Pre-Approvals: Everything You Need to Know Before Buying a Home

In this article we address common questions around getting pre-approved for a home loan. We’ll explain how preapprovals work, what the benefits are, and whether a preapproval might be the right move for you.

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What is a Pre-Approval?

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A pre-approval, also known as an “Approval in Principle” (AIP), is a conditional approval for a home loan before you find a property. The lender assesses most of the details you’d normally submit for a full approval —such as your income, loan-to-value ratio (LVR), employment history, living expenses, asset, liabilities, borrowing power, and credit history— without evaluating the property itself.

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After assessment, the lender issues a pre-approval subject to the property you eventually choose being acceptable to them as security. With most lenders, your pre-approval lasts 90-days. During this time, if you find a property, the lender will require a signed contract of sale and property valuation to move your pre-approval to a formal approval. In some cases, if you provide updated documentation (like recent payslips and bank statements), lenders may extend this period to 180 days.

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What Are the Benefits of Getting Pre-Approval?

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Getting pre-approval offers several advantages:

• Increased Negotiating Power: A pre-approval allows you to make an unconditional offer. Depending on the state you are purchasing in, you can make your offer without a finance clause—making your offer more attractive to sellers and helping you to negotiate a better price.

• Clear Budgeting: Pre-approval gives you a clear spending limit, ensuring you stay within your budget and avoid overpaying. You’ll also have an idea of what your repayments will look like.

• Streamlined Property Search: Knowing your budget helps narrow down your property search, saving time by focusing on areas within your range. It can also help you expedite your offer acceptance.

• Reduced Stress: With your finances pre-approved, you’ll have peace of mind knowing that only the property itself needs to pass the lender’s criteria before you can proceed.

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Why Pre-Approval is Essential for Auctions

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At Hello Home Loans, we highly recommend clients who plan to bid at auction get pre-approval before bidding. Bids made at auction are unconditional, meaning that you’re committed to purchasing the property if you win. Without pre-approval, you risk being unable to settle if your loan application is denied, which could lead to significant penalties.

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However, pre-approval does not guarantee the lender will accept the property as security. Factors like high-rise building restrictions, proximity to powerlines, zoning, and other specifics may affect a property’s eligibility. We suggest researching the property before bidding, which can include consulting a solicitor or conveyancer to review flood mapping, body corporate history, and other important considerations.

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If you have a property in mind, ask your broker to check with the lender on the likelihood of it being accepted before the auction.

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Additional Tips

• Dealing with Real Estate Agents: If you’re pre-approved, you don’t have to disclose this to agents. However, mentioning it can sometimes help agents advocate for your offer. We advise against revealing your exact pre-approval amount, as it may prompt the agent to push for a higher offer.

• Using a Finance Clause: If you’re making an offer and have concerns about the lender acceptance, consider including a seven-day finance clause in your contract (subject to state regulations). This allows time for a property valuation and final lender approval.

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Should You Get a Pre-Approval?

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Pre-approvals are beneficial if you plan to buy soon and want clarity on your budget. They’re essential if you plan to bid at auction. However, if you think it may take you longer than 90 days to find a property, it may be wise to hold off on pre-approval to avoid a lapse that could require resubmission, potentially affecting your credit score.

If you’re planning to buy soon and would like tailored advice based on your financial situation, along with full support from start to finish, book in a one-on-one appointment with one of our Home Loan Specialists.