Getting your home loan pre-approved can be overwhelming, especially if you are a first-time home buyer. However, it is a key step in initiating your home-buying process and requires you to understand all its basics. So what exactly is it?
Home Loan Pre-approval is simply a conditional approval from the lender, in which the lender is expected to assess your borrowing capacity by verifying your credit score and financial document analysis. Then, based on this evaluation, you will get your loan approved up to a specific loan amount subject to certain conditions (and that’s why it’s called ‘conditional approval’).
There is a chance that your loan gets approved by one lender, but another may deny it. This is because different lenders have different policies, and pursue different levels of evaluation, which can lead it to happen.
Key Considerations During Applying for Home Loan Pre-Approval
Therefore, understanding the following factors is necessary before proceeding with the preapproval application.
Credit Score
Most of the lenders will check your credit score upfront, which will define your past and current debt status. The higher the score, the better. Some lenders have their niche of working with low credit-score borrowers.
Debt-to-income ratio
It is also equally important that you keep your debt-to-income ratio low. The debt-to-income ratio defines how much loan you have against your income. Stable income with low debt results in better borrowing capacity.
Financial Documents
While applying for a home loan, your mortgage broker/lender will verify your financial documents, which may include but are not limited to your income statements, pay slips, tax returns, and salary credits. The availability of documents will ensure that your home loan will take less time to get approved, and you can proceed further with your homebuying process.
Proof of Identification
The lender/mortgage broker needs to do KYC and thus will also ask you about your identification proof. So, you must be primarily prepared with your Australian passport, visa, residency-related documents, and citizenship certificate. Alongside this, you need to give your ID card with your photo and name, like a driving license or state photo ID, and you may need utility bills, like telephone, water, gas, and electricity bills.
Savings and Deposit
You should have a sufficient amount of savings to confirm your eligibility for a home loan. A deposit of 20% helps avoid the expense of LMI (lender mortgage insurance). Having said that, it is possible to get a loan even with a 5% deposit because of various government schemes or Lender’s promotions and policies.
Proof of Assets
Lenders also demand proof of your assets to assess your borrowing capacity. So, verify all the assets you have with your lender, including superannuation, shares, property, vehicles, furnishings, and jewelry.
Lender Policies and Criteria
Different lenders have different policies and eligibility criteria, which can impact the approval process. Therefore, ask your mortgage broker to compare lenders to understand different eligibility requirements and serviceability tests and select the best fit for your home loan.
Loan Type And Interest Rates
You can take advantage of varied loans like variable, fixed, and split rates. However, before selecting from them, compare their features. For example, variable-rate loans can fluctuate during market conditions, while fixed-rate loans provide repayment stability during the fixed-rate period and split loans can give the benefit of both offset accounts and fixed rates.
Potential Risks with Home Loan Pre-Approval
In addition to the above, you should know about the below-listed potential risks you may come across during pre-approval
Fluctuation in Your Financial Situation
Once you get pre-approved by the lender does not mean that your financial situation will not be reassessed. It means your pre-approval may be invalidated if you get another loan, switch jobs, or change your finances. So, you should discuss with your mortgage broker a new debt or change your job after pre-approval.
Pre-Approval Expiry
Usually, pre-approvals expire within 60-90 days so if you do not find a suitable property within that time, you may need to reapply. Further, if any change occurs in your credit score, then you may not apply for the same amount.
Therefore, consider the home buying process within the expiry time only. However, if the preapproval date is missed, you should consult your mortgage broker or lender to seek an extension and avoid multiple credit enquiries.
Changes in Interest Rate
Your lender assesses your borrowing capacity based on the current interest rate for pre-approval. Meanwhile, if the interest rates change, reassessment may be required.
Property Valuation Issue
Although you have a stable income and credit score, the final decision of pre-approval depends on the lender’s property check, which includes valuation and post-code policy check.
