Pre-approval to buy a house
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Home Loan Pre-Approval – Understanding it’s Importance

The Importance of Mortgage Pre-Approval in Australia

Obtaining mortgage pre-approval is a crucial step in the home-buying journey. It helps you understand how much you can borrow, speeds up the buying process, and gives you a competitive edge. This guide will explain the importance of pre-approval, the benefits, how to apply, and answer frequently asked questions to help you prepare for this essential process.

Definition and Overview of Mortgage Pre-Approval

Mortgage pre-approval, also known as conditional approval, is an agreement from a lender specifying the amount they are willing to lend, subject to conditions. It’s not a guarantee but gives a clear idea of what you can afford. Pre-approval is vital for setting a realistic budget and providing confidence when making offers on properties.

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Conditional vs. Unconditional Approval

Conditional Approval

Conditional approval indicates you are eligible for a home loan subject to certain conditions, such as:

  • Contract of sale for the purchased property
  • Rental appraisal for the purchased property if it is an investment purchase
  • Satisfactory valuation 

Unconditional Approval

Unconditional approval, or formal approval, occurs when the lender fully approves your loan application loan after you have satisfied the conditions of your conditional approval.

The Benefits of Mortgage Pre-Approval

Financial Clarity and Budgeting

One of the biggest benefits of pre-approval is knowing exactly how much you can borrow. This helps you set a realistic budget and avoid looking at homes outside your price range.

Faster Home Buying Process

With pre-approval, you can act quickly when you find the right property. This speeds up the process and makes you a more attractive buyer to sellers.

Better Negotiating Power

Knowing your exact borrowing capacity gives you confidence to negotiate with sellers. This can help you secure a better deal on the property.

Peace of Mind

Pre-approval reduces stress by handling a large part of the loan application process upfront. This makes the settlement process smoother and faster.

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Types of Pre-Approvals

System-Generated Pre-Approvals

System-generated pre-approvals are typically quick and can be completed online. They are based on the initial information you submit and can provide immediate feedback. However, these offers are often subject to more conditions because they lack a thorough review by a human assessor. While convenient, they might lead to complications later on if your supporting documents don’t match the data entered into your application.

For example, if your payslips show a lower salary than what was entered in the application this may reduce the loan amount available. 

If you are attending an auction a fully assessed home loan pre-approval is a much safer option.

Fully Assessed Pre-Approvals

Fully assessed pre-approvals are more comprehensive. During this process, a lender’s assessor reviews all your financial information in detail, including your employment history, income documents, and credit report. This type of pre-approval takes longer but provides a more accurate determination of how much you can borrow and has fewer conditions to meet for final approval. This thorough vetting can save time and trouble later on in the mortgage application process.

Applying for Mortgage Pre-Approval

Steps to Apply

The best time to start the pre-approval process is just before you begin house hunting.

The first step is to speak to a mortgage broker such as us or apply online. We can usually give you a good indication of your borrowing capacity in an initial 15 minute phone consultation.

If everything looks fine you will then need to collate the necessary documents. You’ll need documents such as ID, proof of income (like pay slips), tax returns, bank statements, loan statements etc. With advancements in digital technology, the application process has become more straightforward. However, if you are self-employed, be prepared to provide more detailed financial information.

Once you provide these documents, we will complete our full assessment and prepare our loan recommendations.

Once you decide on which lender you prefer we submit your application for assessment and typically the lender will respond within 1-5 working days. Some lenders are quicker than others.

Duration and Validity

Pre-approvals are generally valid for up to 90 days. Some lenders may offer validity up to six months. To avoid having to reapply, it’s best to start searching for a home within this timeframe. If you don’t find a property within the pre-approval period, you might need to extend it, which can involve additional paperwork.

Maintaining a stable financial position and employment status during this period is crucial. Significant changes can invalidate your pre-approval, requiring reassessment.

Qualifying Criteria for a Home Loan Pre-Approval

Key Criteria

To qualify for mortgage pre-approval, you need to meet several criteria:

  • Proof of stable employment and consistent income, ensuring you can maintain regular mortgage repayments.
  • A good credit score, reflecting your history of managing credit responsibly.
  • Proof of savings for your deposit, demonstrating financial discipline.
  • Clear documentation of any existing debts, like credit cards.
  • The property you intend to buy needs to meet the lender’s guidelines, which often involves an appraisal to check its value and condition.

A Final Word on Pre-Approvals

It’s important to stay updated with lender policies, as changes can impact your pre-approval. For instance, lenders might shift their focus away from investor loans, affecting your eligibility. Contacting an experienced mortgage broker will be beneficial. They keep track of these changes and help you find the right loan options, making the process easier and more efficient.

Mortgage pre-approval is an essential step in the home-buying process. It provides clarity on your budget, speeds up the purchase process, and strengthens your negotiating position. By obtaining pre-approval, you can confidently make offers and proceed with buying your dream home, knowing that much of the legwork has already been done. Always consider working with experienced brokers to ensure a smooth and efficient process.

Frequently Asked Questions

Q: What is the difference between pre-approval and formal approval?

A: Pre-approval approves you for a specific loan amount subject to one or more conditions. A formal approval is the final approval issued after you have satisfied all the conditions.

Q: How long is a pre-approval valid for?

A: Most pre-approvals are valid for 90 days, though some lenders offer extensions up to six months. If you don’t find a property in the first 3 months updated income documents will be required, even by the lenders offering 6 month conditional approvals.

Q: Can my loan still be denied after pre-approval?

A: Yes, especially if the pre-approval was system-generated. Full assessment pre-approvals are more reliable. Ensure all information provided is accurate. Other reasons why a loan may be denied even after pre-approval include:

  • The valuation amount coming back lower than the purchase price
  • Your situation has changed since the original application (e.g. you have changed jobs)

Q: What should I avoid during the pre-approval period?

A: Avoid significant changes in employment or financial situation, as these can affect your pre-approval status. For example, it is wise to not take out any other loans or credit cards.

Q: Do all lenders offer the same pre-approval terms?

A: No, different lenders have varying policies and criteria. Comparing options is essential.

Q: How can a mortgage broker assist with pre-approval?

A: Brokers help find suitable loans, assist with the application process, and handle paperwork, making it more likely to get pre-approval.

Q: Can my pre-approval be impacted by changes in lender policies?

A: Yes, changes in lender policies can affect your pre-approval at some lenders. Having said that, most lenders will honour the pre-approval under the original policy if it is converted to a formal approval within 90 days. It’s important to stay informed and consult with brokers to manage this effectively.

Q: Can my conditional approval be impacted by an increase in interest rates?

At some lenders, an interest rate increase may reduce the acceptable loan amount. Most lenders will honour the pre-approved amount but some won’t. In a rising interest rate environment it is important to choose the right lender.

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