How reliable is home loan pre-approval?
Pre-approval is a helpful step in securing an offer for your home loan.
Getting pre-approval has a number of advantages, from understanding what your borrowing power is, to being able to bid with confidence at an auction. However, receiving this conditional green light from your lender does not guarantee you will be able to secure the final amount when it comes time to sign on the dotted line.
There have been many instances where homeowners have won a property at auction, only to have their loan approval withdrawn and be left scrambling to secure a mortgage from another lender — often at a less favourable rate.
Understanding what pre-approval is and how it works is the first step to ensuring you can secure the loan amount needed to purchase your dream home. In this post, we look at the difference between home loan pre-approval and final approval, and shed some light on some reasons why a loan approval may be withdrawn.
What is pre-approval?
Pre-approval is an indication of your borrowing ability with a particular lender, based on their lending criteria, your current income, and ongoing expenses. It’s also known as conditional approval, indicative approval, or approval in principle.
Once you submit your pre-approval application to a lender, they will work out:
- How much you can afford to borrow to buy your property based on their lending appetite
- Any fees associated with buying a property such as Stamp Duty, solicitor fees, etc.
- Your estimated home loan repayment (weekly, fortnightly or monthly)
- Your home loan structure (fixed vs. variable or a split option)
Why get a pre-approved loan?
There are a number of benefits to getting pre-approval when buying a home:
- It gives you an accurate idea of your borrowing power.
- It allows you to focus your house-hunting efforts on properties you can realistically afford.
- You may have an advantage during negotiations, as it shows the seller you’re serious and ready to act.
- The process may help you uncover any additional requirements that may help with your final approval, such as reducing credit card limits, or paying off your existing debt.
- You can bid with more confidence at an auction, as an auction contract is unconditional and you will be required to pay a deposit — regardless of whether your home loan is approved.
What’s the difference between mortgage pre-approval and final approval?
One of the biggest myths buyers believe is that pre-approval is the same as final approval.
The main difference between pre-approval and final approval is the degree to which your lender has reviewed your application. Pre-approval has far fewer conditions than final approval, because the lender hasn’t officially committed to offering you a certain amount for your mortgage.
On the other hand, you can think of final approval like your lender sealing the deal. Once a lender gives you their seal of approval, they are saying that they will offer you the full amount that they’ve approved for your loan.
This handy table breaks down the difference between both types of approval:
|Your lender has assessed and reviewed your home loan application in principle||Your lender has fully assessed and reviewed your home loan application|
|Further documentation required, such as pay slips, a property valuation, or a signed and dated contract of sale||Minimal documentation required, but you may need to obtain a certificate of currency (building insurance)|
|No offer of home loan||Your lender will issue a letter of offer and loan documents|
|You will still need to go through an assessment and ensure you meet all the conditions to receive a formal offer.||Your home loan application is ready for settlement |
Why would my pre-approval get declined?
Unfortunately, many buyers have secured pre-approval on their home loan application, only to have their formal application declined.
- You received a system-generated approval. Some lenders may advertise fast pre-approvals online and in their branch. However, these pre-approvals aren’t assessed by the lender’s credit department, which means your application was never truly reviewed and pre-approved in the first place.
- The lender doesn’t accept your property. Lenders don’t assess the property you’re purchasing during the pre-approval process — they do this during full approval. In some cases, a lender may not approve your loan because the property type isn’t acceptable (such as with hobby farms, inner-city apartments, high density apartments or units under 50m2.
- Your pre-approval has expired. Most conditional approvals are only valid for 90 to 180 days. If you apply for a loan after this time period, your pre-approval is no longer valid and you will need to reapply. This means you may be subjected to the new lending policies by the lender, which may be more restrictive.
- Your situation has changed. If you have had any big changes in your life since applying for pre-approval, the lender will need to reassess your application. These changes could involve making a major purchase (such as buying a car), getting a new credit card, or changing jobs.
- The LMI provider doesn’t approve your loan. When your loan to value ratio (LVR) is higher than 80% of your total property value, your lender will need to seek approval from their Lenders Mortgage Insurer. In some cases, your application may have been approved by your lender but declined by the LMI provider, who has different guidelines to the lender.
- Interest rates have increased. If interest rates rise, this will affect the maximum amount you can borrow. In most cases, you will need to proactively reapply for pre-approval, as the lender typically won’t notify you of any changes.
Your pre-approval may also get declined if a lender updates its lending policies. However, some lenders may honour pre-approvals that have been submitted before their policy changed.
Buying a house? Discover 12 home loan application mistakes buyers make when applying for a home loan, and how to avoid them.
How to get conditional approval for your mortgage
Securing pre-approval can be helpful in your house hunting journey, but it’s worth keeping in mind that not all lenders are created equal. Some are known to offer on-the-spot mortgage approvals that are unreliable, which can cause undue stress at an already stressful time. If you’re bidding at an auction, it’s even more important to get reliable pre-approval from a lender.
That’s why it’s best to work with a mortgage broker to find the right lender for your individual situation. A mortgage broker can guide you through every step of the loan application process, from seeking the sharpest rate to securing pre-approval and locking in your final offer.
If you’re ready to buy your dream home without the headache, contact the team at Rateseeker today.
** General Advice Warning
The information provided on this website is general in nature only and it does not take into account your personal needs or circumstances into consideration. Before acting on any advice, you should consider whether the information is appropriate to your needs and where appropriate, seek professional advice in relation to legal, financial, taxation, mortgage or other advice.