Your Guide to Home Loan

Purchasing a new property is an exciting period of your life, no matter if it’s your first home or your fifth. Just imagine the excitement you would feel having just attended the auction of your dream home and walking away with a winning bid. No doubt you’ve already chosen your side of the wardrobe, where you’ll be placing presents under the Christmas tree and your spot in the kitchen where you’ll make carbonara with your grandmother’s secret sauce. Logically, the next step is to make a deposit and apply for a mortgage. The thing is, the house is actually out of your budget and your mortgage has been declined. 

What if you could reduce the risk of this happening? Not only will a loan pre-approval make house hunting easier and more accurate, but it will also increase your chances and the speed of securing the home you have your eye on.

What is a loan pre-approval?

Home loan pre-approvals mean that a lender has agreed to loan you a certain amount of money towards a purchase. A loan pre-approval will allow you to better understand the maximum price you can afford to pay for a property, thus enabling you to look for a home within the perfect price range. It will also benefit you by increasing confidence when bidding and place you ahead of the pack when you’ve found your perfect property.

Why should you apply for one?

In addition to allowing you to narrow down your house hunting to the properties you can actually afford, you will also benefit by closing on the purchase of the property sooner as you have already made significant steps towards full loan approval.

Having a pre-approved loan can also make you a more attractive buyer to vendors. Often, they are looking to sell their property quickly, so having a pre-approval will give you an edge over other buyers who haven’t taken the time to secure one. It shows you are serious about purchasing the property and suggests your offer is less likely to be withdrawn due to lack of finances. This could be enough for the vendor to choose your offer over others’.

How does the process work?

A home loan pre-approval is also referred to as ‘conditional approval’ or ‘approval in principle’. The process involves the bank or lender making an assessment based on your finances to determine your ability to repay a loan. If they deem you eligible and believe you will be able to repay it, they will offer you a pre-approved loan. This will usually last for anywhere between three and six months, giving you plenty of time for house hunting. But what exactly is involved?

1. Review your current finances

Some lenders will want to see the full range of loan application documents, including personal ID, proof of income, typical expenses, assets, bank statements, and evidence of other credit cards and personal loans. It’s important to be prepared, so gathering this information as well as considering monthly repayments you can afford prior to a meeting with the bank or lender will benefit you.

TIP: The more conditions the lender pre-approves, the higher the chance of them approving your final home loan application once you have chosen your property. 
If there are things they are yet to confirm in the pre-approval process, ask them to check this prior to moving forward. This will give you the greatest opportunity for success in securing the loan once you’ve found the perfect home.

2. Consider what sort of home loan you need

Choosing a home loan can be confusing, particularly if it’s your first. There are so many different options and terms such as ‘offset’, ‘redraw’, ‘fixed’ and ‘variable’ may give you flashbacks to maths class more than glimpses of your future investment. This is where researching the various loans available can be of benefit to improve your understanding. It is also worth approaching a home loan expert to gain some professional advice. Better yet, approach a couple to compare.

TIP: Gain pre-approval for far more than you intend to spend on a property.  

This will ensure you don’t have to reapply if your budget changes.

3. Complete the pre-approval applications 

Once you have assessed your finances and decided on the type of loan you want to secure, the next step is to gather the loan application documents you have already organised and apply for pre-approval with your preferred lender. This can be done online, over the phone or in person, depending on whom you choose to apply through.

Following this, a credit report will be performed, your financial situation will be assessed and the loan you’re looking for will be considered to determine if you are eligible for pre-approval. Be aware of how comprehensive this process is. If the detail you have been asked to provide is minimal and the time taken to issue the pre-approval is brief (including within-the-hour, fast online or over-the-phone applications), chances are it is not a reliable review. You will benefit from sticking with pre-approvals that are formal, written applications. 

TIP: Property choice is important.

If you gain a pre-approved home loan, there are still conditions that need to be met. If the property is unacceptable, the final home loan may not be approved. Talk to your lender about properties that are and are not acceptable.

Improve the probability of loan application approval

Maintain good credit history

A poor credit report indicates you could be a high-risk lender. Having a history of late payments won’t do you any favours, so be sure to pay your debts in full and on time to increase your chances of being approved. 

If you haven’t checked your credit history lately, it may pay to, so you don’t get any nasty surprises. If there is poor history that is false, it gives you the opportunity to correct information without having a loan pre-approval rejected for invalid reasons.

Reduce your debt

The greater your financial commitments and personal debt are, the more of an impact it will have on your application. Similarly, if you have a lot of debts and few assets, lenders may be cautious to approve your application. The best option is to look to pay off as much debt as possible, starting with the debt that has the highest interest rate.

Make sure your employment is stable

Ensuring you are out of your probation period and work is steady will also increase the probability of loan application approval. Recent or regular changes in employment can be unfavourable, as well as those who are self-employed and have an irregular income. In saying that, lenders may be able to offer a specialised home loan product to suit your needs, so be sure to enquire.

Ensure you have sufficient income

Income and expenses are incredibly important to lenders. Having a large deposit and a lot of assets may be impressive, but it doesn’t mean you will have the cash flow to make the required repayments. If income is deemed to be too low, taking on a second job or reducing other financial commitments will be of benefit to improve your borrowing power. 

Double-check your details

If a lender finds inconsistencies in your application, they may reject it. Double-checking details is an easy way to avoid time-consuming mistakes.

Supersize your savings

The amount of savings you have will play a major part in the application process and the type of loan you can secure. Not only will a sizeable savings account reduce the total cost of financing, but it will also increase your chances of having your home loan pre-approved. Aim for a deposit of at least 20%. This will give you a stronger chance of being approved while eliminating the need for lender’s mortgage insurance.

TIP: Most lenders will require proof of savings being accumulated in an account in your name. This is often over a certain time period of between three and four months. Lenders are also looking for these funds to have been held in one bank account for about three months, so avoid shuffling your money around as much as possible.

Shop around

Not being accepted by one lender doesn’t mean you will be denied by everyone. Different lenders mean different requirements. It’s important to remember, though, that formal pre-approvals can affect your credit score. So, while loan pre-approvals and investigating your options are important, ensure you don’t apply for too many. Every pre-approval application you submit, a credit check will be performed, which will leave an enquiry under your name. If there are multiple enquires, it can have a negative impact on your credit score.

Home loan pre-approvals are certainly not compulsory, but if you find your dream home and have a pre-approved loan ready to go, it can definitely make purchasing your property significantly smoother and less stressful. It reduces much of the unknown and enables you to approach your incredibly exciting purchase with confidence.