What is home loan pre-approval?
Home loan pre-approval is sometimes also described as conditional approval, approval in principle or indicative approval. Terminology and processes can differ between lenders.
Generally, the lender assesses information about your financial position before you've finalised the purchase of a specific property. Depending on the lender and application, this may include information about:
- income
- employment
- living expenses
- existing debts
- credit card limits
- dependants
- deposit or available equity
- assets and liabilities
- credit history
- the proposed loan amount
- the intended property price range
The lender decides
The lender may then indicate an amount it may be prepared to lend, subject to conditions and further assessment. Not every lender conducts the same pre-approval assessment, and the weight given to each element can differ.
Why get pre-approved before looking for a property?
Pre-approval can help give you a clearer idea of the property price range that may be realistic based on your lending position. Depending on your circumstances, it may help you:
- understand indicative borrowing capacity
- set a property search range
- understand potential deposit requirements
- identify lending issues before making an offer
- prepare required documentation
- understand potential loan structures
- approach the property search with more information
What the regulator says
ASIC's Moneysmart says pre-approval can help set an affordable price range and show sellers that you're serious about buying.
Is pre-approval the same as borrowing capacity?
Not exactly. Borrowing capacity is an estimate of how much you may be able to borrow based on your financial circumstances and applicable lender assessment methods.
Pre-approval involves a lender assessing an application under its own process and indicating that lending may be available up to a certain amount, subject to applicable conditions.
A borrowing-capacity calculation can therefore be useful before pre-approval, but it isn't itself lender approval.
Is pre-approval guaranteed?
No. Home loan pre-approval should not be treated as a guarantee of finance. There may still be conditions that need to be satisfied before the lender provides final or unconditional approval. These can include matters relating to:
- the property being purchased
- lender valuation
- acceptable security
- confirmation of financial information
- changes in your circumstances
- lender policy
- the final loan structure
- other conditions of the pre-approval
The lender must still be satisfied
Pre-approval is conditional. The lender still needs to be satisfied with the final application before it provides final or unconditional approval.
What does a lender check for pre-approval?
The exact process differs between lenders. Depending on the application, the lender may assess the following.
Income
This may include salary, wages and other acceptable income sources. Self-employed income may require a different assessment depending on the lender and circumstances.
Living expenses
Lenders consider household expenditure when assessing serviceability.
Existing debts
Existing home loans, personal loans, vehicle finance and other commitments can affect borrowing capacity.
Credit cards
Credit card limits can form part of a lender's assessment even where the outstanding balance is relatively low.
Dependants
Dependants can affect household expenditure and serviceability.
Deposit or equity
The lender may consider the funds or equity available toward the purchase.
Credit history
Credit history and existing credit facilities may form part of the lender's assessment.
Proposed lending
The lender will consider the amount being requested and the proposed lending structure. Assessment rules are set by each lender and can change.
What documents might I need for pre-approval?
Requirements depend on the lender and your circumstances. A borrower may need information or documents relating to:
- identification
- employment
- income
- bank accounts
- existing loans
- credit cards
- savings
- deposit
- living expenses
- assets
- liabilities
Self-employed applicants
Self-employed applicants may need additional financial information. The exact requirements vary between lenders and applications.
How long does home loan pre-approval last?
Pre-approval does not last indefinitely. ASIC's Moneysmart currently states that home loan pre-approval generally lasts around 3 to 6 months.
However, that is general consumer guidance rather than a universal rule. Individual lenders can use different validity periods, some lenders may use a shorter period, and the process for extending or renewing pre-approval can vary.
Borrowers should check the expiry date and conditions of their actual lender pre-approval.
What happens if my pre-approval expires?
If you haven't purchased a property before the pre-approval expires, the lender may require the application to be renewed, extended or reassessed. Renewal is not automatic.
Depending on the lender and circumstances, this may involve providing updated information. Changes since the original assessment could affect the outcome, including changes to:
- income
- employment
- expenses
- debts
- credit facilities
- dependants
- deposit
- interest rates
- lender policy
- the proposed loan amount
Can my borrowing capacity change after pre-approval?
Yes. A pre-approval reflects the information, assumptions and lender requirements applicable at the time of assessment. Your position may change before you purchase. For example:
- your income may change
- you may take on additional debt
- living expenses may change
- credit limits may change
- interest rates may change
- lender servicing requirements may change
- your deposit may change
- your employment circumstances may change
Not a permanent limit
Any of these can affect the lender's final assessment, so a pre-approval amount should not be treated as a permanently available borrowing limit.
Should I take out new debt after getting pre-approved?
Taking on additional financial commitments after receiving pre-approval can affect your lending position. Examples can include:
- a new car loan
- a personal loan
- a new credit card
- an increased credit card limit
- buy now, pay later commitments where relevant
- other ongoing debt
Tell your broker or lender
If your financial circumstances materially change after pre-approval, tell your broker or lender. A new credit facility does not automatically cancel a pre-approval — the impact depends on the circumstances and the lender's assessment.
Does pre-approval mean I can buy any property within my price range?
No. The property itself can still matter. A lender may need to assess whether the proposed property is acceptable security for the loan. Relevant considerations can vary by lender and may include:
- property valuation
- property type
- location
- size
- condition
- title
- construction
- intended use
- other lender security requirements
Amount approved is not the same as property approved
A borrower may have pre-approval for a certain loan amount but still need the specific property to satisfy the lender's requirements.
What is a property valuation?
