How to get a home loan pre-approval
How does home loan pre-approval work?
Andrew Winter
Home Loans
Video Transcript
Hi, I’m Andrew Winter, host of Selling Houses Australia.
I don’t know that many people would describe house-hunting as their idea of fun; and I
don’t necessarily blame them The endless procession of inspections,
seller’s agents, and rival house-hunters can be a nightmare if you’re not armed with the necessary tools!
And the most important of those tools just might be a home loan pre-approval,
which is something most banks and lenders offer to aspiring home loan applicants.
Home loan pre-approval involves the lender in question running a rudimentary assessment
of your financial situation, and then deciding whether it wants to make an informal agreement
to lend you money or not.
If your application is successful, you’ll be pre-approved to borrow up to a certain
amount from your lender.
So, let’s talk about what pre-approval is, and what it isn’t.
It is a handy thing to have in place while house-hunting – being pre-approved for a
home loan means you can attend inspections and open houses with confidence, knowing which
properties are and aren’t within your budget.
It also acts like a big shiny beacon for real estate agents, telling them ‘this person
isn’t mucking around, they’re looking to buy’.
But what home loan pre-approval isn’t is a binding guarantee that the lender in question
will actually give you a home loan.
Annoying, isn’t it?
You see, the financial assessment the lender runs on you when you apply for a real home loan
is usually a little more thorough than the assessment used for home loan pre-approval.
This makes it completely possible to receive home loan pre-approval but be denied for a
proper home loan when push comes to shove.
This could be because the pre-approval wasn’t assessed thoroughly enough, or because something
changed between then and now.
Maybe interest rates went up, maybe your financial situation changed, or maybe the specific property
you want to buy is simply too risky for the lender!
But regardless of why, it’s important to be prepared for as a homebuyer.
Speaking of preparing yourself to buy a home, have you seen Compare the Market’s new home loan comparison tool?
It lets you compare home loans on rates, fees, features and more, letting you make a better-informed
decision on which home loan might be right for you, and then apply for it using
the exact same tool!
So, what are you waiting for?
If you want to buy a home, you’ll want to compare your home loans with Compare the Market,
As soon as possible.
Expert tips for understanding home loan pre-approval
Our General Manager of Money, Stephen Zeller, understands how frustrating home loan pre-approval can be – especially when quicker, system-generated pre-approvals can potentially fall apart during full assessment. With that in mind, he shares practical tips to help prospective buyers understand pre-approval and avoid costly surprises.
Stephen Zeller, General Manager – Money
Stephen Zeller
General Manager – Money
Check your credit score
Checking your credit score is a good idea before applying, as it will account for a significant part of your overall creditworthiness in the eyes of the lender. You can check your credit report for free with Compare the Market and receive an overview of your credit history, including your repayment history, late payments or defaults you may or may not be aware of.
Have your documents ready
When applying for a home loan pre-approval, it’s helpful to have your payslips, bank statements and identification on hand. Having these ready can fast-track the home loan process and get you a decision sooner.
Compare your options
Before applying, it is worth comparing interest rates, loan features and lender fees to reduce the likelihood of making multiple applications and protect your credit score. Obtaining a home loan pre-approval can be simpler with the help of our easy online application and Home Loan Specialists, who support you through every step of your homebuying journey at no extra cost.
What is a home loan pre-approval?
A home loan pre-approval is a conditional assessment from a lender that estimates how much you may be able to borrow, based on an initial review of your income, expenses, debts, assets, and credit history. It helps you understand your borrowing power before you go house hunting, but it’s not final approval or a guarantee that your loan will go ahead.
Borrowers typically seek pre-approval to align their home search to a clearer budget and to be better prepared for auctions or making offers.
Pre-approval is generally free and often valid for 60 to 90 days. It’s also obligation-free and not binding, which means the lender can still knock back your final application, and you’re free to pull out or switch lenders.
What does conditional approval mean for a home loan?
A home loan pre-approval, also known as approval in principle, is almost always conditional. This means the lender has assessed your financial information at a high level and indicated that you may be eligible for a home loan but has not yet given full and final approval. Your application will still need to meet certain conditions, such as a satisfactory property valuation, document verification and no major changes to your financial situation to confirm your eligibility.
Why should I apply for a mortgage pre-approval?
A home loan pre-approval isn’t mandatory but having it can help you understand your realistic budget, show sellers you’re a serious buyer, and potentially speed up the final approval process once you find the right property.
Knowing your borrowing limit helps you focus on properties in your price range and avoid ‘flying blind’ in a competitive market.
Here’s how having pre-approval can help:
- Auction bids are usually unconditional. Having pre-approval in place can help you avoid overcommitting in the moment. Just keep in mind that pre-approval is still subject to bank valuation and document checks. So if your finance falls through after a winning bid, you could lose your deposit, face legal action, or be on the hook for any resale shortfall.
- When you make an offer, pre-approval signals to sellers and real estate agents that you’re financially capable and more likely to follow through. Sellers often prefer buyers who already have finance organised.
- In some cases, pre-approval can help shorten the final approval timeline, as much of your financial assessment has already been completed.
Which home loan pre-approval type is best for me?
In most cases, a fully assessed home loan pre-approval is the better option, as it provides a more accurate picture of your borrowing power. However, system-generated pre-approvals can be quicker and easier to obtain. Understanding how each type works can help you decide which option best suits your situation.
What is system-generated home loan pre-approval?
System-generated pre-approvals are based on automated assessments of the financial information you provide yourself through an application. They don’t usually involve a full review by the lender’s credit team, and supporting documents typically aren’t verified at this stage.
