When you are buying a home, one of the most important things to do is get pre-approved for a mortgage. What does a home loan pre-approval mean and why is it so important?
Pre-approval explained
Most mortgage brokers recommend obtaining a pre-approval before putting down a deposit on a home. Pre-approval is when your lender gives you conditional approval to borrow money for your loan for your desired property or home — before you’ve even found it. This isn’t unconditional approval, so nothing is etched in stone until the end and the lender may still reject your final loan application.
It puts you in a better position with the seller, but remember that it will be recorded on your credit report whether you continue with your application or not. As a rule of thumb, applying with numerous lenders at the same time is something you should avoid since it can influence your borrowing capacity in the future.
The benefits of home loan pre-approval
One of the most significant benefits of pre-approval for a home loan is that it provides a specific amount you can spend on your future house. This might help you narrow down your search and avoid spending time on properties that are out of your price range.
When you do locate a home you’d want to purchase, pre-approving financing allows you to concentrate on the price talks rather than juggling the hassle of getting a house loan at the same time. Make sure you understand the difference between a personal loan and a home loan.
Aspects of pre-approval for a mortgage
Key aspects of home loan pre-approval include:
- It provides an estimate of your borrowing capacity, helping you understand your budget when house hunting
- Pre-approval is typically valid for 3 to 6 months, depending on the lender
- It involves a credit check and assessment of your income, expenses, employment, and savings
- Pre-approval is not a guarantee of final loan approval; it’s subject to conditions such as finding a suitable property and meeting any specified requirements
- It can strengthen your position as a buyer, showing sellers that you’re serious and financially capable
- The process usually takes 1-3 days, though this can vary depending on individual circumstances
While pre-approval can be helpful in your property search, it’s not a binding commitment from either party. Once you find a property, you’ll need to apply for full approval, which involves a more detailed assessment and often includes a valuation of the chosen property.
The process of pre-approval
Many lenders provide pre-approval, however the type of pre-approval accessible to you will vary. Your Aussie Broker can help you determine which lenders provide the loans that are suitable for your needs, as well as allowing you to apply for pre-approval.
The lender will evaluate your credit history and current financial situation to see if you are likely to make loan payments during the pre-approval process. The approval of your application is contingent on your circumstances remaining the same. A major life change, such as quitting your job to start a new business, might result in an outright refusal of unconditional approval later on.
It’s worth noting that pre-approval does not last indefinitely; it is generally limited to a specific period, usually three to six months.
