Are you thinking about buying a home? If so, you may have heard about the importance of getting a pre-approval. This is one crucial step that often gets overlooked. But what exactly does pre-approval mean, and why is it so important to the home-buying process?
In this article, we’ll dive into the world of pre-approval and answer all your burning questions. Whether you’re a first-time homebuyer or a seasoned pro, this article is for you.
Let’s dive in.
What Is Pre Approval?
A pre-approval is an indication from a lender that they are willing to approve your loan when you find the right property. It is also known as conditional approval, indicative approval, approval in principle or home seeker, depending on the bank you use.
Basically, a pre-approval means the bank will lend you X amount of money, provided you find a suitable property and your income and circumstances don’t change.
Having a pre-approval allows you to make stronger offers on property with shorter finance terms, meaning you can get a better deal and buy the home of your dreams sooner.
In some cases, a pre-approval is not assessed by the bank or lender’s credit department, and, in all cases, a pre-approval is not assessed by the Lenders Mortgage Insurer (LMI).
Always remember that a pre-approval tells you that a bank or lender is highly likely to approve your loan when you apply, but it’s never a 100% guarantee
Why Is A Pre Approval Important?
A pre-approval is an important part of the home-buying process. Here are some of the reasons why it is important.:
- You will be able to know how much the bank is going to lend you. No more guessing your borrowing capacity, as the bank will just tell you how much they are willing to lend you.
- Having a pre-approval means you will be able to calculate the actual amount of deposit you are going to need. You will know if you need to add a little more to what you have already saved or if you are good to go with the deposit you already have.
- Once you know how much you can borrow, you can determine what your cash flow will look like after you’ve purchased your new home.
- Just because a bank says they are willing to lend X amount does not mean you have to borrow all of it. A pre approval helps you know how much to budget to purchase your new home. It helps you also determine your walk-away price, which is the price you are not willing to go beyond.
- It is even more important to have a pre-approval in a competitive property market because we often see first-home buyers missing out on their perfect homes because they weren’t organised and could not put their best offer forward.
- Sometimes, not having a pre-approval can actually cost you money. For example, if you are successful at a property auction, you have to put down a 5% deposit on the day, but then you apply for a home loan through your bank only to have it knocked back because of the type of property or your job status. There is no way to get your deposit back at this point because most states have no cooling-off period when buying at auction. So, on a property worth $400,000, you could lose $20,000 by not having a pre-approval.
- A pre approval saves you a lot of time. The evaluation for a loan is a lot quicker and less stressful than the alternative where you don’t have a pre-approval—you’re running around looking for payslips and tax returns, and you might miss out on government schemes if you are not organised.
- One of the advantages of having a pre-approval is negotiating power. Having a pre-approval is a game changer. Since you are confident in how much you can afford, you can offer a higher price than the asking price and secure your property immediately. You can also negotiate a lower price but attractive finance terms of 7 days instead of the normal 14 days. A pre-approval is a powerful tool in negotiating the price of a property.
- A pre approval can help you identify any issues you may not be aware of. We had a client recently who was an unknowing victim of identity fraud and had a default of $15,000 from Citibank. If he had not gone through the pre approval process, the bank would have knocked back his loan. But we managed to clear the identity fraud, and he was good to go.
Having a pre approval is very important in a changing market. A couple of years ago, when the interest rates were stable, it meant the bank’s assessment and your borrowing capacity stayed the same.
Fast forward to 2024; it’s a completely different situation. What can happen is the banks might assess you today and say yep, we are happy to give you $500,000 based on the current interest rate, but next month, if the interest rates go up, the repayments increase and your borrowing capacity can also decrease.
However, if you get a fully assessed pre-approval, you’ll know that for the next 90 days with the right bank, they’ll lock in that assessment rate, and they’ll give you the confidence to know that your borrowing capacity is not going to change even if interest rates change.
