Explore Home Loans

If you’re beginning the search for your first or next dream home, you may not be looking forward to all the complexities and moving parts that house-hunting can involve – after all, it’s hard enough trying to find the right home while navigating the mess of real estate agents, couples planning where their furniture will go at open homes and fierce bidders battling before the hammer falls.

But the good news is that you can potentially make the whole ordeal more straightforward by getting a home loan pre-approval in place. Let’s break down what a pre-approval is, how it works and its pros and cons.

How does home loan pre-approval work?

Let the host of Selling Houses Australia, Andrew Winter, walk you through what you need to know about home loan pre-approval.

What is a home loan pre-approval?

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.

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 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 the full approval when push comes to shove.

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

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The two types of home loan pre-approval

Generally speaking, there are two kinds of home loan pre-approval: system-generated pre-approvals and fully-assessed pre-approvals. The difference between the two is significant, and not understanding it could potentially cause you grief down the line.

System-generated pre-approvals

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 gravely misleading.

This is because the shallower assessment carried out by a computer can miss or not factor in crucial aspects of your financial situation, and this in turn could potentially lead to you being given a pre-approval while not actually being 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 be bothered attaining a full-assessment pre-approval, a system-generated pre-approval could be an option worth considering.

Full-assessment pre-approvals

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.

Why should I apply for a home loan pre-approval?

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 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. For instance,  a homeowner may not be too keen on the idea of agreeing to sell to someone who hasn’t been pre-approved for a home loan.

How do I apply for a home loan pre-approval?

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; several business days, if not a week or more.

Frequently asked questions

What are the downsides of home loan pre-approval?

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.

With this in mind, you may want to compare your options and decide which lender you want to work with from the get-go so you can avoid having to apply for a home loan pre-approval with multiple lenders, as well as potentially find one that offers a full-assessment pre-approval if that’s what you want.

What factors influence my chances of being pre-approved for a home loan?

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

  • Your income
  • 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.

How long is a home loan pre-approval valid for?

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.

Can a lender reject my home loan application even if I have home loan pre-approval?

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.

Ready to compare?

If you’re set to take the next step on your home buying journey, try comparing your options through our free comparison service.

To compare home loans with Compare the Market, simply enter details, like:

  • Whether you’re a first-home buyer, refinancing or investing
  • The amount you’re looking to borrow
  • Whether you’re looking for a fixed or variable interest rate
  • Your employment status
  • Where you’re looking to buy.

Then, you can compare loan options from some of Australia’s biggest lenders, all in one place!

When you find a competitive loan, you can chat to one of our friendly home loans specialists; they’ll help you work out your next steps and how you can apply for pre-approval. Simples!

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