What Is Home Loan Pre-approval? A Simple Plain English Answer

Thinking about buying a home? One of the most important first steps is securing a pre-approval, which is a formal indication from a lender of how much they’re willing to lend you. It’s a crucial step that not only tells you your borrowing power but also makes you a more confident and competitive buyer. This guide, written by an award-winning mortgage broker in Brisbane, will walk you through what pre-approval is, why it’s a non-negotiable part of the home-buying process, and how to get one that’s genuinely reliable.

Let’s Dive In

A pre-approval is an indication from a lender that they are willing to approve your loan when you find the right property. It is also known as conditional approval, indicative approval, approval in principle or home seeker, depending on the bank you use.

Basically, a pre-approval means the bank will lend you X amount of money, provided you find a suitable property and your income and circumstances don’t change.

Having a pre-approval allows you to make stronger offers on property with shorter finance terms, meaning you can get a better deal and buy the home of your dreams sooner.

In some cases, a pre-approval is not assessed by the bank or lender’s credit department, and, in all cases, a pre-approval is not assessed by the Lenders Mortgage Insurer (LMI).

Always remember that a pre-approval tells you that a bank or lender is highly likely to approve your loan when you apply, but it’s never a 100% guarantee

A pre-approval is an important part of the home-buying process. Here are some of the reasons why it is important.:

Having a pre approval is very important in a changing market. A couple of years ago, when the interest rates were stable, it meant the bank’s assessment and your borrowing capacity stayed the same.

Fast forward to 2024; it’s a completely different situation. What can happen is the banks might assess you today and say yep, we are happy to give you $500,000 based on the current interest rate, but next month, if the interest rates go up, the repayments increase and your borrowing capacity can also decrease.

However, if you get a fully assessed pre-approval, you’ll know that for the next 90 days with the right bank, they’ll lock in that assessment rate, and they’ll give you the confidence to know that your borrowing capacity is not going to change even if interest rates change.

James is a first homebuyer who spoke to us in December 2022, saying he was considering buying a place. We went through the pre approval options with him. But he then said he didn’t want pre-approval right now because he thought the market was going to drop, and he would wait until next year (2023) to see what happens.

We told him that if he applied for a pre-approval now, we could lock in his assessment rate, and the bank would give him that piece of paper saying he is good to go for the $500,000, and he could be confident in that for the next 3 months. But he still decided to wait.

He contacted us a few months later, saying he was ready for the pre-approval. But there had been 2 rate rises, and his borrowing capacity had been reduced by $60,000!

So, getting a fully assessed pre-approval is important, especially in this changing market.

Read More: 10 [simple] Tips for Choosing the Best Home Loan in Brisbane

You should get a pre-approval before you start shopping around for properties. Although pre-approvals aren’t 100% bulletproof, they can give you confidence when putting offers on properties.

Getting a pre-approval before you start checking out properties will help you narrow down your search and look for properties you can actually afford in the longer term.

A pre-approval allows you to budget and work out your lending capacity—you get a full understanding of what your loan repayments will look like and understand the ongoing commitments without any mortgage shock once you find the right property.

Knowing your maximum budget means you won’t waste time chasing properties that are outside your price range or getting your heart set on a property that you absolutely love but is outside your budget.

Getting pre-approval before you start looking for properties is important because not all banks will accept all types of properties. Some banks will not accept high-density towers in the city or homes close to high-tension power lines… 

Ultimately, a pre-approval will give you the confidence to start looking at properties, talking to real estate agents and negotiating, knowing you can afford that particular property you’re interested in.

Having a fully assessed pre-approval is a powerful tool. It gives you an edge over other buyers. You can use a strategy we call ‘reduce, remove, and replace’. This applies to the finance clause in your offer.

The finance clause is a buyer’s safety net. It protects you if your loan falls through. With a solid pre approval, you have three options.

You can remove the finance clause entirely. This makes your offer very attractive to the seller. It signals a high level of confidence. However, you must be careful with this option.

You can reduce the time frame of the finance clause. Standard terms might be 21 days. With a pre-approval, you can often shorten this. You can reduce it to as little as seven days.

A shorter term is appealing to sellers. It means a quicker, more certain sale for them. The reduced time frame is dependent on several factors, including:

You can replace the finance clause with a different condition. One option is a “satisfactory bank valuation clause.” This protects you in a specific way.

Expert tip: Always have your solicitor or conveyancer review any changes to a contract. This ensures your interests are protected and all changes are legally binding.

Dylan and Kennedy were first-time homebuyers. They spent eight months hunting for a property. Their first broker told them pre-approval wasn’t necessary. He advised them to simply make offers with a 21-day finance clause.

