There is a lot that goes into buying a property, especially when you’re just getting started. One of the most important steps in the early stages is securing a pre-approval for your mortgage.

Pre-approval, sometimes called conditional approval, indicative approval, or approval in principle, depending on the lender, is essential to knowing how much you can borrow and gives you confidence when you’re ready to make an offer.

In this guide, we’ll break down everything you need to know about pre-approval, helping you navigate the process with ease and set yourself up for success on your property buying journey.

What Is Pre-Approval?

Pre-approval is an essential step in the home-buying journey. It’s when a lender agrees to extend you a home loan up to a certain limit, provided you meet specific conditions. It is essentially documentation that shows you how much you can borrow.

There are two main types of pre-approval:

• Conditional Pre-Approval: This is when the lender agrees in principle to lend you a certain amount, but the final loan approval will depend on meeting additional conditions.
• Unconditional Pre-Approval: This is more robust and means you’re almost guaranteed a loan, provided nothing changes in your financial situation before you settle on a property.

To apply for pre-approval, you’ll need to provide detailed personal information, including your income, expenses, assets, and debts. This typically involves:

• Personal Details: Verification of your identity and financial situation.
• Income Proof: Payslips, bonuses, and evidence of rental income.
• Expense Details: Information about your ongoing expenses.
• Assets and Liabilities: Documentation of savings, superannuation, investment properties, personal loans, credit card statements, and Buy-Now-Pay-Later debt.
• Credit Check: The lender will review your credit history to assess your repayment behaviour and overall financial reliability.

Once your application is reviewed, and everything is approved, the lender will issue a written pre-approval, outlining the conditions you need to meet. The time it takes to get pre-approved can vary, but your broker will keep you informed throughout the process.

Does Pre-Approval Mean I Will Get A Home Loan?

While pre-approval is an important milestone in the home-buying process, it does not always guarantee that you will receive a home loan. Pre-approval only provides an indication of the amount you could potentially borrow based on your financial situation at the time of application, but it is not a fixed commitment from the lender.

There are a number of factors that can affect the outcome of your final loan application. For example, changes in your financial situation, such as fluctuations in your income or unexpected expenses, can impact whether you secure the loan. Additionally, shifts in the property market or updates to the lender’s home loan policies and procedures can also influence the final decision.

Regulatory changes in Australia can further impact your loan’s status. This is one of the many reasons to use a broker who will ensure you are informed about any potential changes in financial regulations that might affect your borrowing capacity. Lastly, if your Loan-to-Value Ratio (LVR) exceeds 80 per cent, you might be required to pay for Lenders Mortgage Insurance (LMI), which can also affect the final approval of your loan.

Read More: When Do You Need To Pay LMI?

The Benefits of Pre-Approval

While pre-approval isn’t a required step in buying a home, it offers several significant advantages that can greatly enhance your home-buying experience. Here’s how getting pre-approved can make the process smoother and more manageable:

• Narrow Your Search Efficiently: With pre-approval, you know exactly how much you can borrow, which helps you focus your property search on homes within your budget. This prevents wasted time on properties that may be out of reach and allows you to concentrate on finding the perfect home that fits your budget.

• Strengthen Your Negotiation Position: Being pre-approved indicates to sellers and real estate agents that you’re a serious buyer with the financial backing to make a deal. This can give you an edge in negotiations and can be particularly beneficial in competitive markets or when bidding at an auction.

• Boost Your Confidence: Knowing your borrowing limit also provides clarity and confidence when making an offer. You’ll have a clear understanding of what you can afford, which helps you make decisions more confidently and without second-guessing your limits.

• Accelerate the Final Approval Process: Lastly, having pre-approval can streamline your final home loan application. Since much of the preliminary financial assessment has already been completed, the final approval process is often faster and more straightforward, helping you move from offer to settlement with greater ease.

Other Things To Know About Pre-Approval

• Online Pre-Approvals and Credit Scores: Applying for pre-approval online generally does not affect your credit score as it only gives you an idea of how much you can borrow. However, lenders will do a full credit check, which leaves an enquiry on your file, once you have received pre-approval and have made an offer on a property.
• Expiration of Pre-Approvals: Most pre-approvals have an expiration date, usually  three months. If you don’t secure a property within this period, you may need to renew your pre-approval, which could involve a new review of your financial situation.
• Property Suitability: If the property you wish to buy doesn’t meet the lender’s criteria, your pre-approval may not guarantee final loan approval. Lenders need to assess both your financial details and the property’s suitability. Some property types include certain suburbs, small apartments, a property in poor repair, hobby farms etc.
• Changes in Circumstances: Significant changes to your financial situation, such as a change in employment or increased debt, can impact the final loan approval. It’s essential to keep your lender informed of any major changes in your circumstances.
• Interest Rate Fluctuations: Changes in interest rates during your pre-approval period can also affect your borrowing capacity and loan terms. Stay updated on interest rate trends and discuss potential impacts with your lender.

Read More: Investing in property - the ins and outs

Need Help With The Process?

Navigating the home-buying process can be complex, but a mortgage broker can make it much easier. Working with a mortgage broker provides expert guidance and support, making your path to homeownership smoother and more manageable.

• Consultation: Your broker will meet with you to understand your financial and lifestyle goals, helping to refine your aspirations and create an action plan.
• Borrowing Capacity: They’ll assess your financial situation to determine your borrowing capacity and outline repayment scenarios, ensuring the loan products suit your needs.
• Loan Comparison: Brokers explain the features, fees, and charges of different loan options, helping you understand how these factors affect the total repayment amount.
• Pre-Approval Assistance: They assist with applying for pre-approval, helping you identify which property price bracket is best suited to your financial situation.
• Approval Notification: Your broker will inform you when your lender issues an unconditional approval on your loan application, keeping you updated on your progress.

Ready To Take The Next Step?

Securing a home loan can be a complex process, but with the right preparation and guidance, you can navigate it with confidence. Understanding pre-approval and its benefits can set you up for a smoother, more successful home-buying journey.

If you’re ready to explore your home loan options and need expert assistance, our experienced mortgage brokers at Synergy Mortgage Brokers are here to help. We’ll guide you through every step, from determining your borrowing capacity to securing pre-approval and finding the best loan for your needs.

Get in touch with us today to start your journey with a knowledgeable mortgage broker by your side. Let’s turn your home-buying dreams into reality!