What is mortgage pre-approval?

Getting a head start in any game is a major advantage. Buying a home is no different – the odds favour those who have done the groundwork.

The pre-approval process allows a lender to assess a potential borrower on their ability to take on a home loan without drawing up a formal mortgage agreement. Think of it as a conditional 'okay' for a home loan. Indeed, 'conditional approval' is name many lenders give to pre-approval.

What is home loan pre-approval?

Home loan pre-approval is when a lender agrees, in principle, to provide a borrower with a home loan of a specified amount.

Different lenders may call it by different names – conditional approval, indicative approval, approval in principle – but it essentially means that a borrower has taken a preliminary step in the home loan application process.

Pre-approval signals that your application fits the lender's lending criteria. It can provide you with an idea of how much you'll be able to borrow and gives you confidence as to what you'll be able to afford when scouring the property market.

Lenders will generally pre-approve a borrower for a specific amount of time, often between 60 and 90 days, after which it can reassess their case considering their more recent financials.

Which lenders offer mortgage pre-approval?

If you're in the market for a bank or lender that allows prospective borrowers to apply for home loan pre-approval, look no further:

Important Information and Comparison Rate Warning

What are the advantages of getting home loan pre-approval?

In addition to providing an idea of your borrowing power, home loan pre-approval can give you a jump in the property market by providing confidence, bargaining power, and focus. Here's how:

1. Gives you an edge at auction

Being pre-approved for a home loan is essential if you're planning to participate in an auction. If you successfully bid on a property at auction, you commit to buying it or lose your deposit. Home loan pre-approval allows you to bid confidently and helps ensure you don't bid more than the amount your lender is prepared to lend you.

However, pre-approval doesn't guarantee you'll get a home loan. Be warned that your lender will likely want information on the property you're purchasing and more comprehensive documentation of your financial situation before it hands over any funds, which can put buyers at risk in an auction scenario.

2. Can help you negotiate a private sale

Home loan pre-approval is also useful when you make an offer for a property – it can mark you as a serious buyer who has a strong chance of being able to meet the offered amount. This can give you an edge over other prospective buyers who don't have pre-approval in place, as a seller may assume your offer is less likely to fall through due to finance.

3. Can save you time and effort when house hunting

Pre-approval gives you a good indication as to how much you can afford to repay. Having a clear idea about how much you can borrow will help you target homes that fit your budget, ultimately making your property search more efficient.

How to get pre-approved for a mortgage

Getting mortgage pre-approval is typically a far simpler process than getting officially approved for a mortgage. It can also make eventually securing an official approval easier, as many of the documents a borrower will need to provide to be approved for a mortgage have already been gathered and provided during the pre-approval process.

There are several steps involved in the process of getting pre-approval for a mortgage, including:

• Market exploration
  Begin by researching competitive home loan options to find one that best meets your needs. Consider factors such as interest rates, loan terms, and features.

• Select a lender or broker
  Choose a lender or engage a mortgage broker to assist in finding the right mortgage product for you. Even if you go down the broker route, have a look at the mortgage market to see going rates – some lenders offer their best rates exclusively to borrowers who apply directly.

• Application process
  Applying for pre-approval is typically easy and can often be done online via a lender's website. Each lender will have slightly different processes when assessing an applicant for pre-approval, but generally you'll need to provide:
  
  
  • Identity documents
  • Recent bank account statements detailing your spending and deposit
  • Information on assets you hold
  • Information on liabilities
  • Credit card statements
  • Proof of income
  • Breakdown of living expenses

It may seem obvious, but it's worth mentioning: Make sure to fill out an application form from your ideal lender, and don't forget to sign it! Take your time to double- and triple-check the details you're providing as mistakes could slow down (or even forfeit) your application.

• Receive pre-approval
  Once you're pre-approved, you can begin house hunting more seriously knowing you've got a clear idea of your borrowing capacity.

Can you be rejected for a mortgage despite having pre-approval?

Many prospective home buyers may not realise home loan pre-approval only provides an indication that a lender may approve you for a mortgage when you submit a full application.

A lender isn't obliged to approve you for a home loan, even if offered you pre-approval. At the same time, you're not obligated to apply for a home loan with that lender if a better deal comes along.

Some reasons a lender might reject a home loan application, even if an applicant was pre-approved include:

1. Their financial situation has changed recently

A new job, a big purchase, or a major life event could alter your financial status, which might impact your chances of home loan approval.

2. The lending policies of your preferred lender have changed

Some lenders may honour pre-approval applications submitted before their lending policy changed, but many will not.

3. Interest rates have increased

When lenders give pre-approval, they typically pre-approve a loan at or near a borrower's maximum capacity. However, if interest rates rise, your borrowing power will likely take a hit (because you mightn't be able to service the debt at a higher rate).

4. The property you're planning to buy is considered risky

Property assessments are not part of a home loan pre-approval application. Many lenders have policies regarding the type of properties they'll finance. Buying a home in a flood zone or a bushfire-prone area might thwart your chances of getting a home loan. Some lenders may also avoid certain suburbs, small apartments, or hobby farms.

5. The lender's insurance provider rejects your application

If you're hoping to borrow more than 80% of a property's value, you'll probably have to pay for lenders' mortgage insurance (LMI). If that's the case, your application will also need the approval of the LMI provider – its guidelines might be different to your lender's.

See also: How to avoid paying Lenders' Mortgage Insurance (LMI)

Frequently asked questions on mortgage pre-approval

How long does it take to receive home loan pre-approval?

How long it takes to secure home loan pre-approval can vary depending on the lender and the complexity of your individual circumstances. Getting pre-approval may take a few minutes or hours, a couple of business days, or a week or two.

You can help speed up the process by providing all the relevant documentation and accurate information when requested.

How long does home loan pre-approval last?

How long a loan pre-approval lasts depends on the lender. For most banks and lenders, it usually stands for 60 or 90 days.

While two or three months may seem like a substantial period in which to find the perfect home, it may not happen for a prospective buyer in that window.

At the end of your pre-approval period, if you still haven't found a suitable property, you might need to reapply for another pre-approval. Your lender may need to reassess your financial circumstances at this time.

Does mortgage pre-approval affect your credit score?

Any time a lender requests a copy of your credit report from a credit reporting bureau, it's enquiry is recorded. Records of these enquiries can remain on your credit report for up to five years.

However, there are differences in the type of enquiry performed. When you apply for pre-approval, your home loan lender will likely perform what's known as a 'hard enquiry', which can temporarily lower your credit score by a small amount. This shouldn't concern the majority of applicants.

What might cause problems is that this happens every time you get pre-approved for a home loan. A borrower who seeks pre-approval from several different home loan lenders will likely have each application recorded as a separate hard enquiry. This can have a much more significant and longer lasting affect on your credit score.

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