact your home loan pre-approval?
If you intend to sell your house to buy a new one, this may be useful information for a pre-approval. You should keep in mind that the equity of your current home, minus any mortgage repayments left on it, can increase the size of your future borrowing power (provided your mortgage is less than what the house sells for).
Don’t forget those sneaky extra costs, however, when you calculate what’s left after selling. If you have lender’s mortgage insurance, stamp duty, or conveyancing to pay, the difference between the sale price and mortgage may dwindle quickly.
Once these extra costs are paid, you may use any profit to increase your borrowing power when you buy your next house.
What would cause a bank to reject your home loan pre-approval?
If you meet at least one of the following criteria, you may want to hold off on applying for pre-approval. After all, your lender may reject your application.
- Your credit score is too low.
- Interest rates have increased, meaning your maximum borrowing capacity may have decreased.
- You recently changed jobs or had to take another loan, changing your financial situation.
- Your income cannot be adequately documented.
- Your lender’s policy has changed. This may depend on your lender as some will still honour pre-approvals after changes are made.
- You have too many enquiries on your credit report.
If your pre-approval does become redundant, it’s not all bad. Whilst you cannot get the time back, pre-approval typically free. As a result, you won’t lose any money and can apply again easily when you’re ready.
What properties are unacceptable for home loan pre-approval?
Not every property is acceptable for pre-approval. Pre-approvals typically do not include a lender’s assessment of whether the property is sufficient. This is because offers are usually made after a potential buyer has obtained a pre-approval.
As a result, one of the conditions you must meet before applying is that your property qualifies. Most lender will have a list and certain types of properties on that list could include:
- A property in poor condition
- Apartment blocks or small apartments
- Properties near power grids or large power lines
- Hobby farms
- Some suburbs may not qualify – check your suburb with your lender.
How long does it last?
Pre-approvals don’t last forever. Most are valid for between three and six months. This is because the market is not fixed. Instead, it is highly susceptible to change. Moreover, your own life may change through this time too.
When you apply for your pre-approval, speak with your lender about what will happen if you don’t find a property before your pre-approval expires.
What circumstances are inappropriate for home loan pre-approvals?
Sometimes, a pre-approval just isn’t the answer. Situations such as a recent job change or a new baby may signal that it’s not right for you.
In addition, if you have a large debt to your name or are looking to take out an additional loan (e.g. a new car loan), then a home loan may not be right for you. Moreover, if you are in debt, then your lender may reject your application anyway.
Finally, self-employment also may present obstacles, as does seasonal income. So, if you work jobs that have varying incomes, there may be less value to a pre-approval.
Ultimately, though, you must determine if home loan pre-approval is right for you.
Do I have to get a pre-approval for a mortgage?
Pre-approvals are not a necessary step with most lenders. They are simply a tool that may make your loan application smoother. If you have a pre-approval, the process may be faster as your lender has already seen your finances and conditional approval. If you don’t have the permission, no harm done, you will merely be starting from scratch instead.
Home loan pre-approval calculators
While they may not be home loan pre-approval calculators, most banks and lenders will provide online borrowing calculators. A borrowing calculator allows you to input basic estimates, and it will generate roughly how much you can borrow.
Some of the information these calculators will request include:
- Details about your income
- Whether you have any current expenses such as other loans
- The details of your ideal loan. This may include the interest rate, loan term, location, and whether or not you are a first home buyer.
The results this calculator will generate generally include the amount you can borrow up to as well as what kind of repayments you can expect to accompany the loan.
So your loan was declined after a pre-approval, what now?
Firstly, don’t rush down to a new lender for a second pre-approval. As mentioned previously, multiple pre-approval applications will look poor on your credit report. In turn, this may have a run-on effect of making it harder to get your loan.
Instead, it may be worth going to see your lender about why you were denied. Doing so will allow you to see what needs to be fixed. As a result, you can potentially create a plan of action going forward. From there, you can institute any changes that must be made.
The pros and cons of a home loan pre-approval
To recap, we want to simplify all the information so that it sticks in your mind. So, here is a list of advantages and disadvantages.
Advantages of a home loan pre-approval:
- You’ll have an approximate idea of what properties are in your price range.
- It can also help you choose the type of loan.
- Obtaining a pre-approval is relatively easy and may simplify the process.
- It may make you seem more serious in the eyes of a real estate agent.
Disadvantages of a home loan pre-approval:
- Multiple pre-approval applications can hurt your credit score and report.
- If your financial situation changes you could face rejection.
- A pre-approval is not a guarantee that you will be approved for your loan.
- If you don’t settle within six months, your pre-approval may become void.
- Specific properties may not meet the pre-approval conditions.
Hopefully, this helps inform your decision regarding whether pre-approval is right for you. If everything works out well on your journey to being a homeowner, read on for a few handy tips regarding progressing your home loan.
A few things to keep in mind when you progress with your home loan
Whether you were successful with your pre-approval or you didn’t take that path, if you are progressing your home loan, there are a few things you should be keeping in mind.
Firstly, make sure you’re in a stable position. As mentioned, your pre-approval is not a confirmation your loan will be approved. Within the period that you are waiting for your approval, you need to play it safe with work and your spending habits.
If you already have your pre-approval, there is a chance you have already cleaned up your records. However, if you haven’t already, then you may need to go through your spending habits and identify anything that could hurt your chances.
Hold off on your daily coffees and and cut costs where possible before you start your home loan application. If your spending history is shiny, you will look better to the lender.
How can Monzi help?
As Monzi is only a lender-finder service, we cannot help you obtain a pre-approval. However, we may be useful in other aspects of your homeownership journey. If you’ve got an expense to cover, Monzi may match you with lenders offering personal loans up to $10,000.
So why choose us?
At Monzi, we provide fast turnarounds. When you need fast loans from $300 to $10,000, our application process is fast and straightforward. If you apply during business hours, we may match you with a lender in just 60 minutes.
In addition to this, we value our users. Our goal is to make your life easy and we’re paperwork free for precisely this reason. If you have any questions or need a bit of help, get in touch with our friendly staff at firstname.lastname@example.org.
Apply with Monzi today!
If you’ve decided you need to borrow money, we are ready to help you out. We are paperwork free, and you can apply whenever you need. All you have to do is click the apply now button and begin your application when you’re ready!