How to get pre-approval so you don't miss out on the home of your dreams.
There’s one way you can minimise the chance of this happening - by getting pre-approval for a home loan.
You’ve been saving hard and have enough money for a deposit on your first home or dream investment property. You’re brimming with anticipation as you go house hunting, and you find the perfect place. Unfortunately, other buyers think it’s perfect too, and in the time it takes for you to get finance sorted it’s snapped up by the first organised buyers who want it and have their home loan approved.
Home loan pre-approval
- Sean works is a mortgage broker who works with Loan Market, and has over 10 years of experience
- He has a Diploma of Financial Planning in both Finance/Mortgage Broking Management and Financial Planning
- He has a Certificate IV in Financial Services and is a member of the Mortgage & Finance Association of Australia (MFAA)
Pre-approval is when a lender assesses your financial situation and gives you an approved amount to borrow. It’s a vital step to consider and can help make the process of buying a home a whole lot easier.
“Being prepared is one of the smartest things you can do to help the home buying process run smoothly and efficiently,” says mortgage broker Sean Longman from Loan Market. “With a pre-approved home loan under your belt, you will be considered a more serious homebuyer than someone who is ‘just looking,’ because a lender has made a commitment to lend you the money that will allow you to purchase.”
Pre-approvals provide you with increased negotiating power when it comes time to agree upon a price with the seller. You will be considered a preferred buyer, similar to a cash buyer, and having a lender’s seal of approval in place can help you win a bidding war against others who may not qualify. A pre-approval can also reduce stress by helping to speed up the documentation process once you’ve found a home.
“With a pre-approval in place you’ll have a clear understanding of how much money you can spend,” Longman says. “This will enable you to shop with confidence and bid at auctions when your dream home comes onto the market. It will also save you time and effort by eliminating properties beyond your price range.”
A home loan pre-approval is free and there’s no obligation.
Home loan application process
A home loan application can seem like a daunting and often confusing process for many people, so it’s important to get a good understanding of what’s involved in each step.
The first step in the home loan application process is all about budgeting and getting an idea of how much you’ll have to spend. Do your research on real estate websites to get a solid idea of the price range for ideal properties in the areas you’re thinking of buying. This will give you a good idea of how much you’ll need for a deposit, keeping in mind that it’s generally recommended that you save up a deposit that is equivalent to 20% of the purchase price. You can also use home loan calculators to help you get a rough idea of how much you’ll be able to borrow and what your repayments will be.
Now it’s time to seek out pre-approval. After comparing a range of competing home loans — a mortgage broker can help with this if you wish — you can approach your lender of choice to apply for pre-approval. You’ll need to supply a range of information and documentation to your lender to help them assess your financial situation.
What do you need for pre-approval?
A completed and signed application form.“The process of getting pre-approved is actually quite simple and is the same as a home loan application process,” Longman explains. You’ll need to provide:
- Evidence of your income such as pay slips and/or tax returns.
- Evidence of your savings such as bank statements.
- Evidence of your current debts such as credit cards, personal loans and home loans.
- Identification documents, eg a driver’s licence
“It also helps to be able to show a savings history and a copy of a budget to show you can manage your finances well and have an idea of how much you want to borrow,” Longman says.
With a pre-approval in place you can then go house hunting armed with the extra negotiating power you have at your disposal. Once you’ve found the house you want at an affordable price, you’ll then need to get formal approval from your lender. This stage involves an interview and will require you to supply similar evidence to that mentioned when applying for pre-approval. Providing in-depth details of your finances, which can include everything from payslips and bank statements to information about any outstanding debts you may have, will help ensure a successful outcome.
Your lender will explain all the fees and charges involved in establishing your loan and answer any questions you may have, before it then comes time to draw up loan documents. You’ll need to read your loan contract carefully before signing, and your lender will check that you’ve filled out everything correctly.
Your conveyancer or solicitor can then review the contract of sale, before you and the seller can sign a copy. Once a settlement date has been arranged, your lender will provide confirmation of your loan details. This is also the time at which you can expect to be charged for stamp duty and registration costs.
Now it’s time to start managing your loan and, most importantly, this is also the time you get the keys to your new home.
Do you need home loan pre-approval?
