You’ve saved some money. You’ve spent more time than you’d like to admit looking at properties online. And now you’re starting to think:
“Could I actually buy one of these?”
A home loan pre-approval answers that question. It gives you a (fairly reliable) indication of how much a lender may be prepared to lend you before you’ve found the property you want to buy.
It can help turn a rough idea of your budget into something much more useful.
But there’s an important catch:
A pre-approval isn’t the same as having your home loan fully approved.
Let's take a closer look.
A pre-approval is an indication from a lender that they may be prepared to lend you up to a certain amount, based on the information they have assessed at that point in time.
Depending on the lender, they may look at things such as:
If the lender is comfortable with what they see, they may provide a pre-approval, usually subject to certain conditions.
This can give you a clearer idea of the price range you may be able to consider when looking for a property.
This is an important distinction.
The lender has assessed some or all of your financial position and provided an indication of what they may be prepared to lend, subject to their conditions.
You’ve found a property and the lender has completed the additional assessments required for the loan, which may include assessing the property being purchased.
Pre-approval does not guarantee that your final home loan application will be approved.
Your circumstances could change, lender policies could change, or the property itself may not meet the lender’s requirements.
There’s a big difference between an online borrowing calculator telling you a number and a lender actually assessing your financial position.
A pre-approval can give you a better indication of what may be achievable based on the lender’s assessment.
That can help you focus your property search around a more realistic price range.
Sometimes there are things in an application that need to be addressed before someone is ready to buy.
That might include:
Finding these things out before you’ve made an offer can give you more time to understand your options.
Buying your first home involves a lot of moving parts.
Knowing your potential borrowing position can make the rest of the process easier to understand because you have a clearer starting point.
This is where two numbers can sometimes get confused:
What a lender may be prepared to lend you
and
what you are comfortable borrowing.
They aren't necessarily the same number.
Your own budget, lifestyle and future plans matter too.
A pre-approval can help establish a potential borrowing limit, but that doesn't mean you have to spend up to that amount.
Pre-approvals generally have an expiry period, which varies between lenders.
If you haven’t found a property before it expires, the lender may need updated information before extending or reassessing it.
Your financial circumstances can also change while you’re searching.
For example, taking out a new car loan, increasing a credit card limit or changing employment could affect a lender’s assessment.
So if something significant changes after your pre-approval, it’s worth discussing it before making an offer on a property.
A lender may conduct a credit enquiry when assessing a pre-approval application.
That enquiry can appear on your credit file.
This is one reason why applying for pre-approval with multiple lenders just to “see who says yes” may not be a great strategy.
Understanding the available options before submitting an application can help avoid unnecessary applications.
Auctions deserve some extra attention.
In NSW, if you're the successful bidder at auction, contracts are generally exchanged immediately and there is no cooling-off period.
That makes understanding your financial position before bidding particularly important.
A pre-approval can be useful, but it still isn't a guarantee that a lender will provide final approval for that particular property.
Before bidding at auction, it can be worth speaking with both your broker and your conveyancer or solicitor so you understand the financial and legal risks involved.
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