Ever wondered how much a bank will lend you to buy your dream home? The quickest way to find out is by getting mortgage pre-approval. Pre-approval gives you a clear idea of how much money you can borrow, so you know the type of home you can afford to buy. This article will guide you through the mortgage pre-approval process so you’re well-prepared to buy the perfect property.
What is Mortgage Pre-Approval?
Mortgage pre-approval is an initial check by a lender showing that you’re eligible to apply for a home loan up to a specific limit. Mortgage pre-approval is sometimes called home loan pre-approval, conditional approval, or approval in principle. It considers your financial situation and the price of the properties you are considering.
What’s important to remember with mortgage pre-approval is that you’re not obligated to take out the loan, and the lender has no obligation to lend you the amount either. It is simply a strong indication of your borrowing capacity.
The Difference Between Pre-Approval and Full Approval
Pre-approval for a home loan is an initial assessment by a lender based on your financial information, indicating the amount you’re conditionally approved to borrow. It does not guarantee your final home loan application amount will be approved.
On the other hand, full approval comes after you’ve chosen a property and completed a detailed application process. It involves a more thorough assessment, including property valuation, and confirms the lender’s commitment to provide the loan with fewer conditions attached.
Do You Need Pre-Approval for a Home Loan?
Getting pre-approval can save you time and effort in your home-buying journey. It shows real estate agents and sellers that you are a serious buyer with the financial backing to make an offer, giving you more confidence and potentially a competitive edge.
Think of it like this: If you’re selling a car and have two potential buyers, one who already has the money and one who doesn’t, who would you deal with? The one with their financing in order. This buyer demonstrates they can complete the purchase, reducing the risk of the sale falling through. Similarly, having pre-approval for a home loan makes you look like a prepared and credible buyer, boosting your chances of getting the property you want.
“We always recommend to our clients that they get pre-approval before looking at properties; one of the main reasons is that real estate agents won’t take your interest seriously when negotiating if you don’t have pre-approval.” – Mansour Soltani, Soren Financial.
3 Benefits of Mortgage Pre-Approval
Getting pre-approved for a mortgage can be a game-changer in your home-buying journey. It helps you understand your financial limits and positions you as a serious contender in a competitive market. The main benefits of mortgage pre-approval are:
Clear Borrowing Capacity
Understanding your borrowing capacity helps you target properties that match your budget. You can also share your pre-approved price range with your real estate agent, which will help you avoid wasting Saturday mornings attending inspections house hunting for homes outside your budget.
Streamlined Process
Pre-approval doesn’t guarantee a lender will give you a loan. However, because it requires a lender to look at your financial situation, it can speed up the final approval process once you find the right property. Your lender knows your financial situation and will have some necessary documents on file.
Stronger Negotiating Power
Sellers and real estate agents are more likely to consider your offer if you have pre-approval. They know you are a serious buyer who has already taken steps to obtain financing. This can give you an edge in negotiations, potentially leading to a better deal on the property.
“Real estate agents tend to concentrate their efforts on the people prepared with pre-approval in principle. Our job is representing our clients and getting them the best result, so we focus on clients with pre-approval.” – Mae Chan, DiJones Real Estate.
How the Home Loan Pre-Approval Process Works
Getting pre-approved for a mortgage can seem daunting, but breaking it down into steps makes it more manageable. You can follow this simple 3-step process to get a home loan pre-approval:
Financial Assessment
First, you must provide your financial details, including income, expenses, debts, and assets. These details help the lender understand your financial situation.
Credit Check
Next, the lender will conduct a credit check to review your credit history and report. This step is crucial as it shows how well you’ve managed your finances.
Pre-Approval Issued
If you meet the lending criteria, the lender issues a conditional pre-approval. You’ll get a document indicating you’ll likely be approved for a loan, pending final checks.
Expert tip: Using a mortgage broker can simplify the pre-approval process for home loans. For more information on the benefits of using a mortgage broker, check out our article on the five advantages of mortgage broker services.
Factors Affecting Your Borrowing Capacity
How does a lender decide how much money you can borrow? They don’t just take a random guess or choose based on their mood that particular day. Instead, they conduct a deep dive into your financial situation and consider several key factors, including:
Income and employment: Lenders assess your employment history to ensure you have a reliable source of income to make regular mortgage payments.
Credit history: A positive credit history demonstrates your ability to manage debt responsibly, reassuring lenders that you’re likely to repay the loan on time.
Assets: Your assets, such as savings, investments or other properties, provide security for the lender and can be used to assess your financial stability.
Debts and liabilities: Lenders review your existing debts to gauge your current financial obligations and determine how much additional debt you can afford.
Living expenses: Higher living expenses may reduce the money available for mortgage repayments, influencing the amount you can borrow without financial strain.
Property value: The value of the property you intend to buy also plays a crucial role. Lenders consider the property’s value to evaluate the collateral available and the risk associated with the loan.
