Do I need to get a pre-approval?
7 min read
First things first, let’s talk about what a pre-approval is. A pre-approval (or approval in principle) is when the lender undertakes an assessment of your financial situation. They then confirm how much money they are willing to lend to you.
Before you consider applying for a pre-approval, check out our home loan repayments calculator here so you can see how affordable repayments are on various loan sizes.
You usually wait until you have your deposit saved up before you apply for your pre-approval because they have a 90 day expiry.
Why would I get a pre-approval?
You wouldn’t go out to dinner without knowing whether you could afford to pay the bill, so why would you go to look at a house without knowing whether you could afford it?
Knowing your borrowing capacity means you’ll know what price range you can look in for your home. You can look around confidently in this range knowing you will be able to get approved for the loan.
It also means you will be able to get the finance in place more quickly than someone who has not provided any documentation to their lender. Some real-estate agents and vendors may be more likely to accept a lower offer knowing you can get the finance in place faster.
Finally, when you go to bid at an auction or if you are serious about making an offer on a property you are inspecting, you’ll know what the lender is prepared to lend to you. Therefore at auction you have a very clear upper limit or can make a quality upfront offer on a private sale.
I heard pre-approvals aren’t always fully assessed and my loan may not be approved.
Correct. There are two types of pre-approval: full assessment and system generated.
Those that are system generated are by definition not fully assessed. A credit assessor won’t review your financials, identification or proof of employment and will generally have a lot of more conditions that need to be met. They are usually issued quite quickly, sometimes even on the spot.
In comparison, a fully assessed pre-approval will require you to provide a lot more information and will be reviewed by a credit assessor and possibly even the lenders mortgage insurer depending on the LVR (loan to value ratio).
A fully assessed pre-approval will also involve a credit check, so bear in mind this can impact your credit rating in the future. You probably don’t want to go and get pre-approvals with every lender in town.
These pre-approvals can take a few days to be approved and will usually have a lot less conditions in place for it to be converted to an approved loan.
One big thing to keep in mind is this: if your employment or financial situation changes then the pre-approval will no longer be valid. We would not recommend you change jobs before you buy your house and apply for your new loan.
How do I get a pre-approval?
You’ll need to apply for one with a lender. An application for a fully assessed pre-approval requires a few things because the lender is doing a full-assessment upfront to determine how much they would be prepared to lend to you. You’ll need to provide:
- Pre-approval application form
- Proof of ID
- Evidence of employment and income
- Proof of savings (your deposit)
- Details of any current debts/liabilities (like credit cards) and assets (like other properties)
How long does my pre-approval last for?
Most pre-approvals are valid for around 90 days, although there are a few lenders who offer slightly longer expiration dates up to 6 months. Make sure you’re serious and ready to purchase a property when you apply for your pre-approval so you don’t have to keep getting it rolled over every 90 days (requiring more paperwork).
A final word on pre-approvals
Lenders change their policy all the time. This means one day they may be very open to investor loans and the next they may decide to withdraw from that market and make it harder or more expensive for investors to get loans. If this happens, your pre-approval may no longer be valid and you may need to apply for it be re-approved.
Apply for your pre-approval with Entourage today, we’ll compare a range of different lenders and loan options, meaning you can bid or negotiate with confidence.