A pre-approved home loan is one of the best things to do when you are purchasing a home. Pre-approval lets you have a realistic vision of your borrowing capability, enables you to shop within your means, and it empowers you when you provide an offer.
At Capkon Melbourne, we take the home loan pre-approval process to ensure that financing a home is very easy and stress-free for first-home buyers loan and property investors.
What Is Home Loan Pre-Approval?
Home loan pre-approval or conditional approval, or approval in principle is a formal, written, simple statement by a lender that he/she is ready to loan you the money within a given limit. This pledge, however, is dependent on a strict examination of your financial background, but it remains conditional until you locate a property that is satisfactory to the lender.
This process is a serious check of your financial health, which is why it carries significant weight.
Difference Between Pre-Qualification and Pre-Approval
It’s important not to confuse pre-approval with pre-qualification:
| Feature | Pre-Qualification | Pre-Approval (Conditional Approval) |
| Process Depth | Basic, less rigorous assessment. | Detailed, in-depth review. |
| Financial Info | Generally based on self-reported, unverified information (income, debt). | Requires formal documentation and verification (payslips, bank statements). |
| Credit Check | Usually, a soft credit inquiry (no impact on score). | Typically, a hard credit inquiry may slightly impact your score. |
| Lender’s Commitment | A rough estimate of what you might borrow. | A formal, conditional commitment to lend a specific amount. |
| Weight with Sellers | Not generally accepted as proof of finance. | Highly valued and signals you are a serious, capable buyer. |
Lenders provide pre-approved home loans because it reduces their risk and speeds up the final approval process once a property is selected.
Benefits of Getting Pre-Approved
Securing a pre-approval provides several key advantages that can make or break your property purchase journey:
- Shop with Confidence: You are confident of your exact amount of borrowing, which allows you to narrow your search to the types of properties you can afford and save on time wasted browsing through houses that you can not afford.
- Increased Negotiating Power: A pre-approval letter will send real estate agents and sellers the signal that you are an earnest, financially vetted purchaser. This will be able to provide you with an advantage over other shoppers, particularly when negotiating a personal sale or bidding at a competitive Melbourne auction.
- Quick Settlement: The lender has already checked your financial information, hence the process becomes much quicker upon acceptance of your offer. This fast response is appealing to the sellers who desire a quick sale.
- Detect Problems at the First Stage: The thorough examination of your finances compels you to prepare all the records and be aware of any problems (such as debts that need repayment or credit report inaccuracies) that can easily be resolved before you are subjected to pressure to make a purchase.
The Home Loan Pre-Approval Process Step by Step
While the exact steps can vary between lenders, the home loan pre-approval process generally follows this path in Australia:
- Consultation: You meet with a mortgage broker (like Capkon Melbourne) or a lender to discuss your financial goals and borrowing needs.
- Submitting an Application: You complete a formal application, including all necessary personal and financial documents.
- Lenders Review and Credit Check: The lender looks at your income and expenses, assets and liabilities and does a hard credit check of your credit file.
- Conditional Approval Issued: The lender issues a Conditional Approval letter in case they are approved. This is what the maximum loan amount ought to be, and certain conditions to be fulfilled in order to obtain final (unconditional) approval.
- Next Step- Formal Approval: After acceptance of your offer on a property, you inform the lender, and he inspects the house itself (through a valuation), after which he issues the formal approval.
Documents You Need for Pre-Approval
To ensure a smooth and quick process, having your documents ready is essential. You will typically need to provide:
- Evidence of Income: Recent payslips (3-6 months), PAYG summaries or, where the applicant is self-employed, no more than two years’ tax returns and business financial statements.
- Bank Statements: Savings account, transaction account and term deposit statements to confirm the history of your deposits and savings.
- Identification Documents: Passport or Driver’s Licence.
- Information on Debts and Expenses: Credit card statements, personal loan statements, car loan statements, statements on your HECS/HELP debt and a summary of your overall living expenditure.
- Proof of Deposit: Evidence of genuine savings.
How Long Does Home Loan Pre-Approval Take?
The speed of pre-approval in Australia largely depends on the lender’s current processing times and how quickly you provide all the required documentation.
- Average Time: If all documents are submitted upfront and your situation is straightforward, pre-approval can be issued in 1 to 5 business days. Some online lenders can provide an indication even faster.
- Factors that cause delays include incomplete paperwork, complex financial situations (e.g., self-employment), or errors in your application.