CASE STUDY: Getting A Pre-approval In A Changing Market
James is a first homebuyer who spoke to us in December 2022, saying he was considering buying a place. We went through the pre approval options with him. But he then said he didn’t want pre-approval right now because he thought the market was going to drop, and he would wait until next year (2023) to see what happens.
We told him that if he applied for a pre-approval now, we could lock in his assessment rate, and the bank would give him that piece of paper saying he is good to go for the $500,000, and he could be confident in that for the next 3 months. But he still decided to wait.
He contacted us a few months later, saying he was ready for the pre-approval. But there had been 2 rate rises, and his borrowing capacity had been reduced by $60,000!
So, getting a fully assessed pre-approval is important, especially in this changing market.
When Is The Right Time To Get A Pre-approval?
You should get a pre-approval before you start shopping around for properties. Although pre-approvals aren’t 100% bulletproof, they can give you confidence when putting offers on properties.
Getting a pre-approval before you start checking out properties will help you narrow down your search and look for properties you can actually afford in the longer term.
A pre-approval allows you to budget and work out your lending capacity—you get a full understanding of what your loan repayments will look like and understand the ongoing commitments without any mortgage shock once you find the right property.
Knowing your maximum budget means you won’t waste time chasing properties that are outside your price range or getting your heart set on a property that you absolutely love but is outside your budget.
Getting pre-approval before you start looking for properties is important because not all banks will accept all types of properties. Some banks will not accept high-density towers in the city or homes close to high-tension power lines…
Ultimately, a pre-approval will give you the confidence to start looking at properties, talking to real estate agents and negotiating, knowing you can afford that particular property you’re interested in.
How To Use Pre-approval As A Bargaining Chip
Okay, so the first thing you’ll do to use your pre-approval as a bargaining chip is to ‘reduce, remove and replace‘. In many states, it is common practice to include a financial cooling-off period when you make an offer. This protects you, the buyer, in the event that Finance falls through. Since you have a fully assessed pre-approval, you’ll have three options with this Clause.
The first option is to remove it altogether, and if you do this, be sure you know what you’re getting yourself into. So, as an example, removing your Finance Clause means that even if the bank doesn’t approve your loan, you’re locked into the contract. Failing to meet the contract terms would mean you’re in breach of this contract, and it could mean you’re liable for hundreds of thousands of dollars. So, only do this if you’ve spoken to your solicitor or mortgage broker, as it’s a big call to make. But if you can make the call, it will work wonders by putting yourself in the driver’s seat when you’re making offers.
Option two is to reduce, and this is where you’ll reduce the finance terms to as short as possible. An example that’s quite often in WA is to include a 21-day Finance Clause. So, in this case, rather than going for standard terms, you want to reduce this. In most cases, if you’ve got a fully assessed pre-approval, you’d be able to reduce this to as little as seven days, and it does depend on a number of factors, including whether or not you’re paying mortgage insurers if evaluation is required and their lender’s current processing time.
Finally, replace, and this is where you look to replace terms. Rather than having a finance clause, you could look to replace it instead, and in this case, you could opt for a satisfactory bank valuation clause. This would mean that the only way you can exit the contract is if the bank’s valuation is lower than the contract price.
Note: anytime you’re looking to change or add clauses to a contract, it is very important that you get a conveyancer or solicitor to review this. This will ensure that your best interest is upheld and will make sure that any changes are legally binding and achieve the result you’re after. You should also repeat this process with other contract terms such as deposit, building and pest, settlement, and any special conditions.
Case Study: Using A Pre-approval As A Bargaining Tool
Dylan and Kennedy were first-home buyers who spent their first eight months property hunting, spinning their tyres. Before they began the process, they had talked to a mortgage broker who was recommended by their parents. Their broker was very old school and had been doing it for more than 30 years, but he sounded like he knew what he was talking about. After this first meeting, their mortgage broker told them that because of their strong financial position, they didn’t need pre-approval. Instead, they should make an offer on properties with clauses ensuring they’ve got a 21-day finance and 45-day settlement.
