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Home loan pre-approval – what you need to know

Pre-approval from a lender is an important step in the early stages of a home buying journey, giving you an indication of your borrowing capacity. Here’s our guide to how it works.

Key takeaways:

There are two main stages of home loan approval: conditional and unconditional. Both are recorded on your credit history.

 

  • Conditional approval (aka pre-approval or approval in principle) gives you the confidence to make an offer for the right property and may involve verification of your financial position and other necessary checks.
  • Unconditional approval is granted just before you finalise the purchase of a property and may depend on whether the bank’s valuation of the property aligns with the sale price.
  • You can work out how much you may be able to borrow before either approval stage without affecting your credit history, by completing an application online.

What is home loan pre-approval?

Pre-approval, also known as approval in principle or conditional approval, is when a lender agrees to extend you a home loan up to a certain limit, subject to certain conditions. Here at Westpac, we refer to conditional approval or pre-approval as approval in principle.

 

There are two basic stages of approval – conditional approval, which is good to have as you are getting ready to buy your property, and unconditional approval, which happens right at the end of the process.

 

You can start the process of getting conditional approval with an online application. An online application will involve questions about your employment and income, debt such as personal loans and credit cards, and other investments. These answers help paint a picture of your overall financial situation.

 

An online application usually takes under half an hour to complete and, depending on your financial details, could give you an indication of how much you might potentially borrow for a home loan.

 

It’s important to note that this is an obligation-free step that gives you an idea of your borrowing power, but it is not a definitive approval for your home loan application.

 

It’s also worth understanding that not everyone will be able to see this indicative amount that you can borrow straightaway; for example, people who are self-employed may need to provide additional supporting information.

 

Once you’ve been given an indication of how much you can borrow and have told us you want to proceed, a Home Finance Manager will be in touch to help you prepare for the approval in principle.

 

This stage involves an assessment of your situation by the lender, although it’s still not a guarantee of your final loan application being approved – some further checks will be required. For approval in principle, you may need to provide additional proof of the financials you shared in the first step online, so the lender can confirm those details.

 

It’s also important to know that the request for conditional approval will be recorded in your credit history, regardless of the outcome.

How does the pre-approval process work?

When you apply for pre-approval, the lender will take into consideration your overall financial situation, and typically need to verify your identity, income and expenses. This involves providing paperwork such as payslips and proof of any other sources of income such as bonuses or of rental income, plus details ongoing expenses.

 

The lending criteria also includes providing documentary evidence of all your assets and liabilities. While assets can range from savings and superannuation to investment properties, liabilities can include personal loans, credit card statements and Buy-Now-Pay-Later debt.

 

At this stage, the lender will also do a credit check - this basically means they will check your credit history to get a clear picture of your past credit accounts and repayment behaviour.

 

Apart from ensuring your ability to make the loan repayments, these checks and balances could reveal things like an old credit card debt or something similar, that you may have forgotten about at an earlier stage.

 

Once it’s established you’re a suitable candidate for a loan, the lender would issue you a written pre-approval clearly outlining the conditions. How long this process takes usually depends on your situation, but the lender would keep you updated on the progress of your application. And this doesn’t cost anything – it’s free from obligation for both parties.

Should I always get pre-approval when applying for a home loan?

It is not a requirement for borrowers applying for a home loan but there are definitely advantages to getting a home loan pre-approval.

 

Pre-approval lets you work out how much you may be able to actually borrow in your particular financial situation. It will give you a limit to your budget, which can be useful when you're house-hunting.

 

It also allows you to present as a serious home buyer – which is especially useful at auctions. It can make you feel more confident when making an offer once you've found the right home, because you have a clear idea of what you can borrow.

 

And finally, being pre-approved could help speed up the approval process for your final home loan application.

Does pre-approval mean I will definitely get a home loan?

The short answer is no. It’s really important to understand that approval in principle does not guarantee a loan approval. The operative term here is ‘in principle’. It is an indication of your potential loan amount, but it comes with certain caveats, bearing in mind that circumstances change.

 

Your final loan application may have a different outcome from your pre-approval if there are changes in your financial position, changes in market conditions, or significant changes in the lender’s home loan policies and procedures. Final approval also depends on the lender’s valuation of the property – if the sale price is considerably higher than the lender’s valuation of the property, it may affect what you can borrow.

 

Any regulatory changes in Australia may also affect your loan’s status. And,  if your Loan-to-Value Ratio (LVR) is higher than 80 per cent, you may require Lenders Mortgage Insurance.

 

So, unconditional approval, or your final approved home loan, might involve a bit more rigour and additional paperwork, but getting pre-approval means you are off to an informed start.

When should I apply for pre-approval?

It helps to plan this strategically. Start with doing your research, so you have an idea about the price range of the new home you are looking to buy, based on the current property market, and how much deposit you can afford. This is a good time to complete an application online.

 

Another easy way to get a sense check on your own borrowing capacity is with our online mortgage calculator – which gives you an estimate of the maximum loan amount you might be able to borrow. You could also try and work it out using the affordability calculator which bases the loan calculations on how much you are comfortable repaying each month.

 

It’s a good idea to think about the loan term and different types of home loans at this point too. Your lender can help you understand whether a fixed interest rate or variable rate loan, or a combination of both, is best suited for you.

 

Most pre-approvals are valid for three months, including ours, although the timeframe may vary between different lenders. Our approval in principle can be renewed at the end of the 90-day period, if required, provided your financial situation hasn’t changed.

 

You can start the application process any time, but it may be a smart move to not apply too early in the game, if you are not serious about looking to buy.

 

This is because pre-approval for loans are recorded in your credit history, and can affect your credit report. Multiple applications can reflect poorly on your credit rating, as it may appear that your financial situation is unstable. You’re likely to face the same issue if you apply for pre-approval with different lenders at the same time.

 

So, a good time to put in an approval application is when your other credit accounts are in good standing, you’ve saved a deposit and ideally, you’re zeroing in on your dream home.

What happens after I’m granted a pre-approval?

Once you’re armed with approval in principle, you can go house-hunting with a clear and realistic idea of your overall budget.

 

And when you’ve found the right property, you can start the formal approval process for your home loan. This will involve a valuation of the property by the lender, sorting insurance for the property and finalising the contract of sale. The lender will also need to verify that your circumstances have not changed before granting the final approval. Some additional steps here may include completing stamp duty concession or exemption forms, First Homeowner Grant papers, and building or pest inspections, as applicable.

 

Once all the Is are dotted and Ts are crossed, you will be all set for loan settlement. If you have a deposit or are ready to buy, ask for a call back from one of our Home Finance Managers to get the ball rolling, or apply online to get an idea of how much you can borrow with us.

Things you should know

This information is general in nature and has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness of the information to your own circumstances and, if necessary, seek appropriate professional advice. Credit provided Westpac Banking Corporation ABN 33 007 457 141 AFSL and Australian credit licence 233714.