A system-generated pre-approval is generally quicker to obtain, with some lenders offering online pre-approval in mere minutes. The downside is that these system-generated pre-approvals are less comprehensive and may not fully reflect your eligibility, and could potentially result in a pre-approval being issued even if you don’t meet all home loan criteria.
That being said, this kind of pre-approval has its purpose; many sellers and real estate agents may prefer buyers who already have pre-approval. So, if you’re confident of receiving unconditional approval for a home loan but don’t have the time to attain a full-assessment pre-approval yet, a system-generated pre-approval could be worth considering.
What is fully assessed pre-approval?
A fully assessed pre-approval involves the lender’s credit team taking a closer look at your finances and carrying out a more detailed assessment of your personal circumstances. This may include reviewing your income, expenses, assets, liabilities and credit history, as well as verifying supporting documents such as payslips, bank statements, tax returns and other financial records.
The lender may also consider whether you’re a first home buyer, refinancing, or buying an investment property, and assess your application against its lending policies.
This type of pre-approval may take longer, but it will generally make for greater confidence and security.
How do I apply for a home loan pre-approval online?
Applying for home loan pre-approval online usually involves submitting an application through a lender’s website and providing key financial details, such as your income, expenses, assets and debts. You may also need to upload the documents, such as payslips and bank statements, so that the lender can assess your borrowing capacity.
The pre-approval application process is usually straightforward and can be done entirely online, without the need to visit a lender in person. It may be worth having details of your income, expenses, deposit amount and property price range ready to speed up the process.
If you’re unsure what you may need, it’s best to check with the lender.
How long does pre-approval take?
Home loan pre-approval can take anywhere from one to two days to several business days, depending on the type of pre-approval you apply for. A system-generated pre-approval often has the fastest turnaround, with approval issued within 24-48 hours of applying, whereas a fully assessed one can take longer, depending on the complexity of the application.
When you apply for a home loan through our home loan comparison and application tool, if your application is successful, you’ll come out the other side with a fully assessed pre-approval, meaning you don’t need to apply for it separately!
What factors influence my chances of being pre-approved for a home loan?
When you apply for home loan pre-approval, lenders will generally assess your financial situation, credit history and property details to estimate how likely you are to qualify for a mortgage. Lenders will typically look at a range of factors, including your:
- Income and living expenses, which help determine your borrowing capacity and your ability to meet loan repayments.
- Credit history, showing how reliably you’ve met the repayments on debts such as loans and credit cards.
- Existing assets, including savings, investments and other assets that support your application.
- Employment history with stable, ongoing employment helps show your income sustainability.
Also assessed are:
- The loan amount you’re seeking and whether it aligns with your income, expenses and overall financial position.
- The property type and location, along with its size, condition and valuation, to ensure it meets the lender’s lending criteria. Some properties or postcodes are considered higher risk and may reduce borrowing capacity.
These factors are similar to those 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. You can take a look at our tips for being approved for a home loan for more information.
Does home loan pre-approval expire?
Yes. Home loan pre-approval generally lasts 60 to 90 days, depending on the lender. That’s why it’s best to apply when you’re ready to actively start house hunting, so your pre-approval remains valid when you find the right property.
If your pre-approval expires or if your circumstances change, such as a change in income, expenses or new credit, you’ll generally be able to reapply. Lenders will likely ask for updated financial documents so they can reassess your situation. Depending on your circumstances, you may be pre-approved again for the same amount, more or less.
However, it’s worth keeping in mind that reapplying usually involves a new application and a fresh credit check, which can impact your credit score.
Can a lender reject my home loan application even if I have pre-approval?
Yes, it’s possible a lender may knock back your home loan application after they gave you home loan pre-approval. Here are reasons why:
- Your pre-approval wasn’t fully assessed: System-generated pre-approvals are based on limited, self-reported information and don’t involve a full check of your supporting documents. If the details don’t stack up during the final review, the lender may decline the loan.
- Your circumstances change. For example, if 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 you’re no longer eligible for a home loan from the lender in question.
- Interest rates have risen. If interest rates jump, the maximum amount you can borrow from the lender may contract. This means your new borrowing power may fall short of the property value you were working with, and the lender may assess that you may no longer be able to meet the repayments on the 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 such as flood risk. To help avoid nasty surprises when you submit your final loan application, ensure you’re aware of your lender’s excluded properties and suburbs.
Are there any downsides to home loan pre‑approval?
While there aren’t any immediate downsides to having a home loan pre-approval in place, it’s important to be mindful of how many lenders you apply with and which type of pre-approval you choose.
Each time you make a pre-approval application, it will likely appear on your credit file as a ‘hard’ inquiry, meaning it’s treated as a formal credit application.
While a single hard inquiry isn’t usually an issue, making several applications in a short period can result in multiple hard inquiries, which may flag you as a higher-risk borrower. Lenders often interpret this behaviour as desperation for credit or a sign you’re having trouble getting approved, increasing the likelihood of rejection.
Additionally, system-generated pre-approvals can pose challenges later on. Because they often rely on limited information, they may not reflect your true borrowing power, increasing the risk that your home loan application won’t meet full lending criteria.
Meet our home loans expert, Stephen Zeller
Stephen has more than 30 years of experience in the financial services industry and holds a Certificate IV in Finance and Mortgage Broking. He’s also a member of both the Australian and New Zealand Institute of Insurance and Finance (ANZIIF) and the Mortgage and Finance Association of Australia (MFAA).
Stephen leads our team of Mortgage Brokers, and reviews and contributes to Compare the Market’s banking-related content to ensure it’s as helpful and empowering as possible for our readers.