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What is Home Loan Pre-Approval (and how to get it)
Whether it’s your first home, your next home or an investment property, home loan pre-approval is the stage in the home-buying experience that lets you know how much you can borrow. It provides a degree of certainty when you are searching for your new home and, once you are prepared to make an offer on a property, have a real maximum figure to work with.
In short, with pre-approval, you can go house-hunting with confidence. Here is a complete rundown on how the home loan pre-approval process works.
What is home loan pre-approval?
Also known as “conditional approval” or “approval in principle”, home loan pre-approval is an indication from a lender of how much you can borrow when you are searching for a home. Pre-approval is calculated by considering your current financial position: including income, your existing liabilities, and the size of your deposit or funds available to purchase the property. How long do pre-approvals last? Usually 90 days, including from IMB.
It’s important to note that a pre-approval is not “unconditional approval”. Final unconditional approval for the loan amount will ultimately be subject to the bank’s valuation of the property and other potential factors. This is explained below in Does pre-approval guarantee that my home loan is approved?
But, in most cases, you will know where you stand with your bank and how much loan you have to purchase your home.
Do home buyers need pre-approval for a home loan?
Not necessarily. The process may simply be a case of finding a property you love, making an offer and approaching your bank for the finance. But this may leave little time for shopping around for the home loan best suited for you, especially if there are other interested parties, or the house is going to auction.
The process for getting pre-approval is almost the same as simply applying, so it is a worthwhile step if you have not settled on a home because it affords you time to really shop. From an application process and documentation perspective, the only real difference between pre-approval and approval is that you don’t have a property to be valued yet. You do most of the application work at the pre-approval stage. So…
What are the advantages of pre-approval?
You know what you can afford
A mortgage pre-approval from a financial institution could help you work out how much you have to spend, which makes the house-hunting process more surefooted. You have a realistic understanding of what properties are in your achievable price range.
You can act fast
This can be a powerful bargaining tool when making an offer; the owner may have already bought their next home and can be motivated to lower their expectations. At this stage, getting an independent valuation gives you an objective idea of the property’s worth and empowers you to bargain with confidence.
Pre-approval also arms you with the ability to make decisions quickly. As pre-approvals are valid for 90 days, you have the ability to swoop on a deal quickly, even after a couple of months. For example, you can go to an open-house inspection and make an offer on the spot.
Pre-approval is also useful when attending an auction. You know you have a top figure you can confidently bid towards and, perhaps more importantly, not go beyond. However, you must do your due diligence on the market and the property’s value prior to the auction. This is explained below in Can I bid at an auction with home loan pre-approval?
When should I apply for pre-approval?
The question of when to get pre-approved for a home loan will depend on each person’s situation. You can apply at any stage in your home loan preparation, but there may be advantages to applying for pre-approval when you are getting towards the business end of your house-hunting journey and are ready to buy. Here’s why…
There is a time limit to pre-approval
As stated above, pre-approvals are valid for a given period, usually about three months, or 90 days. If you apply for pre-approval very early in the process, hoping to find your dream home quickly, you may be disappointed.
Anyone with experience in searching for property knows that it can sometimes take many months to find the right place. In the meantime, your home loan pre-approval time frame may expire. Of course, you can apply again, however...
Many pre-approval applications can affect your credit rating
Every time you apply for pre-approval it is registered as a credit request. Applying for several pre-approvals over a short period of time – or say, with several institutions – may affect your credit score. So, do some research first, then apply for pre-approval once you are ready to shop hard.
How to prepare for pre-approval
Use our calculators to get a reasonable picture of your borrowing capacity. Our Borrowing Power Calculator is a good first step to get an idea for how much you can borrow based on your income and expenses.
Our Home Loan Repayment Calculator can show what repayments will be with different interest rates and over different terms, which is handy when you find a property at an advertised price; you can immediately see what a different loan rate will mean for you on a monthly basis and over the life of the loan.
It might also be worthwhile to speak with a Lending Specialist even before applying for pre-approval. We are ready to work alongside you for the entire loan process and, even in the early stages, can help you gauge where you are at.
