Home loan pre-approval: How does it work?

Whether you are seeking to move house, purchase your first home or an investment property, we would always recommend seeking pre-approval whenever possible. But what exactly is a pre-approval? What does it involve? Why is it important? And, how long does it last?

What is loan pre-approval?

In a nutshell, pre-approval is a lender’s assessment of the likelihood of a borrower being approved for a particular loan amount. An assessment is made of the borrower’s ability to meet repayments on that amount, by considering living expenses and liabilities, credit history, current income and employment circumstances.

Perhaps the biggest benefit of pre-approval is the peace of mind and confidence it can provide. Going into negotiations on a particular property with pre-approval can give borrowers the confidence to be more assertive with offers and settlement timeframes. Depending on the lender, loan approval times can be as short as 1-2 business days but some could be up to 28 business days. Getting on the front foot with a pre-approval can help shorten these timeframes.

Stepping out the pre-approval process

A pre-approval application is usually the same as for a full application, so borrowers need to supply the same amount of information as if it was a full application, such as payslips, financial statements (if self-employed) and bank statements.

Pre-approval, which is sometimes called a conditional approval, is received subject to particular conditions being met. These conditions could include:

  • A contract of sale on a property
  • A satisfactory property valuation
  • The sale and clearing of an existing property loan
  • The closure of a credit card.

The validity period of a pre-approval can vary from lender to lender, but is usually up to 90 days. Some lenders, but not all, may extend after this period expires to allow buyers more time to find a property.

Does pre-approval equal loan approval?

It is very important to note that a pre-approval is NOT a guaranteed loan. Rather, it is a lenders way of saying to the borrower: ‘Yes, you can borrow that amount based on our current policies, but it is dependent on your income and circumstances remaining the same and finding an acceptable property’. 

There are two main reasons a full approval may be declined or amended after a pre-approval:

  1. Change of circumstances, compared to those at pre-approval: Examples may include the applicant taking out an additional personal loan or credit card since pre-approval or a reduction in income.
  2. Valuation mismatch: If the lender’s valuation ends up being less than the purchase price, the lender will use the lower valuation amount when calculating the maximum loan to value ratio, which may result in a lower loan amount.

We are accredited with a wide range of lenders and can assist with the pre-approval process. While we recommend pre-approval whenever possible, it is important to keep in mind that:

  • A pre-approval is listed as a credit enquiry on personal credit files. Minimising credit queries is preferable, so pre-approval or loan applications should only be lodged when you are seriously considering a new purchase, within a reasonable timeframe of that potential purchase and never with multiple lenders at one time.
  • A pre-approval doesn’t mean you can make an unconditional offer as it is subject to too many variables. Always ensure the contract is signed subject to finance.

Get in touch to find out more about the pre-approval process and whether it might be right for you.

Matthew Laming is an authorised credit representative 478711 of BLSSA Pty Ltd (ACN 117 651 760) Australian Credit Licence 391237. BDO Finance Solutions (SA) Pty Ltd Corporate Credit Representative Number 478582. Aggregation services provided by Choice Aggregation Services. © 2022 BDO Finance Solutions (SA) Pty Ltd. All rights reserved. Your full financial needs and requirements need to be assessed prior to any offer or acceptance of a loan product.