Documents You Need for Pre-Approval
You might groan when you hear “paperwork”, but documentation is critical in getting pre-approval. You need several documents to give lenders a comprehensive view of your financial situation, which may include:
Proof of identity, such as an Australian passport or driver’s licence
Proof of income, including payslips and tax returns
A credit report that includes your credit score and a detailed history of your credit accounts, loans, and repayment behaviour
Bank statements that show your savings and transaction history over the last 3-6 months
Details of your assets, such as vehicles, investments and superannuation, as well as your liabilities, including outstanding loans and credit card debts
A property wish list that outlines the type of property you’re looking to buy, including your preferred price range and location.
Expert tip: Getting pre-approval usually takes several business days to several weeks. Preparing your documents ahead of time and sending back any requested forms quickly can speed up the process.
How Long Does Mortgage Pre-Approval Last?
Sadly, pre-approval doesn’t last forever. It typically expires after 3-6 months. Different lenders have policies on this, so you should always check with them for specifics. Because it expires, you don’t want to apply online for pre-approval too early in the home-buying process. Research home prices and determine the deposit you can afford first.
If your pre-approval expires before you find a property, you might need to reapply or request an extension on your pre-approval. This means providing updated financial information for the lender to reassess your borrowing capacity.
Changes in your income, employment, or new debts can affect your borrowing capacity and loan approval. If your financial situation changes after receiving pre-approval – for example, if you lose your job or win Powerball – inform your lender.
What’s Next? The Final Loan Application
Once you’ve got pre-approval and found the perfect property, it’s time to move forward with your final mortgage application. This requires a more comprehensive assessment of your financial situation and the specific property than pre-approval.
Firstly, you’ll need to provide additional documentation. While you’ve already submitted many documents for pre-approval, the lender may request updated versions or new documents to ensure that your financial situation hasn’t changed. This includes recent pay slips, updated bank statements, and other relevant financial records.
Secondly, the lender will conduct a final property valuation. This step ensures the property is worth the purchase price and meets the lender’s criteria. An independent valuer will assess the property’s market value, condition, and other factors to confirm its suitability as security for the loan.
Once these steps are completed, the lender will thoroughly review all the information provided. They’ll check that the property meets their lending criteria and verify that your financial position is still strong enough to support the loan. If everything is in order, you’ll receive full loan approval and the funds you need to buy your dream home.
Expert tip: A range of loan types are available, and every lender offers varying interest rates and terms. A mortgage broker can save you time sorting through the options and finding the right loan. We’ve compiled a shortlist of the best mortgage brokers in Sydney, Melbourne, and Brisbane to help you decide.
Mortgage Pre-Approval is a Crucial Step in Your Home-Buying Journey
Mortgage pre-approval gives you a clear understanding of your borrowing power, streamlines the home-buying process and provides you with a competitive edge. By getting pre-approved, you demonstrate to sellers and real estate agents that you’re a serious buyer, ready to make a confident offer. This preparation saves time and reduces stress, allowing you to focus on finding the perfect home.
Whether you’re applying for pre-approval or are preparing your final application, a mortgage broker can help. They can guide you through the application process, help you understand your borrowing capacity, and find the best home loan product to suit your needs.
FAQs About Mortgage Pre-Approval
Pre-qualification is an informal estimate of how much you can borrow based on your self-reported financial information. Pre-approval is a more formal process where a lender verifies your financial details and credit history to provide conditional approval for a specific loan amount. Pre-qualification is not recorded in your credit history, while pre-approval is.
Applying for pre-approval does appear on your credit report, but it usually has a minimal impact on your credit score. However, applying for pre-approval with multiple lenders in a short period can raise concerns. If they see several applications close together, lenders might assume others have rejected you. It’s best to limit your pre-approval applications to serious enquiries to avoid this.
The mortgage pre-approval process typically takes anywhere from a few days to a few weeks, depending on the lender and the complexity of your financial situation. To speed up the process, ensure you have all the relevant documents before applying.
Yes, having pre-approval can strengthen your offer and show sellers you are a serious buyer. However, once the owner has agreed to your offer, you must still obtain full loan approval to move forward with the purchase.
If your pre-approval expires, you must reapply for a new pre-approval or request an extension. This may involve resubmitting your financial information and undergoing another credit check.
Getting pre-approved with bad credit is possible, but your options may be limited, and you may face higher interest rates. Improving your credit score before applying can increase your chances of approval and better terms.
You must provide proof of identity, proof of income, bank statements, details of assets and liabilities, and your credit report. Your lender may also require a property wish list that gives examples of the types of properties you’re looking at.
No, pre-approval is a conditional offer based on your current financial situation. It does not guarantee you will get the loan. Final approval requires a detailed valuation of the property and further verification of all financial details.
Yes, you can switch lenders after receiving pre-approval, but you’ll need to go through the pre-approval process again with the new lender, which includes submitting your financial documents and undergoing a credit check.
Most lenders do not charge a fee for pre-approval. However, some may charge for the credit check or other processing fees. Lenders may also charge a fee if you need your pre-approval extended. It is best to check with your lender for any potential costs involved.
Yes, but the process may require additional documentation to verify your income stability, such as tax returns, business financial statements, and bank statements.
Yes, you can adjust the loan amount or loan type after pre-approval. However, significant changes like switching lenders may require re-evaluation and affect your application process.
