What is Home Loan Pre-Approval and How Do You Apply For One?

“What is pre-approval?” did we hear you ask? Well, that’s a very good question. There is a lot to take in when you start the home buying journey, and you have no doubt been bombarded with advice from friends and family about things like lenders, loan features, interest rates, pre-approval, insurance, where to buy, what to buy etc. But first things first – if you are starting to think about buying your first home, then you might like to consider enlisting the help of a mortgage broker, whose role it is to guide you through the lending process step by step. Once you have met with your mortgage broker and they have assessed your borrowing capacity, the next thing to think about is obtaining pre-approval. So what is it?

What is pre-approval?

Pre-approval (sometimes referred to as conditional pre-approval or approval in principle) is an indication or conditional offer from your chosen lender that states how much you may be eligible to borrow, based on your financial situation. The lender provides this dollar amount after examining various financial factors such as your employment status, salary, credit history, assets and outstanding debts.

How do you apply for pre-approval?

One of the easiest ways to apply for pre-approval is with the help of a mortgage broker. Your mortgage broker can do all the heavy lifting for you in terms of collating all of your financial information and submitting the application on your behalf to your chosen lender. After chatting with your mortgage broker about your potential borrowing capacity and which loan product might be right for you, your mortgage broker will then usually ask you to provide things like recent payslips, bank account statements, credit card statements and identification documents, so that they can start compiling your pre-approval application. This is usually done via an online portal. Once they have the documentation they need, your mortgage broker will submit the application, and keep you updated as to its progress. Alternatively, you can apply for pre-approval yourself via phone or online with most lenders.

Does pre-approval mean you will get the loan?

Whilst pre-approval isn’t a guarantee that your final loan application will be formally approved, it provides you with a fair indication of your borrowing capacity and allows you to bid at auctions with some form of confidence. Pre-approvals are generally valid for 90 days, depending on your chosen lender.

What does pre-approval do?

Pre-approval is an indication, rather than a guarantee from your chosen lender as to how much you may be able to borrow. So whilst the finance is not set in stone, pre-approval can certainly come in handy once you find a property that you are keen to make an offer on. Having pre-approval indicates to the vendor and the real estate agent that you are serious about the home buying process, and it also signals that your financial situation has been assessed to some degree by your chosen lender, and that you are likely to be successful in obtaining formal approval. Pre-approval also helps you to set realistic budget parameters and refine your property search.

How long does pre-approval take?

The time it takes for a pre-approval application to be assessed can vary, depending on the type of loan you have applied for, the lender, your financial situation, your employment status and various other factors. Turnaround times usually range between one and thirty business days.

Do you have to commit to the lender that you obtain pre-approval from?

Obtaining pre-approval from a lender doesn’t necessarily mean that you must continue working with that lender right through to unconditional approval. You are allowed to switch lenders after being pre-approved and some borrowers choose to do this because they discover that a different lender is offering a better deal, or they find a loan product that better suits their needs. A mortgage broker can assist you with comparing lenders and loan products to ensure that you find a deal that is right for you. However, be mindful that applying for multiple pre-approvals may harm your credit score.

Can pre-approval be denied?

It is possible for your pre-approval application to be denied. If your pre-approval application is rejected, don’t be discouraged. Take a step back and review your circumstances. Perhaps you need to close out some old loans or credit cards, or maybe you need to work on building your savings a little more. Your mortgage broker can ask the lender why the application was rejected, and the lender will usually provide an explanation and some advice on how to make any necessary improvements. Remember, it is your mortgage broker’s job to guide you through this process and do all that they can to assist you with qualifying for finance in the future.

What happens after pre-approval?

Once you have secured pre-approval, you can begin house hunting and attending open for inspections in earnest, knowing approximately how much your chosen lender is likely to loan you. Once you find a property that you want to buy and your offer is accepted, the next stage of the process is applying for formal or unconditional loan approval. Again, your mortgage broker will assist with this process. Once you secure unconditional loan approval, you can relax knowing that your chosen lender has officially agreed to offer you a home loan, based on your finance paperwork and the property you have chosen to buy.

If you’re ready to embark on your home buying journey, reach out to your local MoneyQuest mortgage broker to get the ball rolling.

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