Over the coming months, they found three properties that ticked all the boxes, but each time they put their offer in, it was beaten, and not one was accepted. In one case, the agent told them that the owners accepted an offer that was much lower than theirs.
After talking to their friends about how disappointed they were about losing out on so many properties, their friends passed on a mortgage broker they used, saying to Dylan and Kennedy that these guys would not only help them with the finances but also help them buy a home. Having had not much luck so far, they decided to call this next mortgage broker, and this is where I got a call from Dylan and Kennedy. They told me their story, and the first thing I did was explain the exact strategy for using pre-approval as a bargaining chip. From there, we helped Dylan and Kennedy get a fully assessed pre-approval, and once they received this pre-approval letter, they looked to make offers completely different this time. As they were in such a strong position, they decided to remove all clauses but the building and pest Clause when they found the next home. Dylan and Kennedy were revitalised with this new strategy, and within the next three weeks, they found a perfect property, making an offer on a home that was accepted the same day. This story hits home about how important pre-approvals are and how they can be used as a bargaining chip.
What Is The Pre-approval Loan Process?
Below are the steps involved in the pre-approval process:
- Sign an application form given by your mortgage broker.
- Provide proof of loans, credit cards, savings, and income.
- After completing the initial assessment, the mortgage broker will recommend several lenders and loan options.
- Once you have chosen a bank, the loan application and all the documents are submitted to your broker.
- The lender assesses your application and gives you a home loan pre-approval.
The pre-approval process differs from bank to bank and depends on which mortgage broker you use. Here at Hunter Galloway, we have a very thorough process to help you get a reliable pre-approval. Our process is as follows:
- Initial free assessment. During this call, one of the brokers will quickly review your financial goals, your financial situation, and your eligibility for a home loan. We’ll ensure you’re ready to buy and help you decide the next steps for your home-buying journey.
- We collect your financial information. Your primary contact at this stage is the Credit Analyst. The information we collect is:
- Your Details. We need to collect some basic details about you and your co-applicant (if applicable). This includes your contact information, residential details, employment situation, income, assets and liabilities. We do this using a simple form.
- Your Supporting Documentation. We will ask for some supporting documentation to help us review your file. Depending on your situation, this will include payslips, bank statements, and other documentation. We collect this using a secure, encrypted online tool.
- We do a credit analysis. Once we have collected your details and documentation, our expert credit analysis team gets to work. We have developed a systematic review process to assess your chances of getting your home loan approved. This process is split into three core components:
- Your credit file. Our analysts will comb through your credit report to ensure it is accurate. We will ensure that any debts recorded are correct and that your payment record is accurate. If there are defaults, we will review them to ensure they are genuine and reflect your actual credit situation.
- Employment history, job, and income. Your length of employment, job type, and income greatly impact which banks or lenders will be willing to offer you a loan.
- Your deposit. Your deposit is the other main factor in your ability to get a loan. We will review your deposit and access to other funds (such as grants) to see whether you have enough deposit to qualify for a loan.
We take the information gleaned from the credit review process and use a custom loan policy checker that checks over 4,890 data points across our panel of lenders to see which lender will be your best option.
- We send your information to the bank or lender. Once our internal credit team and your broker have reviewed your file, we will send your pre-approval application to your chosen bank or lender. We will work with them to complete your pre-approval as quickly as possible, but bear in mind that this takes time—usually 1 to 3 weeks.
Once your pre-approval is complete, we will give you a call to go through the details and give you the resources and tools you need to get out there and find your new property.
Read More: Home Loan Process [Step by step guide]
What Are Some Common Approval Conditions?
In most cases, a pre-approval has conditions that need to be fulfilled before the loan can be unconditionally approved. These can range from generic conditions, like subject to valuation, or specific ones, like obtaining a letter from your employer.
A few common bank terms & conditions include:
- Validation of all details provided to ensure they are true and correct.
- Receipt of all necessary supporting documentation. We have an application checklist that you can download and fill in.
