5 things to know about home loan pre-approval
It's generally advisable to have home loan pre-approval before making an offer on a property. Here's what you need to know heading into Spring auction season.
Pre-approvals can be called different things by different lenders: conditional approval, indicative approval or approval in principle. But it all amounts to the same thing. Pre-approval is a preliminary step in the home loan application process. It's an indication from a lender that they will lend you a specific amount subject to certain conditions. It is not a guarantee that your application will be approved – it is simply an indication that your application fits the lender's criteria.
Pre-approval should be attained before making an offer on a property, as it is the best indicator that your financial situation will be acceptable by the lender, giving you confidence to go house hunting, make an offer or participate in an auction.
Two types of home loan pre-approval
There are two types of pre-approvals. For both, you will need to provide personal details and information on income, expenses, assets and debts. The main difference is what the lender does with that information.
This is where the lender's credit department does a full assessment, including reviewing your documents and conducting a credit check. This type of pre-approval will take a few days to be issued and results in the lender running a credit check, which leaves an enquiry on your credit file. Multiple enquiries can negatively impact your credit score. As such, this type of pre-approval is less common.
Online pre-approval can often be received quite quickly, either on the spot or within a few hours. However, the finer details of the credit report and documents have not been evaluated by a credit assessor. This type of pre-approval will have more conditions attached based on the details that you included in your initial application.
While the full assessment-style of pre-approval results in a credit check against your file, the more common online pre-approval gives you an idea of how much you can borrow without the lender doing a credit check. This is a great way to get an initial indication of the loan amount you may be eligible for. After you have received pre-approval and made an offer on a property, lenders will do a full credit check, which does leave an enquiry on your file.
5 things you should know about home loan pre-approval
1) Pre-approval tells sellers that you're serious about buying
If you have pre-approval from a lender, you have already started the process towards getting a home loan. You will be in a good position to snap up a bargain quickly, proceed to full approval for your loan and exchange contracts before others in the market. Real estate agents may also ask for a copy of your pre-approval prior to accepting your offer to ensure that you are a serious contender.
2) Pre-approvals are valid for a set period of time
For most lenders, pre-approvals are valid for between three and six months. This is because both a borrower's financial situation and the property market can often change over a few months. When applying for a pre-approval, speak with your lender about the expiry date and what will happen if you don't find a property within that time.
3) If the property is unacceptable, you may not be approved
A pre-approval does not include an assessment of whether the property is acceptable by the lender, as you typically don't make an offer on a property until after you receive pre-approval. This is why one of the conditions in the pre-approval will be 'subject to a satisfactory valuation'. Certain types of properties may not be acceptable to some lenders, such as:
- Small apartments or particular apartment blocks
- Hobby farms
- Certain suburbs
- A property with large power lines close to it
- A property in poor repair
Speak with your Lending Specialist about what types of properties are typically accepted.
4) A change in circumstance may affect your application
If your personal or financial situation changes after you have been pre-approved, the lender will need to reassess your application. Worst case, it may mean that the lender considers you are no longer able to afford the repayments. Some examples include:
- Changing jobs
- Going part-time or becoming a contractor
- Taking on a new credit card or loan
- Having children
- Spending your deposit on an emergency expense
- Lenders finding out about loans or credit cards that you did not disclose
Note: These changes don't necessarily mean your application will be rejected, but you will need to talk with your lender about how they will impact your financial situation. Regardless of whether your circumstances change after pre-approval, lenders will always do a full assessment after you've found the property you want to purchase before approving your loan.
5) Interest rate changes could affect your pre-approval
There is always a possibility that interest rates could change. If the interest rate increases, the maximum amount you are able to borrow may decrease.
Want to be ready to jump on the property of your dreams? Speak with with our Lending Specialists before you head to an auction.
This material has been prepared for information purposes only. This should not be taken as constituting professional advice. You should consider seeking independent legal, financial, taxation or other advice to determine how this information relates to your own circumstances.