Home loan pre-approval

Couple talking to an agent in front of a house about home loan pre approval.

If you’ve made it to the pre-approval stage of the property buying process it means you’re nearing the finish line. Congrats!

But if you want some more info on how pre-approval works – including everything from how long it will last to the process you’ll follow and any pre-approved home loan processing fees – this guide is for you.

Let’s start by answering some of the commonly asked questions around pre-approval home loans.

What is home loan pre-approval?

Home loan pre-approval  is often known as 'conditional approval', which means, in theory, the bank accepts the loan amount you're after before you are formally approved for a mortgage. The reason many home buyers apply for home loan pre-approval is because it strongly indicates you fulfil the lender’s borrowing requirements and are likely to be approved for the home loan.

However, it’s important to remember that most pre-approvals aren't a 100% guarantee. Being “conditional” means that, even if you make an offer on a property, the lender isn’t obligated to follow through and approve you for the loan.

Who offers home loan pre-approval?

Mortgage pre-approval is offered by everyone from the Big 4 (aka CommBankNABWestpac and ANZ) to the smaller online lenders, mutuals and credit unions. When choosing which provider to apply for pre-approval, there are two major things to ask yourself:

  1. Am I comfortable with banking online? Smaller lenders will often offer more competitive home loan interest rates and fees, as they don’t need to pay for the cost of bricks and mortar branches. So, if you're comfortable with the idea of managing your mortgage digitally, then you may be better off taking out a home loan through an online mortgage lender.
  2. Do I want to bundle my banking products? While online lenders generally offer lower rates, there are some positives to taking out a home loan with a major. For example, many big banks offer packaged home loans, which allow you to bundle banking products like your credit card, bank account and home insurance together with the loan. Beyond the convenience aspect of getting all your banking done in one place, the bank may offer some discounts or fee waivers on these bundled products. 

How long does pre-approval last?

Each provider will have their own cap on the number of months pre-approval will last for, but generally it is around 3-6 months.

If you haven’t found a property that takes your fancy in this period, you may be able to ask your lender to extend the pre-approval term. However, they will reassess you at this point to ensure your financial situation hasn’t changed.

When should I apply for home loan pre-approval?

Home loan pre-approval is one of the last stages on your journey to purchasing a property. You should be considering pre-approval only once you’ve saved up a deposit that meets the lender’s requirements, can show genuine savings beyond this, have a good credit score and have a good idea of your borrowing power and if it qualifies you for a loan of the size you're after.

Each lender will have different loan to value ratio criteria for their home loans. Some may allow you to borrow up to 95% of the property value (e.g have a deposit of as little as 5%). Lower deposit loans are generally available to owner occupiers, and lenders may have stricter deposit requirements for investors.

What are the benefits of home loan pre-approval?

When the provider pre approves you for a home loan they will put a cap on the amount you can borrow, which means you won’t be tempted to spend beyond this limit. It also means you’ll have a clear idea of the types of properties that fall within your budget and can narrow down your real estate search.

Is there a pre-approved home loan processing fee?

Generally, mortgage pre-approval shouldn't come with a fee. However, lenders are able to charge you something for this process if they wish to do so. If they do charge a pre-approval fee, it'll usually be a few hundred dollars.

Home loan approval steps

From knowing your credit score to organising your paperwork, there are a number of steps you’ll need to take when it comes to getting your home loan formally approved:

Step 1: Get a copy of your credit report. Lenders use your credit score to assess you for pre-approval and whether or not you will be risky to lend to. If your home loan application is rejected by the lender, this will show on your credit report and could hinder your chances of being approved by other banks and lenders.

So you’ll want to make sure before you apply for pre-approval that you’re a prime candidate by getting a copy of your credit report for free online. Check for any mistakes that shouldn’t be there and if you find some red marks against your name, rectify them by paying back any credit card or personal loan debt before you apply for pre-approval.

Step 2: Compare home loan deals online. Before you apply for home loan pre-approval, you should also ensure you're applying for a loan that's the best possible match for you. There are many different types of home loans available, so it pays to compare home loans online and look for a mortgage with a great headline rate, comparison rate and features to boot. 

Step 3: Don’t make any lifestyle changes. When the lender assesses you for pre-approval, they will want to see that you have income stability, so avoid making any big ticket purchases like a new family car or making lifestyle changes like switching jobs or moving house in the lead up to applying.

Step 4: Provide the lender with borrowing details. Once you’ve found a home loan that ticks the boxes for you, you can begin your home loan pre-approval application. You could go into the provider’s branch to speak with a bank manager or apply online.

At the pre-approval stage you may not have found the property you want to buy yet but the lender will still want some key details. This may include an estimate figure of how much you want to borrow, what the property value might be, whether you’re buying as an investor or owner occupier, and the number of borrowers signing onto the loan.

Step 5: Organise your documents. Providers will also require you to provide several forms of documentation, such as your income (payslips, rental income) and expenses (credit card and loan debt), so they can assess you for pre-approval. They will also want to see genuine savings in your savings account or bank account, as well as identification like your driver’s licence or passport.

Step 6: Home loan pre-approval. Once the lender is satisfied you meet their lending criteria, they will send you a form that outlines your pre-approval, including the amount you can borrow up to. You can then show this form to sellers and real estate agents when you’re ready to make an offer. Don't forget – the lend doesn’t necessarily have to give you final approval even with pre-approval accepted.

Step 7: Lender assesses property. Final home loan approval will come once the provider has assessed the property you have made an offer on and are happy that the amount you have paid matches the market value (i.e you haven’t overpaid). They will then send you a contract to sign and send back to them. After this they will pay the amount to the seller (minus the deposit you have already made).

Now pop the bubbly!

But if you're still considering your home loan options right now, start by comparing a few of the offers below.

Home loan comparison - last updated 7 July 2022

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* WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate displayed is for a secured loan with monthly principal and interest repayments for $150,000 over 25 years.

** Initial monthly repayment figures are estimates only, based on the advertised rate, loan amount and term entered. Rates, fees and charges and therefore the total cost of the loan may vary depending on your loan amount, loan term, and credit history. Actual repayments will depend on your individual circumstances and interest rate changes.

^See information about the Mozo Experts Choice Home Loan Awards

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