Obtaining a mortgage is a crucial step in purchasing a home, assuming you are not flushed with cash or don’t want to lose liquidity by paying in full. However, the process of getting a home loan can be quite lengthy, potentially risking the chance to secure your preferred property before someone else snaps it up.
This is where getting pre-approval comes in handy – it gives you a better chance to lock down a property when the opportunity arises.
What is home loan pre-approval?
Pre-approval, also known as conditional approval or approval in principle, is an indication that a lender has agreed to extend you a home loan up to a certain limit, pending conditions. You are under no obligation to accept the loan nor does it compel the lender to grant you the specified amount.
Instead of a binding guarantee, pre-approval is more of an insight into your borrowing power. Having a preliminary approved loan amount gives you the confidence to shop around for your dream home and allows you to focus your property search based on how much you can afford; saving you time putting in bids for houses outside your budget.
Another key advantage of pre-approval is it demonstrates to sellers that you are a serious buyer who can financially push through with the transaction, which is especially useful at auctions and in hot markets where buyers need to stand out.
Additionally, pre-approval can potentially expedite the turnaround for the final or unconditional home loan approval given that the lender has already scrutinised many details of your application.
| Lender | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | Max LVR | Lump Sum Repayment | Additional Repayments | Split Loan Option | Tags | Features | Link | Compare | Promoted Product | Disclosure |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
5.69% p.a. | 6.16% p.a. | $2,899 | Principal & Interest | Fixed | $0 | $530 | 90% |
| Disclosure | |||||||||||
5.99% p.a. | 5.90% p.a. | $2,995 | Principal & Interest | Variable | $0 | $0 | 80% |
| Promoted | Disclosure | ||||||||||
6.04% p.a. | 6.06% p.a. | $3,011 | Principal & Interest | Variable | $0 | $530 | 90% |
| Promoted | Disclosure |
What are the required documents to get a home loan pre-approval?
Every home loan provider has a specific set of requirements, which generally consists of documents verifying an applicant’s identity, source of income, debt and savings, and assets and liabilities.
Depending on your chosen lender, you can apply for a home loan pre-approval online via their platform or make an appointment for a face-to-face meeting with a lending specialist. Here’s a list of everything you need to present to get a home loan pre-approval:
1. Proof of identity
Lenders typically require applicants to present primary and secondary identification documents to prove their identity and citizenship status. This also helps reduce the risk of identity theft and fraud, i.e. another person taking out a loan in your name. Proof of identity documents come in three categories.
Primary photographic identification documents:
-
Australian passport
-
Australian or New Zealand driver’s licence
-
Government-issued firearms licence
-
International passport
-
Foreign national identity card
-
Proof of Age card
Primary non-photographic identification documents:
-
Birth certificate
-
Foreign citizenship certificate
-
Pension card
-
Medicare card
-
Driver’s licence (with no photo)
Secondary identification documents (with full name and residential address):
-
A notice from the Commonwealth, State, or Territory
-
Australian Tax Office (ATO) notice
-
Council rates or utility bill notice
In most cases, you may only need to present one primary photographic ID to prove your identity. However, the lender may ask for a combination of non-photographic primary and secondary identification documents if you don’t have a primary photo ID.
Note that the documents must be certified copies of the original, are current and not expired (unless otherwise stated), and must be in English or translated into English. You may head to your local Justice of Peace (JP) to have your paperwork certified or, if you apply for your pre-approval in person, have them verified by a qualified representative.
Further, if your name has changed since the documents were issued, you may have to provide a Change of Name certificate issued by the Registry of Births, Deaths and Marriages.
2. Proof of income
Lenders assess your ability to repay your loan through documents that prove your income. Your earnings have to be stable and sufficient to cover repayments in addition to your other living expenses and financial commitments.
Home loan lenders typically prefer borrowers with a steady employment history, but this doesn’t mean self-employed individuals can’t take out a mortgage, let alone get pre-approval. Admittedly though, providing proof of income can be slightly more complex compared to salaried employees.
Employed applicants are generally required to present the following:
-
Recent payslips
-
Income tax returns
-
Recent payment summary from employer
Self-employed individuals or sole traders may present the following documentation:
-
Australian Business Number (ABN)
-
Business Activity Statements (BAS)
-
Tax returns for the recent financial years
-
Notice of Assessments (NOA) from the ATO
-
Business and personal bank statements
-
Accountant’s letter declaring your income
If you are self-employed, you may consider applying for a low doc home loan which demands less conventional proof of income.
3. Credit score
Lenders will look at your credit score to evaluate your credit history and creditworthiness. This can influence the terms of your loan, including the interest rate, loan amount, and repayment terms.
Applicants with higher credit scores often qualify for better loan terms. As such, if you are getting pre-approval, it is best to check your credit score in advance so you may be able to improve it by paying down existing debts or correcting inaccuracies in the credit report.
This might vary between lenders, but a lender might make an inquiry on your credit file in the pre-approval process. Be aware that too many inquiries and too many knock-backs for credit can weigh on your score and look bad in the long run.
4. Savings and deposits
Another way to improve your chances of getting a mortgage pre-approval and potentially secure more favourable loan terms is by having robust savings and sufficient deposits.
Lenders will require that you submit proof of your savings to determine whether you can afford or have already saved for a downpayment. Generally, you need to have a deposit of at least 5% of the property’s purchase price. However, it is much more ideal to save up 20% to avoid paying lenders mortgage insurance (LMI) and secure better interest rates.
