How does home loan pre-approval work?
Dominic Beattie
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- Home loan pre‑approval can give you a solid idea of your borrowing power and help you narrow your property search to homes you can realistically afford.
- Being pre‑approved for a mortgage also signals to agents and sellers that you’re a serious buyer, which can strengthen your position, especially in competitive markets.
- While pre‑approval is helpful, it doesn't guarantee you'll be granted unconditional approval when the time comes. Changes to your finances, a lender's policies, or interest rates, or the property you set your heart on, can impact you’re final approval.
Home loan pre-approval can give you an idea of how much a lender is willing to lend you, taking some stress out of the process of buying a home, and position yourself as a more serious buyer. Whether you're hunting for your first home or an investment property, getting pre-approved for a home loan ahead of time is probably a good idea.
Savings.com.au's two cents
Getting pre-approved won't guarantee that you'll walk away with your dream home loan, but it will give you a good indication of how much you can borrow and the sort of property you can buy.
Getting pre-approval - whether it's a quick online approval or a full assessment - can shave time off your house hunt, not to mention provide valuable peace of mind.
What is home loan pre-approval?
Home loan pre-approval (also known as conditional approval or mortgage pre-approval) is essentially an initial assessment conducted by a lender after which they may agree, in principle, to lend you a certain amount of money to buy a property. Getting pre-approved essentially serves three purposes:
Establishes your financial position with the lender
Indicates approximately how much you might expect to borrow and what type of house you can afford to buy
- Shows sellers and real estate agents that you're a serious buyer who's likely able to snap up a property
But pre-approval is not a binding guarantee of finance - things can still change through the home buying process which could impact your ability to service a loan.
Pre-approval is always an attractive option as it shows intent to a seller and the sales representative.
If a buyer has gone to the extent of talking to a potential lender and had their finances assessed, it means they are serious about buying.
Paul Blakeley, Licensee of Harcourts Mandurah
How long does it take to get pre-approved?
The time it takes to receive your pre-approval will depend on your lender but it shouldn't be too long. Some banks say you should expect your pre-approval to take a couple of business days, others say they can get you a response on the same day, while those boasting the fastest pre-approvals on the market reckon they can get back you within hours - or minutes - of submitting your application.
It's worth starting the process early on in your homebuying journey to be on the safe side. Once pre-approval has been granted, it usually lasts for a few months.
Should all homebuyers get pre-approved for a home loan?
Unless you're buying with cash, it's probably a good idea to get pre-approved for a mortgage prior to getting down to business in your property search. Though, some buyers might benefit more from mortgage pre-approval than others.
"Pre-approval is important for all prospective buyers as it gives the selling representatives, as well as the sellers, confidence that finance has already been applied for and the buyers are in a stronger position," Mr Blakely told Savings.com.au.
"It is fair to say that this is especially true for first homebuyers, more than any other purchaser.
"This segment of the market usually need to borrow a higher amount and have little to no previous credit history, so having pre approval completed provides more confidence to sellers and increases their chances of being accepted."
Real estate agents and sellers like buyers to have mortgage pre-approval
Being pre-approved for a mortgage means you're more likely, at least on paper, to have access to the money needed to buy a property. It also insinuates you've been considering entering the market for some time.
This can be particularly advantageous in hot property markets, where sellers typically receive multiple offers for their property, Mr Blakely told Savings.com.au.
Securing a pre-approval upfront is advantageous in any market but most certainly in a sellers’ market where demand out strips supply.
I wouldn’t necessarily say I’ve seen a buyer rejected outright because they weren’t preapproved, but I have certainly seen them moved to the bottom of the pile when it comes to presenting offers.
Currently, we are finding that most properties have multiple offers and those from buyers who have not been pre-approved fall into the 'less attractive options' pile and often get considered last.
Paul Blakeley, Licensee of Harcourts Mandurah
Which lenders offer pre-approval?
If you're unsure which lenders to approach, the table below features lenders who offer pre-approvals along with competitive home loan interest rates.
