Home loan pre-approval explained

A home loan pre-approval, sometimes also referred to as ‘conditional approval’ or ‘approval in principle’, is an arrangement in which your lender conducts an initial assessment of your financial position and informally agrees to lend you up to a certain amount of money if you decide to purchase a home.

It serves as an eligibility check of sorts, with a successful application demonstrating that you’ve passed the lenders’ preliminary tests and credit checks regarding your creditworthiness. If you’re interested in potentially improving your odds of passing those tests and checks, you might be interested in our tips for making yourself a more attractive borrowing prospect.

However, it’s important to note that despite the rigmarole, a home loan pre-approval isn’t a binding agreement for either party, or a guarantee that your lender will give final approval to any future request for a home loan.

Any home loan application you submit will still be subject to a stringent approval process and having a home loan pre-approval in place doesn’t mean you’ll receive unconditional approval when push comes to shove. That being said, if you want to potentially improve your chances of receiving both pre-approval and final approval for a home loan, take a look at our Mortgages Made Simples series.

Furthermore, depending on the lender you receive pre-approval from and the processes they use, your home loan pre-approval may not be as concrete as you’d hope.

Having a home loan pre-approval of some sort in place can potentially make the house-hunting process easier on you in a number of different ways.

First and foremost, a home loan pre-approval can help you navigate the property market more efficiently and confidently. Knowledge is power and having a good idea of how much you’ll be able to borrow will help you zero in on the properties you can afford, as well as save you from flying blind. Knowing your budget is also crucial at an auction, where it can be easy to get carried away trying to put in the winning bid on a particularly attractive home.

And when you do put an offer in on a property, having a home loan pre-approval in place will signal to the seller and their agent that you both mean business and have the appropriate financing behind you. Sellers are looking for a potential buyer that they can trust to stay the course, and a home loan pre-approval can go a long way towards building that trust; a homeowner may not be too keen on agreeing to sell to someone who hasn’t been pre-approved for a home loan.

A system-generated pre-approval is generally much quicker to obtain than a full assessment, with some lenders offering pre-approval in mere minutes. The downside of this smaller timeframe, however, is that these system-generated pre-approvals are much less comprehensive and can potentially be unreliable.

This is because the limited assessment carried out by a computer can miss crucial aspects of your financial situation, and this in turn could potentially lead to you being given a pre-approval when you’re not actually eligible for final approval.

Additionally, it only uses the information you provide, so if you make a mistake or the lender mis-categorises you, you may be wrongly approved or denied for pre-approval.

That being said, this kind of pre-approval has its purposes; many sellers and real estate agents may refuse to sell to someone without a pre-approval in place. So, if you’re confident beyond a doubt regarding your odds of receiving final approval for a home loan but can’t attain a full-assessment pre-approval yet, a system-generated pre-approval could be an option worth considering.

This type of pre-approval involves a holistic assessment of your financial standing and will be much closer in its comprehensiveness to a home loan application assessment. The lender will ask if you’re a first home buyer, want to refinance or looking to buy an investment property, in order to get a feel for the type of borrower you are.

Typically, the lender’s home loan specialists will also complete a full assessment of your finances, your credit score and a range of other factors. This form of pre-approval can help you manoeuvre the homebuying process with greater confidence, including when you put an offer down on a property (so long as your circumstances haven’t changed since your pre-approval was granted).

If you’re seeking as much peace of mind as possible from your home loan pre-approval, you may want to find a lender that offers a fully assessed pre-approval rather than system-generated pre-approvals. It may take longer to be finalised, but it will generally make for a greater degree of confidence and security.

These days, many lenders let you apply for a home loan pre-approval online, making it a relatively quick and easy process. Whether you apply online or in-person, you’ll generally be required to provide the same amount of information and documentation.

This means it may be worth having details of your income (such as recent payslips), expenses, the size of your deposit and your approximate price range on hand before beginning an application for home loan pre-approval. If you’re unsure what you may need for the approval process, enquire with the lender in question.

The time it takes to process your application will largely depend on which type of pre-approval the lender you’ve applied with offers. A system-generated pre-approval will generally take less time (sometimes only minutes), whereas a full-assessment pre-approval will take longer; it can take several business days, if not a week or more, depending on the lender.

Generally, when you apply for home loan pre-approval, the lender in question will look at a range of factors including:

• Your income and expenses
• Your credit score
• Your proposed loan amount
• Your existing assets
• Your saved deposit
• The property types and locations that you’re looking at
• The property itself – the lender will have to accept the property, which they may not do if it doesn’t meet their requirements regarding size, location, the valuation of the property, etc.

These factors here aren’t too different from the ones a lender will look at when processing your actual home loan application; the difference is the extent to which they investigate them, and the stringency of their lending criteria.

Home loan pre-approvals will generally be valid for 60 to 90 days depending on the lender, which gives you a solid chunk of time to hunt for the right property while having a pre-approval in place.

If your pre-approval expires, you’ll typically be able to reapply fairly easily – however, you may want to consider the impact this may have on your credit score.

Yes, it’s possible that a lender may decline your home loan application even if they already offered you home loan pre-approval. Here are some potential reasons as to why this could happen:

• Your pre-approval wasn’t assessed thoroughly enough. If the application process for your pre-approval didn’t do a thorough enough assessment of your financial circumstances, you may not be as well-positioned to apply for a loan as you thought you were. This is a potential drawback of online, computer-assessed pre-approvals.
• Your financial situation has changed. If, for example, you get a new credit card, take out a personal loan or lose your job between getting pre-approval and applying for a home loan, you may find that you’re no longer eligible for a home loan from the lender in question.
• Interest rates have increased. If interest rates increase, the maximum amount you can borrow from the lender may decrease. This means your new borrowing power may not match up to the property value limit you were previously working with, and you may no longer be able to meet the repayments on the original proposed loan amount.
• The property you want to buy is too risky for the lender. Lenders consider certain property types and postcodes as riskier to finance, based on factors like the location’s propensity for flooding. To help avoid any nasty surprises when you submit your final loan application, ensure you’re aware of your lender’s excluded properties and suburbs.

While there aren’t any immediate downsides to having home loan pre-approval in place, you’ll want to be careful about how many different lenders you lodge an application with, and which type of pre-approval you get.

Each time you apply for home loan pre-approval, it’ll show up on your credit history as a ‘hard’ inquiry, which means it represents a formal application for credit. While hard inquiries aren’t inherently bad, too many of them can put a small dent in your overall credit score.

This is a bump you’ll have to take at some point anyway if you can’t afford to buy a home without the help of a loan, but applying for home loan pre-approval with multiple lenders means multiple hard inquiries on your credit history and a larger impact on your overall credit score. And if you do eventually apply for a home loan, your lender of choice may not be thrilled to see several different pre-approval applications on your credit report.

Furthermore, if you obtain a system-generated pre-approval, you may encounter trouble when push comes to shove, as it may not have been accurate or given you an accurate idea of your true buying power.