Spring is often one of the busiest times of year for property buyers. More homes can come onto the market, open homes pick up and buyers who have been thinking about making a move start turning those plans into action.
But before you start saving properties on realestate.com.au or heading to every open home in your area, it’s worth getting your finance sorted.
Home loan pre-approval can give you a clearer idea of your borrowing position and help you understand what you may be able to spend. It can also put you in a stronger position when the right property comes along.
However, pre-approval is not a guarantee that your loan will be approved. Understanding what it does, what it doesn’t do and what happens next can help you approach your property search with greater confidence.
What is home loan pre-approval?
Home loan pre-approval, sometimes called conditional approval or approval in principle, is an indication from a lender that they may be prepared to lend you up to a certain amount, subject to specific conditions.
The lender will generally assess information about your income, expenses, existing debts, assets and liabilities as part of the process.
If the lender provides conditional pre-approval, you can then start looking at properties with a better understanding of your potential borrowing range.
However, pre-approval is not formal loan approval.
Once you have found a property, the lender will still need to assess the property and may need to confirm your financial circumstances. They will also need to be satisfied that the property meets their lending requirements.
Only once all relevant conditions have been met can your loan receive formal or unconditional approval.
A simple example
Imagine Sarah and James want to buy their first home this spring.
After reviewing their income, expenses and existing debts, their lender provides conditional pre-approval for up to $700,000.
That doesn’t necessarily mean they should buy a $700,000 property.
They still need to consider their deposit, stamp duty and other purchasing costs. They also need to make sure the ongoing repayments fit comfortably within their budget.
When they find a property they like, the lender will then assess that particular property before finalising the loan.
The pre-approval gives Sarah and James a useful starting point, but it doesn’t remove the need for the property and loan to go through the final approval process.
Why get pre-approved before house hunting?
You don’t technically need pre-approval to start looking at property. But there are some good reasons to consider getting your finance sorted first.
1. Understand your potential budget
One of the biggest benefits of pre-approval is having a clearer idea of what you may be able to borrow.
Rather than choosing properties based purely on what you think you can afford, you can start your search with a better understanding of your potential borrowing position.
It’s important to remember that your maximum borrowing capacity isn’t necessarily the same as your comfortable buying budget.
A mortgage broker can help you look at both the lending position and the broader costs involved in buying a property.
These may include:
- Your deposit
- Stamp duty
- Conveyancing or legal costs
- Building and pest inspections
- Loan costs
- Moving expenses
- Ongoing home loan repayments
Having a clear picture of these costs before you start looking can help prevent you from falling in love with a property that doesn’t fit your overall budget.
2. Know where you stand before making an offer
Property searches can move quickly.
If you find a home you love, you don’t want to be scrambling to work out your finance position at the same time you’re trying to negotiate with the seller.
Having pre-approval in place means you’ve already taken an important step towards understanding your finance position.
It doesn’t guarantee your offer will be accepted, but it can give you greater confidence when you’re ready to make an offer.
What about buying at auction?
This becomes particularly important if you’re considering an auction.
Auctions are generally unconditional. If you’re the successful bidder, you may be required to sign the contract and pay a deposit on the day.
That’s why it’s important to understand your borrowing position before you raise your hand to bid.
Pre-approval can help you establish your potential borrowing capacity, but you should also understand the lender’s requirements and make sure you’ve completed the appropriate checks on the property before bidding.
3. Show vendors you’re a serious buyer
In some situations, having pre-approval can also demonstrate that you’ve taken steps to organise your finance.
This may give a seller greater confidence that you’re a genuine buyer.
It doesn’t necessarily mean your offer will be accepted over another buyer’s offer, but having your finance position understood can make the purchasing process more straightforward.
How long does home loan pre-approval last?
Pre-approval doesn’t last indefinitely.
The validity period varies between lenders, but it is commonly around three months, although some lenders may offer different timeframes.
If you haven’t found a property before your pre-approval expires, your lender may need to reassess your circumstances or update your documentation.
This is one reason it’s worth talking to your broker before your pre-approval expires rather than assuming it will simply continue.
What happens if your circumstances change?
Your financial circumstances should remain relatively consistent while you’re house hunting.
If something significant changes, let your broker know.
For example, you may:
- Change jobs
- Start a new business
- Take on a car loan
- Apply for another credit card
- Increase your existing debts
- Experience a significant change in income or expenses
These changes could affect your borrowing position.
It’s much better to discuss a change with your broker early than discover it has affected your application when you’re already trying to purchase a property.
Pre-approval doesn’t mean you should spend to your maximum
This is an important distinction.
If a lender says you could potentially borrow $700,000, that doesn’t automatically mean you should buy a $700,000 property.
Your personal budget needs to take into account more than the lender’s assessment.
Think about your lifestyle, other financial commitments, future plans and the level of repayments you would feel comfortable managing.
Another real-world example
Consider Michael, who receives pre-approval to borrow $800,000.
He initially assumes that means he should focus on properties around that price.
After discussing his plans with his broker, he decides he would rather purchase at a lower price point. This leaves him with more room in his household budget and gives him greater flexibility if his circumstances change.
Borrowing capacity tells you what may be possible. Your personal budget helps you decide what feels right for you.
What documents might you need for pre-approval?
The exact documentation will depend on your circumstances and lender, but you may need to provide information such as:
- Identification
- Recent payslips
- Bank statements
- Details of existing loans and debts
- Credit card limits
- Savings and deposit evidence
- Details of assets and liabilities
- Tax returns or financial statements if you’re self-employed
Getting these documents together before you apply can help make the process smoother.
If you’re self-employed, the requirements may be different depending on how long you’ve been trading and how your income is structured.
What happens after pre-approval?
Once you’ve received pre-approval, you can start your property search with a clearer understanding of your potential finance position.
When you find a property, there are still several steps to complete.
Your lender will generally need to:
- Assess the property
- Confirm the purchase price
- Review any remaining documentation
- Confirm that the lending conditions have been satisfied
- Provide formal approval
Your broker can help coordinate this process and communicate with the lender as your purchase progresses.
Buying this spring? Get your finance sorted first
Spring can be an exciting time to start looking for a property, but it’s worth doing the groundwork before you fall in love with a home.
Home loan pre-approval can help you understand your potential borrowing capacity, establish a realistic property budget and put you in a stronger position when you’re ready to make an offer.
At Ironbark Group, we take the time to understand your financial position and your plans before comparing home loan options across our lender panel.
We’ll help you understand your borrowing capacity, explain the costs involved and guide you through the pre-approval and home loan process.
Whether you’re buying your first home, upgrading or looking for an investment property, get in touch with Ironbark Group to discuss your finance options and get ready for your next move.
Pre-approval is subject to lender criteria and conditions and does not guarantee formal loan approval. Your individual circumstances will determine what lending options may be available to you.