| Lender | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | Max LVR | Lump Sum Repayment | Extra Repayments | Split Loan Option | Tags | Features | Link | Compare | Promoted Product | Disclosure |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
5.94% p.a. | 5.98% p.a. | $2,978 | Principal & Interest | Variable | $0 | $530 | 90% |
| Promoted | Disclosure | ||||||||||
5.89% p.a. | 5.80% p.a. | $2,962 | Principal & Interest | Variable | $0 | $0 | 80% |
| Promoted | Disclosure | ||||||||||
5.89% p.a. | 5.92% p.a. | $2,962 | Principal & Interest | Variable | $0 | $0 | 60% |
| Promoted | Disclosure | ||||||||||
5.98% p.a. | 5.98% p.a. | $2,991 | Principal & Interest | Variable | $0 | $395 | 80% | Disclosure |
Before you trawl the websites of dozens of lenders and begin to spam pre-approval applications, it's worth understanding that getting a pre-approval isn't always slam dunk. Below are some things you should know about pre-approval before you seek it. No, pre-approval is not a necessary step to get a home loan with most lenders, but it can help speed up the process and boost your confidence. It can also boost the confidence of the person selling the home you are interested in and your lender. If your lender has already run a fine-tooth comb through your finances and given you a preliminary tick of approval to borrow a certain amount, all parties involved in the property transaction will likely feel more certain you can leave the table with the property in hand. It might be temping to fill in dozens of pre-approval forms to find the lender willing to offer you the largest home loan or the lowest interest rate - on a preliminary basis of course. But, be warned, submitting multiple pre-approvals in a short space of time can leave a black mark on your credit score, since lenders will usually run a credit check and, therefore, leave evidence of an enquiry on your credit history. For that reason, it's probably best to try to settle on one lender beforehand and then seek pre-approval through it. The lender might ask you what type of property you want to buy, or it might include a condition called "subject to satisfactory valuation". This means your pre-approval could be invalid if you're buying what the lender deems to be a risky property. But what is a risky property? Well, it might be: Definitely remember to ask your lender about what sorts of properties they will and won't accept a home loan for. If you're serious about your property search and want to get a conditional approval done, make sure you have the following information and paperwork handy: You may also try to show your lender a list of properties you're interested in (or just the one, if your mind is already made up). This could save you from finding out your lender doesn't approve of your dream property after you've done the ground work to find it. Having a deposit available and ready to show a lender could also help you secure a preliminary loan approval. So, you've secured pre-approval for a home loan? Congrats! Now you can start hunting for properties with greater surety of your ability to sign onto a mortgage and, probably, a clearer picture of your budget. You can also bid at auction knowing you'll likely be able to pay the amount you've promised. See also: What are the benefits and drawbacks of buying at auction? But keep an eye on your pre-approval's expiry. If you don't buy a house in the given time frame, you might have to apply for it to be extended or seek pre-approval all over again. Most mortgage brokers don't charge an upfront fee for their services, and the majority of Aussie homebuyers employ one during their house hunting journey. As it stands, more than three-quarters of new home loans are taken out through mortgage brokers. If you don't have the time or the know-how to go through the pre-approval process from scratch, a mortgage broker can provide a valuable service - often for free. Just be sure to find a reputable one.
FAQs on pre-approval
How do lenders assess mortgage pre-approval applications?
There are technically two kinds of loan pre-approval you can get:
- A system-generated pre-approval
This type of pre-approval often involves nothing more than submitting an online application. A system-generated or online pre-approval can be completed within hours and some lenders boast that they can give you an answer within minutes. But there is a downside: this type of pre-approval mightn't be as accurate and will likely come with more terms and conditions attached. - A full assessment
A full assessment is a more complete pre-approval. It involves a lender's credit department conducting a full assessment of your finances, including checking and reviewing your home loan documents and a credit check.
I've got mortgage pre-approval. Do I still need a 'subject to finance' clause?
Getting pre-approved for a home loan is a good signal that you'll be able to take out a mortgage when the time comes, but it isn't a guarantee. That's why it's always safest to add a 'subject to finance' clause to any offer you put in on a property, just in case.
"Pre-approvals are often conditional upon the property being purchased being an acceptable security against the loan," Mr Blakely said.
"Things such as bank valuations, postcodes, and state of repair of the home, for example, all play a part in determining whether a lender is comfortable lending funds against the property being purchased."
A buyer who puts in an unconditional offer and finds out after the cooling off period that their lender won't provide a mortgage on the property they're purchasing may end up losing any deposit they've handed over. In more serious cases, the vendor may even have grounds to pursue the buyer for losses.
Can you be denied a home loan after pre-approval?
You can absolutely be denied for a loan even after being pre-approved by the same lender. There are plenty of reasons why this might happen:
- Your financial circumstances changed
You might have lost your job or moved to a new one and are in a probation period. This can make lenders nervous. - The lender's policies changed
If a lender makes policy changes (like tightening its lending criteria), it might reject those who were previously pre-approved when their unconditional application comes in. - Interest rates change
If interest rates increase, your ability to repay the loan will likely change, which could reduce your borrowing power. - There was a fault in the system
There's always a chance that a technical glitch occurred and you weren't supposed to be granted pre-approval in the first place.
There are many other reasons you might be rejected, like if a lender finds out you lied on your application. If you're tempted to stretch the truth, there's a high chance your fibs will be found out during the process - it pays to be honest from the outset.
What do I do if my loan is denied after pre-approval?
If your loan is rejected after pre-approval, take a deep breath and calm your mind. This isn't the end to your home buying journey. But what you do next could impact your financial health.
It's probably not wise to rush to another lender for another pre-approval. Too many applications in a short space of time could leave a bad mark on your credit report.
Instead, you should ask the lender why your application was denied and, if possible, remedy the situation. You might be able to get the lender's approval by making a few simple adjustments.
Pros and cons of home loan pre-approval
We get it, reading is boring. If you only read a small part of this article, make it this section on the pros and cons of home loan pre-approval.
Pros of being pre-approved for a home loan
- Pre-approval can give you an idea of your budget when house hunting
- It can let you know the type of loan you're eligible for
- It lasts three to six months - likely more than enough time for you to find a property
- It's generally quick and simple to secure and can make the actual mortgage approval process much faster
- It can make you seem like a more serious buyer to a seller or real estate agent
Cons of getting home loan pre-approval
- Pre-approval isn't a guarantee of unconditional approval - you still need to submit a full application before committing to a purchase
- Those buying certain properties may be rejected for a home loan despite having pre-approval
- Pre-approval tends to last no more than six months and, sometimes, finding the right home can take longer than this
- Multiple pre-approval applications can negatively impact your credit score