- Satisfactory valuation for the proposed security property(s). Where a bank requires a valuation to be completed, we will arrange for this to be undertaken.
- Lender’s Mortgage Insurance approval, if required.
- No significant change in the customer’s financial position.
Once all of the conditions are satisfied, the bank can issue loan agreements(s). The loan agreements(s) and other documentation will set out requirements to be met before loan funds are made available.
You must sign and return the loan agreements(s) within the first 90 days from the date of this letter, or they may require you to revalidate your financial position.
Read More: The Complete First Home Buyers guide to buying a home.
How Do You Know If You Can Rely On Your Bank's Pre-approval?
Not all banks are the same when it comes to assessing a pre-approval home loan. There are two types of pre-approvals, and one of them is more reliable than the other.
- The 1st one is what we call a coffee shop approval, and that’s where you rock up to the bank and say hey, I want to get pre-approval for a $300,000 home. Can you give it to me? They put it in the system, and the system spits out a response that the bank can definitely do that based on the numbers you gave them. But no one’s actually looked at your living expenses and your bank statements. No one’s checked if you’ve got gambling or bad credit or if you’ve got a job whose income they might not accept, e.g. if you are a casual worker or contractor. This pre approval is very unreliable.
- The 2nd one is a fully assessed pre-approval. This pre-approval has generally gone to a human who actually sits there and looks at your payslips, your bank statements, your financial situation and your savings to see if they are genuine. Then they will give you a pre-approval of, say, $300, 000 and it’s been fully assessed. Now, all they will need to see is a contract of sale for the home that you want to buy and live in. This type of pre approval is more reliable.
It’s important to remember that in most cases, a pre-approval is just an indication that the bank is okay with considering approving your loan. They may complete a credit check and not check any of your documents and wait until you lodge a full mortgage application to do this.
A full mortgage application is made when you find a property, which means the lenders will only complete the entire assessment of your loan—verifying your payslips, bank statements, income information, savings information and any liabilities you have—to be 100% sure they can lend you the money.
Unfortunately, if you have gone out and got pre-approval from a bank, the lender is under no obligation to fully approve your loan once you have found a property. They can say your situation has changed and knock you back.
Read More: Loan Declined After Pre-approval | 26 Ways to Get Unconditional Approval
What Questions Can I Ask To Make Sure I Have A Real Pre-approval?
Our team at Hunter Galloway always requests that the lender or the bank fully assesses our clients’ pre-approvals. If, for some reason, this is not possible, we will let you know.
To make sure you are protected, below are a few questions you should ask your banker or broker to make sure your loan application has been assessed and you have a real pre-approval:
- Has my application gone to the credit department?
- What are the conditions of my approval?
- Can I bid at an auction based on this approval?
- Has the lender’s mortgage insurer approved my application?
If you are given an on-the-spot or system-generated approval, your home loan was never really approved. In this case, your loan could be declined in the future.
As you can see from the example above, the bank hasn’t fully assessed the home loan application. While the details entered into their lending system are acceptable, an actual credit assessor hasn’t reviewed the application to double-check that the numbers match—for example, that the income details entered match the payslips provided.
A formally approved loan is not subject to any further approval conditions
Are There Any Specific Lenders That Provide Unreliable Approvals?
Again, you should ask your banker or broker the above questions. Still, you must be cautious of any system-generated approvals from St George Bank, Westpac Bank, Suncorp, ANZ, NAB or any other bank that gives on-the-spot pre-approvals.
While many of these banks may complete a credit check and provide approval in principle, the credit department hasn’t assessed your application. Therefore, the bank could change its decision to lend you the money at a later date.
If you aren’t sure, get in touch with our team. Call us on 1300 088 065 or get in touch online so we can review it for you.
At Hunter Galloway, we work with lenders who will verify your income and deposit information to ensure you have a verified pre-approval.
What Are Some Common Pre-approval Mistakes?