A lender may arrange or rely on a valuation when assessing the property being offered as security. The lender's valuation is used for lending purposes and may not always equal:
- the purchase price
- the selling agent's estimate
- an online property estimate
- what the buyer believes the property is worth
Why it matters
If the lender's valuation is lower than expected, this can affect the loan-to-value ratio and the amount the lender is prepared to provide.
Can I make an offer with pre-approval?
Pre-approval can help a buyer understand their potential lending position before making an offer. However, having pre-approval does not remove the need to understand the conditions of the property contract and the conditions attached to the lending.
Whether an offer should be subject to finance or other conditions is a legal and property-contract matter. Rove Financial provides credit assistance, not legal advice.
Borrowers should obtain appropriate legal or conveyancing advice about the contract and any finance conditions before signing.
Can I bid at auction with pre-approval?
Pre-approval can be useful when preparing to bid at an auction because it can help you understand your indicative lending position. But pre-approval does not guarantee final finance for the property.
Auction purchases can involve different contract conditions and may not provide the same finance protections that can be negotiated in some private sales. Before bidding, borrowers should understand:
- their lending position
- their deposit
- the lender's pre-approval conditions
- the proposed property
- contract terms
- settlement requirements
Get advice before bidding
Bidding at auction carries real risk even with pre-approval in place. Obtain appropriate legal or conveyancing advice before bidding where needed.
Does pre-approval affect my credit report?
A lender may make a credit enquiry as part of a home loan or pre-approval application. The exact process can vary between lenders.
Consumers should avoid making unnecessary credit applications simply to collect multiple pre-approvals. A mortgage broker may be able to help assess relevant lender options before an application is submitted.
Should I get multiple pre-approvals from different banks?
It is generally more useful to compare lending options before submitting unnecessary applications, because multiple credit applications can result in multiple credit enquiries.
Rather than treating pre-approval as a way to shop around by applying to many lenders simultaneously, borrowers can first compare:
- lender suitability
- borrowing capacity
- interest rates
- fees
- features
- credit policy
- loan structure
Compare first, apply once
A broker can help consider relevant lenders available through their panel before an application is made.
Can a mortgage broker organise pre-approval?
Yes. A mortgage broker can help assess your lending position, consider suitable lenders available through their lender panel and assist with a pre-approval application where appropriate. This can include:
- reviewing your circumstances
- assessing indicative borrowing capacity
- understanding deposit requirements
- considering lender options
- helping gather information
- preparing the application
- communicating with the lender
The lender still decides
The lender ultimately determines whether pre-approval is issued.
Do first-home buyers need pre-approval?
Pre-approval isn't necessarily mandatory simply because someone is a first-home buyer. However, it can be useful before seriously searching for a property, because first-home buyers may need to understand several things at once:
- borrowing capacity
- deposit requirements
- LMI
- government support
- purchasing costs
- loan structure
- lender requirements
Part of preparing to buy
Pre-approval can form part of preparing for the purchase.
Is pre-approval the same as unconditional approval?
No, and this distinction is important.
Pre-approval / conditional approval
An indication from a lender that lending may be available based on the assessment completed at that stage and subject to applicable conditions.
Unconditional / formal approval
The lender has completed the required assessment for the particular application and confirmed approval, subject to the terms of the loan offer and any remaining procedural requirements.
Check what your lender has actually approved
The terminology used by lenders can vary, so borrowers should understand exactly what their lender has approved and what conditions remain.
What happens after I find a property?
Once you find a property, tell your broker or lender. Depending on the lender and transaction, the next steps can include:
- providing details of the property
- providing the contract of sale where required
- completing any remaining application requirements
- lender valuation or security assessment
- lender review of outstanding conditions
- final credit assessment where required
- formal or unconditional approval
- loan documents
- preparation for settlement
Timing varies
The exact process and timing varies between lenders and transactions, so no particular approval timeframe can be promised.
Frequently asked questions
What is home loan pre-approval?
Home loan pre-approval is an indication from a lender that, based on the information assessed at that time and subject to applicable conditions, you may be eligible to borrow up to a certain amount.
Does pre-approval guarantee a home loan?
No. Pre-approval is not a guarantee of final finance. The lender may still need to assess the property, confirm information and satisfy other conditions before final approval.
How long does home loan pre-approval last?
ASIC's Moneysmart currently says pre-approval generally lasts around 3 to 6 months. Individual lender validity periods can vary.
Can pre-approval expire?
Yes. If it expires before you purchase, the lender may require the application to be renewed, extended or reassessed.
Can I buy any property once I'm pre-approved?
No. The specific property may still need to satisfy the lender's valuation and security requirements.
Can I bid at auction with pre-approval?
Pre-approval can help you understand your lending position, but it does not guarantee final finance for an auction purchase. Understand the contract and lending risks before bidding.
Is pre-approval the same as unconditional approval?
No. Pre-approval remains subject to conditions and further assessment. Unconditional or formal approval occurs later in the lending process once the lender has completed its required assessment.
Can my pre-approval amount change?
Potentially. Changes to your finances, debts, interest rates, lender policies or other circumstances can affect the final lending assessment.
Can a mortgage broker help with pre-approval?
Yes. A mortgage broker can help assess your position, consider relevant lenders available through their panel and assist with a pre-approval application.
General information only. This information does not take into account your objectives, financial situation or needs. Pre-approval is conditional and does not guarantee final loan approval. Lending criteria, rates, fees, valuation requirements, products and eligibility vary between lenders and may change. Rove Financial considers lending options available through its lender panel and does not represent that it compares every lender or product in the Australian market. Credit is subject to lender approval and applicable lending criteria. Consider obtaining independent legal or conveyancing advice before entering into a property contract.