Further, your lender can discuss the different home loan options available to you and the kind of home loan you are after – like a fixed interest rate, variable interest rate or split loan– and what features will work best for you, if any. Features can include offset accounts, redraw facility, packaged credit cards and so on.
Finally, pull together all of your relevant documents (ensure they are all accurate), including:
- Proof of Identity (passport, driver’s licence etc)
- Payslips
- Credit card statements
- Bank account statements
How to apply for home loan pre-approval
At IMB, one of our Lending Specialists can contact you at a time that works for you and walk you through the process, either in person – at home or in one of our branches – or on the phone. The conversation takes between 30 and 60 minutes and you will need to supply details about your income and expenses along with supporting documentation (as listed above). We will identify any further documents you may need for home loan pre-approval so you can get them ready.
Can I make an offer on a property with home loan pre-approval?
You can. Pre-approval is evidence that the bank has assessed your circumstances and is prepared to lend you a certain amount. You can now make an offer on a property that is listed for sale. You can now make an offer on a property that is listed for sale. However, your chosen property will be subject to a valuation by the bank before giving you unconditional approval for the loan.
If the bank deems the loan value too high for the property’s valuation, it can be grounds to not approve the loan, even if the loan property price comes under your pre-approved amount. Take care to not offer more than the property is worth on the market, as property value will be a deciding factor in the final loan approval process.
Prior to making an offer you might consider:
- Paying for an independent Building & Pest (B&P) inspection done. In the ACT, the real estate agent will supply a B&P as part of the marketing material offered to serious buyers. Many agents in New South Wales may do the same, although it is not mandated by law. If not, paying for your own inspection should give you a clearer picture of what you are purchasing.
- Having the property independently valued. This is another cost, but it could provide some assurance about the property’s market value.
- Request a condition be added to the contract about the sale being “subject to finance” or “subject to a building and pest inspection”. If there isn’t time for the inspections, then the addition of this kind of clause is not unusual and may save your deposit, should the property value be less than your lender is comfortable with. You should seek your own legal advice before signing the contract.
Can I bid at an auction with home loan pre-approval?
Auctions are potentially more fraught because of the nature of the transaction. The bidding process can be unpredictable, and a collective rush of blood may send the property price quite high. Unless you stick to your guns, you could end up paying more than you can, or should. Also, there is no cooling-off period, so once the hammer falls, it’s yours to pay for.
Even with home loan pre-approval for a certain amount, there is a possibility unconditional approval may be declined; for example, if the bank deems the property value is too low.
Banks are reluctant to value homes before an auction – the market on the day is the market on the day, after all – but will try to work with you within reason. So, it is wise to have done extensive research on the market and the property itself prior to raising your hand. Both a B&P inspection and an independent valuation could be valuable steps pre-auction, so that you go in with as much knowledge as possible.
- How much is the home most likely worth?
- What is the market value for a property of its nature in the area? and
- Are there any potential structural problems with the property that will affect its valuation?
Taking ownership of the valuation process will go a long way to ensuring you can bid confidently. Now that you have agreed on the price, the real estate agent will request a copy of the Contract of Sale be forwarded from the vendor's solicitor to your solicitor, unless this has already happened. Your solicitor will review the contract to determine inclusions and council regulations concerning the property and factor in the Building and Pest report.
Does pre-approval guarantee that my home loan is approved?
Nothing in life is guaranteed, and a home loan pre-approval is also called a “conditional pre-approval home loan” because it is not a guarantee. A pre-approved loan only gives you an idea of how much you are able to borrow. Once you decide on a property, the bank will need to do a valuation of the property and conduct other checks to ensure it is suitable security for the bank before giving you unconditional approval for your home loan.
There are a range of reasons why final approval may not be granted, here are some examples:
- Your financial or personal circumstances change
- The property valuation is less than the accepted offer
- There are new issues with the property
- Government regulations change
If none of the mitigating factors have impacted the purchase viability, then unconditional approval should be granted. You can then begin the process of settlement. After that: it’s keys, removalists and a party.
Contact one of our Lending Specialists now and get your conditional pre-approval sorted so you can shop with confidence. You can also call 133 462 and set up an appointment over the phone.