1. Thinking your pre-approval is the same as a formal, unconditional approval.
We have been mentioning this quite a lot in this article, and this is because it is crucial to keep it in mind always. Getting a loan after a pre-approval is subject to getting your updated income information, obtaining a valuation to ensure the property is suitable and an updated credit file.
2. Thinking that you can purchase any type of property.
Sometimes, after the pre-approval, the type of property that you ultimately purchase may be deemed unacceptable. Some banks restrict lending for units, while others restrict you based on bushfires or flooding restrictions. So make sure the property you want to purchase is acceptable to the bank before getting the pre-approval. As a broad rule of thumb, make sure you double-check with your broker before buying any property that fits these criteria:
- Smaller than 50 square meters inside
- Land size over 2 hectares
- Doesn’t have standard title and zoning
- Not in a major town or city
- Includes incentives like furniture packages or rental guarantees
- Is run down or in disrepair and needs lots of work to fix up
3. Not knowing that the bank and the insurer are two separate entities.
This is a really big issue. Let’s say the bank has taken the necessary steps and issued a fully assessed pre-approval. You’ve got your golden ticket, but this may be short-lived because, whilst you meet the lender’s criteria, you may not necessarily meet their mortgage insurance. For example, if your property is close to high-tension power lines, it might be acceptable to your bank but not to your insurer.
4. Not knowing you are stuck with the bank you got the pre-approval from.
You should only get a pre-approval from one bank at a time to avoid damaging your credit score by making many applications in a short period. So, if another bank or lender announces a new, better rate, you must re-apply for a pre-approval (potentially damaging your credit file) or accept the increased costs of staying with your current lender.
5. Thinking pre-approvals last indefinitely.
Most pre-approvals only last for 90 days. Some banks will allow 180 days, but either way, if you cannot find the right home within that time frame, you’ll need to re-apply for another pre-approval. That means wasted time and effort on your part, plus you’ll have to hit your credit file again in 90 days for an updated pre-approval.
What's Next When You Are Pre-approved?
Now it’s time to go shopping! Follow these steps:
1. Determine how much you are willing to spend—your budget.
For example, you may be pre-approved for $500,000 but decide you want to only spend $450,000
2. Start looking on RealEstate, Domain, and local real estate agents' websites to find a property to buy.
When you’re looking online, be sure to select the bracket that you want to purchase in. So, let’s say you’re looking at a $500,000 purchase. You can search for houses between $400,000 and $500,000. An interesting thing we found in the past is that sometimes you’ll get higher-priced properties that come up in this bracket. So, reduce your bracket a little bit further—maybe from $300,000 to $500,000, which will give you a far larger range of properties to look at. The best part of these websites is that you can set up real estate alerts, so when properties you like come up on the market, you’ll get an email notification and be the first to view them.
3. When you find the right property, do your research and find as much information as you can online.
You can use websites like Onthehouse and RP Data. Some sites like RP Data will charge you a fee to obtain a report or even require a subscription. Luckily, here at Hunter Galloway, we’ve got access to RP Data! Feel free to contact us for any reports you need; we’re only too happy to provide them.
4. Once you have done your research, you make an offer on the property.
At this point, it doesn’t hurt to get your conveyancer or solicitor to check over the contract before you go ahead. You want to ensure that you have standard finance clauses in the contract. Here at Hunter Galloway, we ensure that our first homeowners have the right terms to be competitive and protect them if anything goes wrong.
Next Steps And Getting Your Home Loan
If you want to get a pre-approval or buy a home, speak with one of our experienced mortgage brokers to walk you through the next steps of home loans in Brisbane.
At Hunter Galloway, we help home buyers get ahead in this competitive market, and we give you the actual strategies that have helped other home buyers like you secure a property when there have been 5 other offers on the table! Enquire online or give us a call at 1300 088 065.
Unlike other mortgage brokers who are just one-person operations, we have an entire team of experts dedicated to helping make your home loan journey as simple as possible.
If you want to get started, please call us on 1300 088 065 or book a free assessment online to see how we can help.
Start again