For example, if the purchase price is higher than the estimated property value, the loan may be reduced. Secondly, you also need to pay a larger deposit, which can impact your financial stability. You should therefore wait to make an offer until you have investigated the property’s value. Furthermore, discuss having a financing clause in your purchase contract with your solicitor or conveyancer.
Low Credit Score
Every time you apply for a home loan pre-approval, you need to undergo a credit enquiry, which will impact your credit score. For instance, applying for pre-approval multiple times from different lenders can negatively impact your credit score.
As a result, you may have reduced borrowing capacity or fewer lender options. Therefore, you should avoid seeking approvals from multiple lenders. Rather, talk to your mortgage broker to do thorough research before applying for pre-approval.
Changes in Lending Criteria
Subject to government initiatives, lenders’ policies, and interest rates, the lending criteria may change. For instance, subject to the recent RBA cut, lenders also reduced their interest rates. Such reductions may impact your deposit requirement and loan borrowing capacity.
LMI (Lender’s Mortgage Insurance) Costs
If your borrowing exceeds the limit of 80% of your property value, then you may need to buy LMI. This requirement will further increase the overall loan cost and impact your budget. So, try and save a higher deposit and check if you can qualify for LMI waivers, especially if you are a medical professional, lawyer, or accountant.
When Should You Apply for Home Loan Pre-Approval?
Since you know the key considerations and the risks you may come across, you may be interested in knowing when to apply for pre-approval. So, if you have initiated a search for a suitable property, then it is a favorable time to apply for it.
Additionally, you must have all required documents and a deposit for loan approval.
Home Loan Pre-Approval Process
To get your home loan approved quickly, you should follow the below procedure.
- Find the right lender: Search for suitable lenders and compare them to find the right one as per your specific requirements. A competent mortgage broker can add a lot of value to the right lender selection.
- Consider various loan features: You should check various available loan features and then confirm the ones important for your scenario. Again, a good mortgage broker can help you figure your situation out easily.
- Gather identification evidence: Now, you’ll need to gather all ID proofs, including your Australian passport, citizenship certificate, and driving licence.
- Check eligibility for government benefit schemes: You should also check whether you are eligible for any government schemes or not, like the Stamp Duty Waiver Schemes, LMI Waiver Schemes, or Home Owner Grants.
- Apply for pre-approval: Work with your mortgage broker and submit your application for pre-approval with the lender.
- Receive a pre-approval letter: Once your mortgage broker/lender verifies your loan application, you will receive a letter disclosing the maximum loan amount you can get a loan for.
- Move further for a home search: Lastly, initiate your search for your first home confidently.
Role of Professional Guidance in Your Home Loan Pre-Approval
Since the home loan pre-approval process is not as simple as it seems and involves several analyses and important decisions, it is highly advisable to take professional guidance. The right professional guidance can protect you from potentially costly mistakes.
It will further help you strategize your home-buying decision without impacting your financial stability. You can consult a credible mortgage broker, who will guide you in every step towards your home loan preapproval.
Nfinity Financials has strong credibility in the market, and it has won various industry awards. For more information, reach us at Nfinity Financials. Or give us a call at 1300 GET LOAN or 0456 456 267.
FAQs
Here are some frequently asked questions.
Q1. How long does pre-approval take?
It depends on your financial situation, like, your credit score and credit assessment may take either a few hours or a few days. For this reason, you should ask your mortgage broker/lender about the estimated time the approval takes.
Q2. Why is a home loan pre-approval important?
It is a key step in your home-buying process, which helps you focus your search and understand your estimated budget.
Q3. Can a home loan decline even after pre-approval?
Yes, your loan might get declined even after getting pre-approved once, depending on changes in your financial conditions, bank policies, or the property you signed the contract. So, make sure you discuss these issues with your mortgage broker and avoid taking on more debts or switching jobs after getting your loan approved.
Q4. Do pre-approvals affect your credit score?
Taking approvals from multiple lenders in a short time can negatively impact your financial stability, as each lender has different eligibility criteria.
