Buying a home is a major financial decision. Before you start looking at listings or attending auctions, it helps to know how much you can borrow. That’s where home loan pre-approval comes in.

Home loan pre-approval is a lender’s way of saying: “You’re likely to be approved for this loan amount based on your current financial situation”. While it’s not a guarantee, having pre-approval can help make your property search more efficient and less stressful.

This article will walk you through the steps to get home loan pre-approval, why it matters, and the alternatives available to you.

What is home loan pre-approval and why is it important?

Home loan pre-approval is a process where a lender assesses your financial situation and estimates how much you can borrow. This isn’t a final loan offer, but it’s a strong indication of the potential size of your home loan.

Pre-approval can help you set a clear budget when searching for a property. Knowing your borrowing limit allows you to focus on homes within your price range, saving time and effort. It can also build confidence when making an offer, as you’ll have an idea of what the lender is likely to approve.

In competitive markets, pre-approval can be an advantage. Sellers may view your offer more favourably if they know you have pre-approval. It shows you’re serious and have taken steps to secure financing.

However, pre-approval isn’t a guarantee. The lender will still need to review your application in detail once you find a property. Changes in your financial situation or the property’s valuation could affect the final approval.

What steps are involved in home loan pre-approval?

As part of the bigger home loan process, getting home loan pre-approval involves several key steps. Here’s a simple guide to help you understand the process:

Step 1: Evaluate your financial situation

Start by assessing your financial position. This includes reviewing your income, expenses, and any debts you have. Make sure you have documents like payslips, bank statements, and tax returns ready, as lenders will need these to assess your application.

Step 2: Research and compare lenders

Different lenders offer different loan products and pre-approval processes. Spend some time researching and comparing lenders to find one that suits your needs. Look at factors like interest rates , fees, and customer service. You can apply for pre-approval with multiple lenders, but keep in mind that each application may impact your credit score .

Step 3: Submit your application

Once you've chosen a lender, you can submit your pre-approval application. This usually involves filling out a form and providing the financial documents you gathered in step 1. The lender will review your financial situation, conduct credit checks, and assess your ability to repay the loan.

Step 4: Wait for lender assessment

After you’ve submitted your application, the lender will assess it. This process may take a few days or longer, depending on the lender and the complexity of your financial situation. They’ll look at your income, credit history, and other factors to determine your borrowing capacity.

Step 5: Receive your pre-approval

If your application is successful, the lender will issue a pre-approval letter. This letter will outline the amount you’re likely to be approved for, as well as any conditions you need to meet. Again, this amount is an estimate, not a guarantee.

During the pre-approval period, try your best to maintain your financial situation. Any significant changes could affect your final loan approval. Also, read and understand all the terms and conditions attached to your pre-approval – yes, even the fine print. This helps minimise surprises down the track.

Can I buy a property in Australia without home loan pre-approval?

Yes, it’s possible to buy a property in Australia without home loan pre-approval, but it may come with certain risks.

What are the risks?

Without pre-approval, you may not have a clear idea of how much you can borrow. This means you could potentially spend time looking at properties that are outside your budget. If you make an offer on a property without pre-approval, there’s a risk the lender might not approve the full amount you need. This could result in financial stress or even the loss of the home deposit you’ve worked so hard to save up.

When might it work?

In some situations, buying without pre-approval might be an option. For example, if you’re confident about your financial situation and have a strong relationship with a lender, you might choose to proceed without pre-approval. Cash buyers also don’t need pre-approval since they aren’t borrowing to make the purchase.

Other considerations

While home loan pre-approval isn’t mandatory, it can reduce uncertainty and provide peace of mind. It helps streamline the buying process and shows sellers you’re a serious buyer. Even if you decide to proceed without it, make sure you have a good understanding of your finances and the potential risks involved.

What are the alternatives to home loan pre-approval?

If you decide that home loan pre-approval isn’t right for you, there are other options to consider.

