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· Posted on
February 21, 2024

Mortgage pre-approval: What is it - and how do you get it?

The early stages of buying a home can be exciting, but also tricky to navigate if you don't know how much you can afford.

What's the key learning?

  • Home loan pre-approval is when your lender agrees - in principle - to lend you a certain amount of money to fund the purchase of your home
  • Pre-approval helps you understand your max budget, so you can choose houses within your budget
  • To get pre-approval, lenders will look at your current financial situation - and your credit history - to work out what you can afford
  • They will also add a serviceability buffer to make sure you can afford loan repayments when interest rates rise
  • Pre-approval is not unconditional.

You’re in the early stages of buying a home. 

You’re probably scrolling Realestate.com.au or Domain drooling over those luxe listings, setting up Pinterest boards of your dream decor, and just all-round sussing the market.

Me trying to calm my delulu after scrolling multi-million dollar mansions.

But in this early stage, it’s hard to know exactly how much you can afford.

You may have some idea given your savings and your salary, but you’re not certain about what your mortgage will look like.

Enter: home loan pre-approvals.

Pre-approval on home loans

Home loan pre-approval is when your lender agrees - in principle - to lend you a certain amount of money to fund the purchase of your home. Hooray!

“In principle” means that the deal isn’t set in stone, it’s more like a pinky promise.

You and your lender

It’s the bank saying, ‘hey, this is what we’re prepared to lend you if your financial sitch stays the same when it comes time for you to actually buy a house’.

So it’s a solid indication of how much you should be able to borrow to fund your property purchase.

Why do I need pre-approval for a home loan?

Without an indication on how much you can afford, you run the risk of finding your dream home, thinking you’ve got it in the bag, only to find out that your lender won’t lend you the money you need to buy it.

So, pre-approval helps you understand your max budget, so you can choose houses within your budget. 

When you go to bid for a house, you must be able to follow through on your offer.. otherwise you risk losing your deposit.

With a pre-approval you can bid for a house with confidence that the bank will front your finances.

Are there any drawbacks to getting a pre-approval?

There aren’t really any drawbacks of getting your loan pre-approved, but they do like to make cameos on your credit report.

So having multiple pre-approvals in a short period of time might be a red flag for lenders and create the impression that you’re financially unstable.

How do you get pre-approved for a home loan?

You can either go straight to a bank or lender, or go through a mortgage broker to organise a pre-approval.

Once you’ve settled on a lender, they’ll deep dive into your current financial situation and your credit history to work out what you can afford. Generally, they’ll ask you to provide things like:

  • Proof of genuine savings
  • Your employment history 
  • Your current salary
  • You current expenses (i.e. car rego, bills, how much you spend on clothing/food each month)
  • If you earn any money outside of your salary (i.e. your side hustle cash/commissions from work).

From there, the home loan specialist will calculate how much you can afford to repay each month. 

Lenders also want to make sure you can continue to repay your loan if interest rates rise (like they have been this year) so they use a serviceability buffer.

That’s where banks add an extra 3% on top of their current home loan rate to see if you’d still be able to repay if interest rates rise.

They use this serviceability buffer to work out the total amount their willing to lend you.

After looking through your documents, the lender will provide you with the in principle agreement to loan you a certain amount. 

Remember: it ain’t an unconditional, final yes. If your situation changes (i.e. you quit your job…you lose a significant chunk of your deposit) then lenders may need to re-look at your finances, and issue an updated pre-approval statement.

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