The most common documents you can present are savings account bank statements and term deposit certificates.
5. Current liabilities
You also need to submit a list of your liabilities which lenders will use to assess your debt-to-income ratio and accurately calculate how much you can afford to repay each month. This then helps them decide the amount and terms of the loan they will extend to you.
Examples of documentation for this include loan statements, credit card statements, lease agreements, HECS/HELP debt statements, and child support or alimony agreements.
6. Current assets
Lenders may also ask for records proving your ownership of assets to get a clearer picture of your financial situation. Some of the assets worth noting on your pre-approval application and their corresponding documentary proof include the following:
-
Real estate – Property deed or title certificate
-
Shares and other investments – Investment account statements
-
Superannuation – Member account summary or superannuation statement
-
Life insurance – Policy document or recent policy statement
-
Vehicles – Registration and valuation documents
-
Jewellery, art, antiques – Professional appraisal or certificate of authenticity
7. Living expenses
You should also prepare detailed information – with corresponding invoices, statements, or bills – about your everyday expenses, including housing, utilities, petrol, transportation, groceries, entertainment, childcare, and other regular expenditures.
How much you spend on daily living impacts your ability to service a loan, which is why your lender will ask for these details to assess how much repayments you can realistically afford.
8. List of properties you’re interested in
Lenders may also require a detailed list of properties you’re planning to purchase, including the type and price range. This information ensures that the loan for which you’re applying pre-approval aligns with your specific needs and is tailored to your property. This may also speed up the property valuation process.
Have your documents ready when applying for pre-approval.
When is the good time to apply for pre-approval?
Ideally, you should only apply for pre-approval if you are serious about your homebuying plans. Pre-approvals are typically only valid for 90 days, which means you need to shop, put in offers, and have your offer accepted within that timeframe. If you weren’t able to accomplish those steps, you need to reapply to get pre-approved again.
Therefore, the best time to put in your pre-approval application is when you are in good credit standing, have saved for a deposit, and already have a property (or at least a wish list) you intend to buy.
How long does it take for home loan lenders to issue pre-approvals?
The turnaround for pre-approvals can vary depending on the lender and the borrower’s situation. Suppose you have all supporting documents ready, pre-approval can be usually obtained within three to five business days. Many lenders operate faster than this these days, with pre-approval granted in many cases within an hour.
On the other hand, complex cases (i.e. you are self-employed, have a low credit score, or have incomplete documents) could take longer to process. This makes it important to have all your documents ready so you can be conditionally approved in a faster timeframe.
Some lenders, particularly those with online pre-approval systems, claim to deliver updates – whether you’re pre-approved or not – in less than a day. But again, a huge part of it depends on your circumstances and the volume of applications lenders receive.
Does getting pre-approval mean you’ll be approved for a home loan?
The short answer is no. It’s important to note that pre-approval is not a binding loan guarantee. In fact, a pre-approved application can be declined during the final loan approval if there are changes in your financial situation, market conditions, or the lender’s home loan policies and procedures.
If your lender uncovers something about you such as extra debts, a baby on the way, or that your income is lower than reported, these changes could give pause to a lender unconditionally approving your home loan application.
Final approval depends on a more thorough assessment of your application and the lender’s valuation of the property you intend to purchase. If, for instance, the sale price of the property is appraised at a lower value, it may affect the amount you can borrow or your eligibility for a loan.
What to do if your home loan pre-approval is declined
A declined pre-approval doesn’t mean you can never be eligible for a home loan. But before you send in another application, it’ll do you good to take a step back and reassess.
Lenders are usually required to explain their decision in a rejection letter. Review it and find out where you may need to improve. Some of the steps you can take include:
-
Review your credit report; dispute any errors and improve your credit score
-
Maintain your employment status
-
Increase your savings
-
Pay off existing debts and avoid making large purchases on credit or consider getting rid of the credit card as the limit will be factored into your borrowing capacity
-
Re-evaluate your budget and consider another property you can realistically afford
-
Consult a financial advisor or a mortgage broker for personalised advice
If your home loan pre-approval is declined, make sure to wait enough time before reapplying as pre-approval for loans is recorded in your credit history and making multiple applications in a short period can negatively impact your credit score.
What to do after getting pre-approved
Once you’ve been pre-approved, you typically have 90 days to shop around and put in offers. If your offer is accepted, you can then head back to your lender for a property valuation, which allows them to assess the loan-to-value ratio (LVR) of the loan.
It usually takes lenders a couple of days to conduct the review and inspection. After the valuation is completed and all I’s are dotted and T’s are crossed, it’s up to the lender to issue full or unconditional approval and make an official loan offer.
In the event that you aren’t able to find a property within the pre-approval timeframe, you can request an extension or apply for a renewal provided that your financial situation hasn’t changed.
Is it worth it to get pre-approval?
Pre-approval is not a requirement for borrowers applying for a home loan. Matter of fact, you can simply apply for final approval and skip this part - but this requires more effort upfront and counts as a hard credit inquiry.
Going through the pre-approval process helps you plan strategically, get a sense of your borrowing capacity and overall financial standing, and save time on your home search. If an auction is coming up, or you need to submit an offer on a property, pre-approval can be a quicker way to shop with confidence and put in a bid or offer.
It might not guarantee final home loan approval, but it puts you right to an informed start and a few steps ahead of other homebuyers looking at the same property.
Photos by Drazen Zigic (main) and pressfoto (in-text) on freepik
Need help with a home loan?