Option 1: Full loan approval before property search

Instead of seeking pre-approval, some buyers choose to apply for full loan approval before beginning their property search. This approach means your loan is fully approved and ready to go once you find a property. However, this can be time-consuming, and the approval is usually tied to a specific property.

Option 2: Conditional approval

Conditional approval is similar to pre-approval, but it comes with specific conditions that must be met before final approval. These conditions might relate to your financial situation or the property you intend to buy. It gives you a stronger position than pre-approval, but still requires further steps to finalise the loan.

Option 3: Cash purchases

For people who don’t need to borrow, buying with cash is another option. Cash buyers avoid the loan process entirely, which makes their offers more attractive to sellers. But this option is only feasible if you have the necessary funds available.

Option 4: Mortgage brokers

Mortgage brokers can help you navigate the loan process and may provide alternative solutions if pre-approval isn’t suitable for you. They can compare different lenders and loan products on your behalf, potentially finding options you might not have considered.

Each of the above alternatives has its benefits and potential drawbacks:

Option	Benefits	Drawbacks
Full loan approval before property search	Certainty of loan approval before property search. Ready to proceed with purchase.	Time-consuming process. Approval may be tied to a specific property.
Conditional approval	Stronger position than pre-approval. Offers flexibility with some conditions.	Conditions must be met before final approval. Still requires further steps.
Cash purchases	Avoids the loan process. Offers more attractive to sellers.	Requires having full funds available. Limits liquidity.
Mortgage brokers	Access to a wider range of lenders and products. Guidance through the process.	May incur additional fees. Choices are limited by the broker’s network.

Consider your financial situation and property goals when deciding whether to pursue pre-approval or explore other options.

How long does home loan pre-approval last?

Home loan pre-approval usually lasts between three and six months. This period gives you time to find a property and proceed with the purchase. However, pre-approval isn’t indefinite. If it expires and you haven’t found a property yet, you may need to reapply.

If your financial situation changes during this period, it could affect your final loan approval. Lenders may reassess your application if there are significant changes, such as a new job or increased debt.

Knowing the duration of your pre-approval can help you plan your property search and avoid surprises later on. Keep track of the expiration date and be prepared to renew if needed.

For more on the timeframes for home loan pre-approval and what happens when it expires, read ‘How long does home loan pre-approval last?’

Anything else I should know?

When seeking home loan pre-approval, here are some additional factors to remember:

• Impact on credit score : Applying for pre-approval can affect your credit score. Each application results in a credit enquiry. This could lower your score if you apply with multiple lenders. It’s a good idea to research and choose your preferred lender carefully before applying.
• Updating financial information : During the pre-approval period, keep your financial information up to date. Significant changes, like switching jobs or taking on new debt, could impact your final loan approval. Let your lender know about any major changes to avoid complications later.
• Costs and fees : Some lenders may charge fees for pre-approval, while others don’t. It’s worth checking with your lender to understand any costs involved. Also consider any other costs associated with buying a property, such as stamp duty and legal fees, and factor these into your budget.
• Property valuation : The lender will conduct a valuation of the property you want to buy as part of the final approval process. If the valuation is lower than the purchase price, it could affect how much you can borrow. Be mindful of this when making an offer on a property.

Consider these factors to better prepare for the pre-approval process and the steps that follow.

Prepare for your next steps

There’s a lot involved in the home loan pre-approval process, and it can feel overwhelming. Simply taking it step by step helps. Understanding your options, knowing what to expect, and being prepared can give you confidence in your property search.

Pre-approval isn’t the final word, but it’s a helpful guide. You get a clearer picture of what you can afford, for a smoother home-buying process. Having this financial information can position you to make decisions that align with your goals.

Buying a home is a big step, and it’s normal to have questions along the way. Take your time, consider your options, and approach each decision with care. This way, you can best prepare to take the next step towards owning your home.