Does Pre-Approval Guarantee a Home Loan?
No. Pre-approval is conditional. It is an agreement to lend you a sum of money based on your financial profile at the time of application.
Final approval depends on several conditions being met, most importantly:
- Property Valuation: The lender must be satisfied that the property you choose is worth the purchase price (i.e., it is acceptable security for the loan).
- No Change in Financial Circumstances: Your income, employment status, or debt levels must not have substantially changed since the pre-approval was issued. For example, quitting your job or taking out a new large loan can cause the lender to revoke the pre-approval.
It is crucial to understand and adhere to all the conditions outlined in your pre-approval letter.
Common Mistakes to Avoid During Pre-Approval
Avoid these common pitfalls to keep your home loan journey on track:
- Application with Multiple Lenders at Once: There is a hard credit check in each pre-approval application, and multiple checks over a short period are known to adversely affect your credit score, making you appear more of a risky borrower. You are better off dealing with one mortgage broker who can shop lenders on your behalf rather than making several applications.
- Making Large Purchases or Acquiring New Debt: Do not take on new credit card financing, furniture and pre-approved car loans after the pre-approval. Any liability that is new may radically alter your borrowing ability and result in your ultimate loan being rejected.
- Assuming Pre-Approval is Guaranteed: Always remember that the approval is conditional. Continue to manage your finances responsibly and inform your broker or lender of any significant changes.
How Long Does Home Loan Pre-Approval Last?
The pre-approval of a home loan in Australia lasts between 3-6 months (i.e., 90-180 days).
- What happens when it expires? In case you have not located a property before the expiry date, you must seek an extension or a new pre-approval. Renewal is normally easier, yet it might also demand new financial forms to ensure that your situation has not changed. Early application is a pitfall because chances are that you will have to apply again and pay another credit check.
Who Should Get Pre-Approved?
Although not obligatory, pre-approved home loans are strongly encouraged in:
- First-Home Buyers: It gives you the necessary transparency and certainty in establishing a budget that is priceless when you are trying to find your way through your first property purchase.
- Investors: To property investors, pre-approval assists you in comparing your maximum borrowing capacity in various structures, and it is essential in getting into a good investment.
- Buyers in Competitive Markets (such as Melbourne): When buying at auction or competing in a hot suburb, being serious will go a long way, which is the benefit of having your finances in order.
How Capkon Melbourne Helps You Get Pre-Approved
As expert mortgage brokers in Melbourne, we simplify the entire pre-approval process for you:
- Professional Advice: We have clearly defined the documents and requirements of various lenders, and your application is finished properly and correctly in the first place; thus, there is less wastage of time.
- Compare Multiple Lenders: We do not make you apply to different banks individually, but instead, we evaluate your profile and compare it with the appropriate pre-approved loans at a broad group of lenders and get you the best offer.
- End-to-End Support: We handle the whole application, monitor the progress of the lender and support you during the process of pre-approval, all the way to the final settlement of your new house.
Book a consult or contact Capkon for a more detailed outlook on home loan pre-approval. The guarantee of your home is our top priority.
FAQs About Home Loan Pre-Approval
Q1: What’s the difference between pre-qualification and pre-approval?
A: Pre-qualification is a quick, unverified estimate based on self-reported information and usually involves a soft credit check. Pre-approval is a more thorough process requiring verified documents, a hard credit check, and results in a formal, conditional commitment from the lender.
Q2: Does pre-approval cost money?
A: Generally, no. Most lenders and brokers do not charge a fee for the pre-approval application itself.
Q3: How long does home loan pre-approval take?
A: In Australia, pre-approval typically takes 1 to 5 business days, provided you have all the necessary documentation ready to submit.
Q4: Can I change lenders after pre-approval?
A: Yes, your pre-approval is non-binding. You are free to choose a different lender for your final loan application if you find a better product or rate.
Q5: Does pre-approval affect my credit score?
A: Yes. The pre-approval process usually involves a hard credit inquiry, which can cause a small, temporary dip in your credit score. This is why you should limit applying for pre-approval with multiple lenders.
Q6: What happens if I don’t find a property before pre-approval expires?
A: You will need to contact your lender or broker to apply for an extension or re-application, which will involve submitting updated financial documents.
Q7: Does Capkon Melbourne help with refinancing after pre-approval?
A: Yes, Capkon Melbourne provides comprehensive mortgage broker services, including guiding you through refinancing your home loan once your current fixed or introductory period ends.