Many prospective home buyers enter the property market feeling a little clueless and overwhelmed. After all, it’s easy to waste time looking at houses out of your reach when you don’t know what your borrowing capacity looks like. This is why home loan pre-approval can be a highly useful step in the mortgage application process, regardless of whether you are purchasing an investment property or a home to live in.
Getting home loan pre-approval means that you’ve received a formal indication from a lender that they are likely to approve you for a specific home loan amount. Here we’ll explain the requirements, the pros and cons, and everything else you need to know about getting pre-approved for a home loan.
Calculate your borrowing power based on your income.
Some borrowers might look at pre-approval as another unnecessary step in an already complicated homeownership journey. While pre-approval isn’t compulsory, it comes with a range of benefits that makes it something for every future home buyer to consider.
There are more costs that come with buying a home than just saving for a deposit. You have to consider stamp duty, solicitor or conveyancer fees, extra home loan costs and more. So, when it comes to calculating your borrowing power, lenders will factor in the broad range of home loan costs to ensure they don’t allow you to over-borrow.
Getting pre-approved means that you’ll have a specific dollar-figure that the lender is willing to consider lending you. This can help narrow down the property search and limit the risk of you bidding or placing an offer that you can’t actually afford.
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Knowing what you can afford means that you can comfortably attend and bid at auctions. You can confidently place offers knowing that you can actually afford the property, rather than going in blind like you would without pre-approval.
Many vendors (people selling their homes) favour home buyers with pre-approval because it indicates that you are serious about your offer. Plus, there is an increased possibility of a faster settlement process when you are pre-approved. A faster settlement process means that both parties can move on with their new lives and homes as soon as possible.
Unlike many formal home loan applications, pre-approval applications come at no cost to you. So, if you’re serious about obtaining a home loan with a certain lender, what do you have to lose?
Lenders typically offer pre-approvals that are valid for 3-6 months. This gives most people sufficient time to find their dream home without having to rush. Many lenders even allow you to extend the pre-approval towards the end of the term. If you want to extend your pre-approval, chat with the lender or a Home Loan Specialist.
Each time you apply for pre-approval, it is recorded in your credit history as a credit enquiry. Therefore, you want to avoid applying for pre-approval with multiple lenders. Credit enquiries aren’t necessarily looked at as stains on your credit file, however some lenders may assume that other lenders have rejected your application.
Think about chatting with a mortgage broker before applying to make sure you are looking at a home loan that really works for you.
If your financial circumstances change or the bank alters their lending policies, your pre-approval could end up being marked as invalid, or the lender could decide to not approve you for the loan in the end. Keep on top of any changes the lender is making as they won’t always communicate these with you.
There is always a possibility that your application for pre-approval gets rejected. Common reasons for this may include:
Most pre-approval applications require a lot of documentation. Since you’ll also be asked to provide paperwork when you formally apply for a mortgage, it may actually be helpful to already have the documents ready to go.
A guide to deposits, pre-approval, & choosing the right property.
Lenders may request different documents, but they will typically request the following:
In addition to these documents, lenders will want to see proof of funds that will cover the deposit, stamp duty, lender fees and other initial costs. Proof of funds will usually include bank statements, shares, equity, term deposit, or a gift letter from family.
No, you have zero obligation to stick with the lender or home loan you were pre-approved for. The best part about pre-approval is that it’s free and you lose nothing. The only thing to remember is that it involves a credit check and will be recorded on your credit report as a credit enquiry.
Read our article on switching mortgage lenders after pre-approval for more information.
If you’re concerned that the loan you’ve been pre-approved for isn’t best for you, get in touch with a Home Loan Specialist to look over your other options.
Here are the basic steps you need to take to get home loan pre-approval:
Comparison websites like Lendi make it easy to shop around, compare loans and interest rates offered by multiple lenders in one place. Our Home Loan Specialists are on hand to answer any questions and provide guidance should you need it.
The application you complete will require you to share details about your income, assets, expenses and debts. If you use Lendi’s platform, you can easily apply online.
These requested documents will usually include:
Lenders will also want to check that you can actually afford to complete the purchase. So, they’ll request proof of funds in the form of bank statements, equity, shares, term deposit, or a gift letter.
Once your application is submitted, all you can do is wait for the lender to assess your borrowing risk and ability to repay the loan. If you have a strong application, then they will likely grant pre-approval and inform you of how long this is valid for. Remember to check the terms and conditions and that you can request an extension on your pre-approval if required.
Read our comprehensive guide to find out more about applying for home loan pre-approval.
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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.
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