Perfect Your Timing by Knowing When To Get Pre-approval for a Home Loan

February 25, 2020
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Searching for a home loan is just as important as looking for the perfect house. There are many boxes to tick throughout the search, including if or when to get pre-approval for a home loan. The timing of pre-approval is key for buyers to gain a strong position in the competitive property market. 

What is home loan pre-approval?

Sometimes called conditional approval or approval in principle, home loan pre-approval is when a lender provides an estimate of how much you can borrow for a mortgage. It isn’t compulsory, but it does help you identify how much you can borrow and be a more strategic buyer.

Buyers need to know that even with pre-approval, they still need to pass the last hurdle of getting final approval from their lender. Without final approval, they won’t be able to purchase the property, so let’s look at four reasons to get pre-approval. 

1. Competitive edge

Depending on where and when you are buying, the property market can be extremely competitive. By gaining pre-approval, sellers and agents may prioritise you as they are confident that you’re a serious buyer who can have the loan ready for sale.

2. Auction preparation

Pre-approval is an essential for buyers that are going to auction. Auctions can be daunting, very fast-paced and high-pressure environments, so knowing your pre-approval figure will help build your auction plan and know your limits.

3. Informed budget

Having a figure of how much you can borrow will help your search for the perfect home and be confident when attending open homes. If there’s a mismatch between the loan and the house you want, you may need to rethink your buying strategy or increase how much of your own funds you’ll need to contribute.

4. One step ahead

The buying journey is exciting. On the flipside, it includes a stack of paperwork. No one wants to be rushing around locating payslips and statements when they are under pressure to make an offer.

While the pre-approval process doesn’t cover everything, it allows you to have the majority of paperwork sorted in advance.

Types of pre-approval

There’s more than one type of pre-approval for a home loan, the two options include system generated pre-approval and a full assessment.

System generated pre-approval requires a full application and some of the supporting documents. This type of pre-approval is sometimes instant or received within a few hours. While the convenience of this option is appealing, many conditions are attached as it only relies on the information you provided.

Making an offer based solely on a system generated pre-approval isn’t recommended, as it can be unreliable.

A full assessment is a much more comprehensive and reliable option. For this, your lender will look at all your documents, ask further questions and carry out a full credit check. A full assessment will take a few days, but it can save you a lot of time when it comes to getting final approval.

When should you get pre-approval for a home loan?

Buying a home is a planned journey, not a race. Applying for pre-approval is in the later stages and should be aligned with when you are ready to start making an offer.

The first step is to apply for pre-approval with your chosen lender. This is generally when the lender looks at your financial situation to estimate how much they can lend to you.

In most cases, a number of conditions are attached to a pre-approval. A common pre-approval condition is ‘subject to satisfactory valuation’. 

This condition covers the situation where the buyer hasn’t found the property they want to buy, and the lender must make sure that the property is within their lending guidelines.

Pre-approval is provided to you in writing with a time limit attached. Depending on the lender, this limit can be between three to six months. Therefore, it’s important to get the timing right to avoid a reapplication.

Disadvantages of pre-approval

On face value, there’s no clear disadvantage of pre-approval. However, pre-approval can result in the buyer being in an unfavourable position if they aren’t measured in their approach.

If a buyer’s financial circumstances change, they may no longer be approved. Some examples of these circumstances include changing jobs, going part-time, or having children. You need to tell your lender of any current of known future changes so that they can re-asses your application. 

Other external factors, such as changes to interest rates or government regulations, can also affect whether you’re still pre-approved. In this case, it’s always a good idea to check with your lender to ensure your pre-approval hasn’t been impacted.  

Applying for pre-approval and how it impacts your credit score is another factor to consider. Application for pre-approval is a type of recorded credit enquiry that involves a credit check. This means that every application for pre-approval is recorded on your credit history. 

Multiple applications with the same or different lender in a short period can negatively impact your credit score. This, along with the pre-approval time limit, should always be factored into your buying strategy.

Hard work and smart savings will help you be in a strong position when applying for pre-approval. We have included some additional information below to help you get there. 

Tips on how to save for a house deposit to set yourself up for success

What to know when shopping for a home loan

10 steps to buying a house

Soho is your expert team in Australian real estate, offering an innovative platform for effortless property searches. With deep insights into buying, renting, and market trends, we guide you to make informed decisions, whether it's your first home or exploring new suburbs.
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Our AI match engine will match you with over 150,000+ properties and you can swipe away or shortlist easily. Making your home buying journey faster and easier.