How to Get Pre-Approval for a Home Loan

Securing pre-approval for a home loan is a crucial step in the home-buying process, providing you with a clear budget and demonstrating to sellers that you are a serious buyer. Here’s a comprehensive guide to obtaining a home loan pre-approval in Australia.

1. Understand What a Home Loan Pre-Approval Is

Pre-approval, also known as an approval in principle, is an indication from a lender of how much they are willing to lend you based on your financial situation. It’s important to note that this is not a guarantee of a loan but a preliminary assessment of your borrowing capacity.

2. Check Your Financial Health

Before applying for pre-approval, ensure your finances are in order:

• Know Your Credit Score: Lenders will assess your credit history to determine your reliability in repaying loans.
• Organise Your Documents: You will need to provide proof of identity, income, expenses, assets, and liabilities. This includes payslips, tax returns, bank statements, and details of any debts.

3. Determine Your Budget

Calculate your income and expenses to figure out how much you can afford to borrow. Use online calculators to get an estimate of your borrowing capacity or talk to an experienced broker, like Dark Horse Financial.

4. Choose a Lender

Research and compare different lenders to find the one that best suits your needs. Consider interest rates, loan terms, and the lender’s capacity to settle the loan within the time of a finance clause. Non-bank lenders are increasingly popular solutions for many homeowners.

5. Submit Your Application

Once you’ve chosen a lender, start the pre-approval process. This typically involves filling out an application form, providing detailed information about your financial situation, including income, expenses, and any existing debts.

6. Undergo a Credit Check

The lender will perform a credit check to understand your score and credit history. Be aware that multiple credit checks in a short period can impact your credit score.

7. Provide Supporting Documents

You will need to submit various documents to support your application. These may include:

• Identification: Passport, driver’s license, or citizenship certificate.
• Income Proof: Recent payslips, tax returns, or financial statements if self-employed.
• Bank Statements: Typically for the past 6 months to verify savings and ensure any other loans and credit cards have been kept in good conduct (ie no missed payments).
• Assets and Liabilities: Documentation of your assets (e.g. property, vehicles, savings, investments) and liabilities (e.g., credit card debts, personal loans).

8. Wait for Assessment

The lender will review your application and documents. This process can take a few days to a couple of weeks, depending on the lender and the complexity of your financial situation. The lender will assess your ability to repay the loan and verify the information you have provided.

9. Receive Your Pre-Approval

If your application is successful, you will receive a pre-approval letter outlining the amount you can borrow and any conditions that must be met. This pre-approval is usually valid for 90 days, after which you may need to reapply if you haven’t found a property.

10. Shop with Confidence

With pre-approval in hand, you can confidently search for properties within your budget.

Pros and Cons of Pre-Approval

Pros:

• Budget Clarity: Helps you understand how much you can borrow.
• Strengthened Buyer Position: Helps with your confidence in the buying process.
• Streamlined Final Approval: Potentially speeds up the final loan approval process once you find a property.

Cons:

• Credit Impact: Multiple applications can affect your credit score.
• Not a Guarantee: Pre-approval does not ensure final loan approval.
• Limited Validity: Typically valid for 90 days, requiring reapplication if it expires before you find a property.

By following these steps, you can navigate the home loan pre-approval process smoothly and set yourself up for success in the competitive housing market. Happy house hunting!