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Published October 27, 2022

What Is Home Loan Pre-Approval?

When you are pre-approved for a home loan, it means a lender has checked your credit and has made you a loan offer. It is a promise, not a guarantee.

Home loan pre-approval is another vital step in the home loan journey. It occurs when a lender agrees to lend you, the borrower, an agreed amount to purchase a property, subject to you meeting certain conditions. 

Pre-approval allows you to go property hunting happy in the knowledge that you can put in an offer or make a bid at an auction up to the amount contained in the pre-approval. Without pre-approval, you may have a vague idea of how much you can borrow, but making an offer would be a pointless exercise. 

Types of home loan pre-approval

Pre-approval falls under two main categories — conditional and unconditional. 

Conditional approval

Conditional approval is not a guarantee of finance for your loan but more an indication of your eligibility. 

This type of approval is subject to you meeting the conditions set out in the approval, which usually include, but may not be limited to:

  • Proof of employment over a specified minimum period of time.
  • Proof of income if you’re self-employed as a contractor, freelancer, or small business owner.
  • Tax returns over a specified period.
  • A qualifying credit score.
  • The property you seek to purchase meets the lender’s guidelines in terms of size, state of repair or location, aka ‘subject to a satisfactory valuation.’

Failure to meet these conditions could result in your loan application being declined. Some lenders may be less stringent when providing supporting documents at the conditional pre-approval stage. There’s absolutely no point in embellishing any of your details on the loan application.

Unconditional approval

Unconditional approval, also known as final approval, happens when a lender formally approves your application to buy a property up to a certain amount.

Most lenders will also offer either a system-generated pre-approval or a full-assessment pre-approval. 

System-generated pre-approval

System-generated pre-approvals are generated when you apply with supporting documents, whereas the lender’s staff assesses a full assessment. System-generated pre-approvals may not take as long to process as full assessments, but the latter provides a more complete picture of precisely how much you can borrow.

Full-assessment pre-approval

With a full-assessment pre-approval, a physical assessor will be able to pick up on things like how reliable your overtime is and other factors that may determine the regularity of your income and hence your ability to repay your mortgage.

Whatever products your lender offers, you should always ask for as much pre-approval information as possible, especially with regard to the conditions involved, so there’s less potential confusion down the track. Additionally, a full assessment pre-approval now should save you time when you seek unconditional mortgage approval later.

How to get pre-approved for a home loan

Start before you house hunt

The best time to start the pre-approval process is when you’re about to start looking for a home. Pre-approvals generally last between 60-90 days, giving you plenty of time to find a property that suits your desires. Lenders can easily extend them beyond that point, but it pays to start your hunt within that timeframe to avoid unnecessary extra paperwork.

Seek out multiple offers

While you’re at it, you might want to get more than one pre-approval, or at the very least, research the best offers available so you can find the most suitable mortgage. The more pre-approval offers you get, the better, as they provide you with more flexibility.

Prepare for the process

The pre-approval application process has become progressively more straightforward and less onerous with the steady advancement of digital technology, especially as you don’t need to go into minute detail with full supporting documentation at this stage. So filling out more than one per-approval shouldn’t take more than half an hour as long as you have your papers in order.

However, you should be aware that even at this formative stage in the process, if you’re self-employed, the lender will probably want far more information upfront before proceeding.

Wait for the lender’s assessment

Once you’ve provided the relevant supporting documentation, the lender will assess your ability to repay the loan and process the pre-approval. 

Remember, pre-approval is not an automatic process, and you could find your pre-approval declined if you don’t meet your lender’s financial criteria.

Frequently asked questions about pre-approval

Does home loan pre-approval affect your credit score?

Every time you apply for pre-approval, your prospective lender will run a credit check to determine your credit score as an essential element of your eligibility. However, a credit check for a home loan application should not affect your credit score, despite what you may have heard. 

Pre-approval checks are unlike checks because someone seeking a home loan often needs to make multiple enquiries in a short time period. Frequent applications for personal loans, car loans and especially credit cards aren’t as necessary, so frequent credit checks in these areas have a greater chance of negatively impacting your credit score.

About the Author

Alan Hartstein

Alan Hartstein has worked in publishing for over 25 years as a writer and editor across broadsheets, tabloids, magazines, trade publications and numerous forms of digital content. Alan was initially attracted to journalism through his love of words and their ability to make an impact in the world. Alan’s main areas of expertise are in business IT, financial services and fintech, but he also thoroughly enjoys writing comedy sketches and arts-related content, which can include everything from ballet and opera reviews to TV and movies. Alan is based in Sydney, Australia.

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