When you’re in the market to purchase a property, “home loan pre-approval” is a term you’ll hear over and over. The concept is simple to understand, but how reliable is your home loan pre-approval once you find a property you want to purchase? In the lending world, it’s essential to understand that a pre-approval (or conditional approval) is not a guarantee of finance approval.

Conditional pre-approval can give you an idea of what you’ll have to spend, but it’s not a guarantee your loan application will be approved and that you’ll actually receive the finance amount you need… You could say, a home loan pre-approval is about as reliable as the paper it’s written on. 

Because there are multiple layers to moving from conditional pre-approval to an unconditional loan approval, you’ll need to keep in mind which components influence a banking institution’s final decision. 

These include:

  • You — the buyer
  • The property
  • The lender

First, let’s examine some of the reasons why getting conditional pre-approval could be a good idea for you.

The Pros

If you’re serious about buying, there are benefits to obtaining home loan pre-approval. Here’s how it can help:

  • You know where you stand – Obtaining a pre-approval is excellent as a basis for understanding what you can afford. This will give you a realistic view when looking at properties and will save time on ones that are out of budget.
  • You’re slightly ahead of the game – When putting an offer on a home, a bidder who has pre-approval is more likely to be accepted than one who hasn’t yet begun the process. It also gives the impression to the real estate agent and seller that you are serious and ready to take the next steps.
  • You will be ready for auction – To register for some auctions, you must have first received pre-approval. If you decide on a property that is going to auction, you will know your limit and will be prepared if you are the highest bidder.

While it may seem like smooth-sailing with conditional pre-approval, there are some concerns you should consider before obtaining one. 

The Buyer

Some people may believe that by obtaining a conditional pre-approval, they’re on the fast track to receiving a formal (or unconditional) approval when they’re ready to buy. However, there are many factors within your circumstances that need to be considered before this can happen. These can include:

  • Change or loss of a job – If you lose your job, begin working fewer hours, or change positions, your income will appear inconsistent and may lead a lender to believe your source of repayment is unreliable.
  • Opening a new credit card or acquiring another loan – By having additional debt such as a car loan added to your monthly repayments, it will raise concern that you may not be able to keep up with your loan repayments.
  • Changes to your credit score – Any negative changes to your credit score are always a red flag for the bank. Be warned, these changes can even happen if you have too many pre-approval requests.
  • Starting a family – Banks view having children as a considerable expense that may have the ability to affect your financial situation.

When going through your home loan approval process, it’s vital to ensure that your circumstances remain consistent. Some lenders have been known to contact employers or run credit checks even up to the date of settlement.

The Property

Not only do your circumstances affect your pre-approval but the property itself can also result in a negative outcome. For example, in Melbourne and Sydney some banks won’t accept loans for apartments that are under 50 square metres. If you receive a pre-approval to purchase a unit, and the one you choose is 49 square metres, the pre-approval has no security.

Homes that are located in high-flood or bushfire prone areas, a property that is in disrepair, or an otherwise non-standard home are all considered high risk and will likely be rejected. Lenders won’t take on these types of loans because they have to consider the resale value should you default on your payments and in the event it has to be repossessed.

The Lender and Mortgage Broker

Another factor that people may not think of is the lending terms and conditions, which are different from institution to institution. Lenders are continually amending their policies — with some making changes every month or so. Whilst some banks will accept an application if the pre-approval was given before policy changes, others will only give final approval if the applicant meets their new criteria.

In addition, many large banks will offer “on-the-spot” pre-approvals. You may see this on offer at your bank’s local branch or in marketing emails that you receive. This is not a full assessment of your financial capability, nor a property assessment. As such, these approvals are unreliable and carry no security.

When you’re going through the loan approval process, it’s crucial to deal with a good broker who will do everything they can to understand your situation and the security of the pre-approval. Because they work with the banks daily, they will be able to understand the criteria and where you are more likely to have success. It is beneficial to be as transparent as possible when disclosing your circumstances and what you are in the market for.

The Bank’s Conditions

As you can see, there is distinguished difference between conditional pre approval and unconditional approval. There is no real certainty until you have obtained unconditional approval.

Often, conditional approval will be based on the information you have given your lender, and final or unconditional approval will be subject to:

 

  • You finding a suitable property
  • Your lender:

    • Verifying your financial information 
    • Confirming with you that the proposed loan meets your requirements and objectives
    • Conducting a valuation of the property you are buying if required
    • Confirming whether or not you need Lender’s Mortgage Insurance or a Low Deposit Premium
    • Providing a loan offer to you (such that, if you enter into a contract to purchase a property before then, there is no guarantee the lender will make the offer)

If you’re selling your home

If you’re selling your home it’s important to realise that the equity in your current home (the sale price less your current mortgage) plus your proposed loan amount determines how much you can afford to spend — assuming you don’t have any other cash at hand. 

When determining how much you can afford to spend, make sure you include stamp duty, conveyancing costs and any Lender’s Mortgage Insurance you may incur. Importantly, if you sell your home for less than expected and have put a deposit down on a new home, you may end up with a funding gap. This can turn into a serious issue if you can’t afford to complete the purchase, and would result in losing your deposit.  

A great way around this is to lock in the sale price of your current home using a Market Price Guarantee. With a 100% guarantee that your home sells for at least the amount offered, you’ll have a clearer and significantly more reliable indication of your borrowing and purchasing capacity.