- David is a Senior Advisor with Noble Financial Services, and is a qualified mortgage broker and accredited credit advisor
- He has over ten years of experience in the mortgage broking industry, and is a full member of the Mortgage & Finance Association of Australia
- He has a Diploma of Financial Services in Finance/Mortgage Broking Management, a Certificate IV in Financial Services, and a graduate Diploma in Business Studies. He's also a NSW Justice of the Peace.
David Johnson, authorised credit advisor and mortgage planner from Noble Financial Services, says that home loan pre-approvals have many advantages to help you buy your new home. “A pre-approval helps set up the goal posts so you know where you are aiming at,” he said.
“It will establish your maximum purchase price and your maximum loan, and therefore the repayments as well. It gives borrowers some confidence in making offers or going to an auction, that they understand how much they can pay.”
Getting pre-approved offers security and confidence, plus it gives prospective buyers an advantage over others in the property market. “In this competitive market, any serious buyer should pursue a pre-approval from a lender in advance of beginning the search for a home,” Longman explains.
“Shopping for a home before getting pre-approved for a home loan is the equivalent of walking into a supermarket without any cash, yet the vast majority of homebuyers don't get a loan pre-approval for what for most people is the biggest purchase they’re ever likely to make.”
Most banks and lenders offer home-loan pre-approvals, though the exact type of pre-approval offered can vary. It’s possible to get conditional and unconditional pre-approval, while some lenders offer very basic lending guidelines in the form of online pre-approvals.
“Some lenders will give pre-approval in a written communication to the applicant, but [it is] generally communicated via email to the broker,” Johnson explains. Though it can vary between lenders, pre-approvals are usually valid for up to three months.
The importance of a mortgage broker when seeking pre-approval
“Normally we discuss this sometime before progressing to the formal application, as people need to get comfortable with the proposed loan repayments, plus then need to make sure there is a home to buy in the area they want, and for a price they can afford. Maybe they need to adjust their living expenses to be able to afford the property they want,” he says.Enlisting the services of a good mortgage broker can also help make the pre-approval process much easier. “The process I go through with clients is helping them to understand where they are now and what they are comfortable paying on a home loan,” Johnson explains.
Longman explains that a good mortgage broker will guide you through the process every step of the way, from securing the pre-approval right to settlement and homeownership. “A mortgage broker will take the time to discuss your needs and circumstances with you, which will give them the opportunity to determine which type of loan is most suitable,” he says.
After assessing your objectives and financial needs, your mortgage broker will search the hundreds of loan products available in the market. Brokers also may have access to exclusive loan products which are not available elsewhere.
“They will also help you complete the necessary paperwork and liaise with the lender on your behalf. This will include the completion and submission of your home loan application, acting as an intermediary between you and the lender, and the on-going communication between all parties until your home loan is approved and settled,” Johnson says.
“A great mortgage broker will also be there to provide additional finance advice further down the track.”
Traps and pitfalls
Prospective borrowers should be aware that just because they’ve obtained pre-approval from a lender, this doesn’t mean they are guaranteed a home loan. David Johnson from Noble Financial Services points out that if you fail to meet the conditions a lender or bank attaches to your pre-approval, they will not issue a formal approval.
“Conditions are normally standard like:
- Providing a Contract of Sale (no greater than the pre-approval scenario stated)
- The bank getting a valuation on the property
- The bank and the mortgage insurer being satisfied that the property is suitable (e.g has a kitchen or you did not pay too much)
- That you have not changed jobs halfway through the process”
Sean Longman from Loan Market warns borrowers to be wary of the several different definitions of ‘pre-approval’ used in the mortgage industry. “It’s important you get a formal, written, unconditional pre-approval,” he says.
“For some pre-approvals the lender relies on information provided by the buyer to estimate how much the borrower could qualify for. With a fully assessed unconditional pre-approval, the lender verifies the borrower's information and documentation to determine exactly how much it would be willing to lend to that borrower.”
Finally, make sure your chosen lender takes the time to properly evaluate pre-approval applications rather than simply issuing an automatic approval. “Always make sure your pre-approval application will be fully assessed by the bank; otherwise it isn’t worth the paper it’s written on,” Johnson advises.
Getting pre-approved for a home loan is an important step in the home-buying process. To find out more, or to get an idea of the size of the loan you could be approved for, get in touch with a trusted mortgage broker.