What is a pre-approval and do I need it?
Pre-approval—also known as conditional approval or approval in principle—is one of the best ways to find out how much you can borrow and if your financial situation meets the lenders credit policy before making an offer on a property. When you apply for a pre-approval, your lender will run a complete credit check on your finances and provide you with an indication of how much they may lend you.
Please note pre-approval is not the same as pre-qualification. A pre-qualification assessment will give you an idea on how much you can borrow, based on the information you provide about your financial situation. This is a great way to get an initial indication of your borrowing power before making a formal application for a pre-approval. When you apply for a pre-approval, your application will be submitted to the lender and they will perform a credit history check to verify your financial situation.
A pre-approval is usually valid for 90 days, at which time if you have not found a property, you will need to apply again. Note, this is still a conditional approval—it is not a guaranteed approval. Factors such as the property valuation still affect your application.
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Benefits of being pre-approved for a home loan
- Get an accurate indication of how much you can borrow
- Help you set your purchase budget
- Real estate agents and sellers may view you as a motivated buyer
How to apply for a pre-approval
You apply for a pre-approval the same way you do for full approval. In fact, pre-approval is the first step of the mortgage approval process.
You will be required to submit a number of supporting documents when making your application. These documents help the lender to assess whether you will be able to afford the loan repayments.
Before submitting your application, your lender will let you know which documents they require, but it’s a good idea to have them prepared when you are ready to apply.
Evidence of income
- PAYG: This will involve providing recent payslips and your tax assessment notices for the last 2 years.
- Self-Employed: You will need to provide documents regarding your own income as well as those for your business.
Details of assets and liabilities
In order to assess your financial position, you will need to provide details regarding your assets and liabilities.
Make sure you include all liabilities. Any liability that is found after an application is received could cause a non-disclosure issue. When checking your credit history your lender will be able to see exactly what credit you have applied for. Any enquiries on your credit file that don’t appear on your liability statement will be queried to determine whether they proceeded.
You will also need to note an amount for living expenses so the lender can factor this figure into serviceability.
You will need to provide copies of your identification with your application. If your application is made over the telephone or online, certified copies will be required.
Certified copies are photocopies that have been declared by a Justice of the Peace (JP) or other acceptable certifier, to be genuine copies of the original document. You will need to take both the original document and the copy to the JP who will sign the copy stating it is a true copy of the original.
Whenever you apply for credit an entry is made on your credit file. Everyone who has ever applied for finance (credit cards, phone account, loans etc.) will have a credit history. When you submit an application for finance, the lender will check your credit history, as well as make an entry on your credit file for the amount you are applying for.
The credit file will show how many applications you have made for credit in the last 5 years. After 5 years, the entry will drop off. The credit file will also show if you have had any defaults for not meeting repayments within 60 days of their due date, as well as bankruptcy history, if applicable.
A lender cannot conduct a credit check unless you have provided them with a signed privacy statement consenting to the credit check.
As mentioned previously, pre-approval does not guarantee formal approval of your home loan—a lender retains the right to assess the value of the property you intend to buy.
Speak to one of our friendly lending specialists for more detailed information regarding the home loans we have to offer.
We recommend you seek independent financial advice prior to making any decisions that could affect your financial security.
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