This advice cost them. They found three perfect properties. Their offers were all rejected. In one case, a lower offer was accepted instead. This was a tough lesson. Their offers were not seen as strong.

Dylan and Kennedy lacked negotiating power. Without a formal pre-approval, their offers were weak. The 21-day finance clause was a liability. It gave sellers an easy excuse to reject their offer. They were “spinning their tyres” in a competitive market.

They were referred to us. The first thing we did was explain the power of a fully assessed pre-approval. We helped them get one. We then showed them how to use it as a bargaining chip.

Dylan and Kennedy took a bold approach. When they found the next home, they removed all clauses except for the building and pest inspection.

This new strategy worked wonders. Their offer was accepted the very same day. They had finally secured their dream home. This story shows how a simple pre-approval can change your home buying journey. It proves it is a powerful tool for negotiating. It helped them get a winning offer, even when others failed.

Getting your documents ready is the first step. It helps make your application smooth. Lenders want to see the full picture. This ensures you can comfortably repay your loan. This is a great place to start your pre approval journey.

Here is a simple checklist:

Lenders need to verify your income. It shows you can make repayments. You’ll need to show where your money comes from. This includes your salary and any other earnings.

This is all about confirming who you are. We need to prevent fraud. You must provide a few key documents.

Lenders must understand your finances. They want to see your savings history. This shows you are a good saver. They will also look at your living expenses. This proves you can manage your money.

Your current debts impact your borrowing power. Lenders will look at all your liabilities. This includes credit cards and personal loans. We’ll need a statement for each debt. This helps us accurately calculate your pre approval amount.

Below are the steps involved in the pre-approval process:

The pre-approval process differs from bank to bank and depends on which mortgage broker you use. Here at Hunter Galloway, we have a very thorough process to help you get a reliable pre-approval. Our process is as follows:

We take the information gleaned from the credit review process and use a custom loan policy checker that checks over 4,890 data points across our panel of lenders to see which lender will be your best option.

Once your pre-approval is complete, we will give you a call to go through the details and give you the resources and tools you need to get out there and find your new property.

Read More: Home Loan Process [Step by step guide]

In most cases, a pre-approval has conditions that need to be fulfilled before the loan can be unconditionally approved. These can range from generic conditions, like subject to valuation, or specific ones, like obtaining a letter from your employer.

A few common bank terms & conditions include:

Once all of the conditions are satisfied, the bank can issue loan agreements(s). The loan agreements(s) and other documentation will set out requirements to be met before loan funds are made available. 

You must sign and return the loan agreements(s) within the first 90 days from the date of this letter, or they may require you to revalidate your financial position.

Read More: The Complete First Home Buyers guide to buying a home.

Not all banks are the same when it comes to assessing a pre-approval home loan. There are two types of pre-approvals, and one of them is more reliable than the other.

It’s important to remember that in most cases, a pre-approval is just an indication that the bank is okay with considering approving your loan. They may complete a credit check and not check any of your documents and wait until you lodge a full mortgage application to do this.

A full mortgage application is made when you find a property, which means the lenders will only complete the entire assessment of your loan—verifying your payslips, bank statements, income information, savings information and any liabilities you have—to be 100% sure they can lend you the money.

Unfortunately, if you have gone out and got pre-approval from a bank, the lender is under no obligation to fully approve your loan once you have found a property. They can say your situation has changed and knock you back.

Read More: Loan Declined After Pre-approval | 26 Ways to Get Unconditional Approval

The answer depends on the type of inquiry. Not all credit checks are the same. Some won’t affect your score.

A soft inquiry is a preliminary check. It happens when you check your own credit. Lenders also use them sometimes. This type of inquiry does not hurt your score. A hard inquiry is different. It occurs when you formally apply for credit. This includes applying for a home loan. A hard inquiry can slightly lower your score. It usually recovers quickly.

You want to be smart about this. Limit your formal applications. Applying to multiple lenders in a short time can be a red flag. It may signal to lenders that you are a risky borrower

Our team at Hunter Galloway always requests that the lender or the bank fully assesses our clients’ pre-approvals. If, for some reason, this is not possible, we will let you know.

To make sure you are protected, below are a few questions you should ask your banker or broker to make sure your loan application has been assessed and you have a real pre-approval:

If you are given an on-the-spot or system-generated approval, your home loan was never really approved. In this case, your loan could be declined in the future.

As you can see from the example above, the bank hasn’t fully assessed the home loan application. While the details entered into their lending system are acceptable, an actual credit assessor hasn’t reviewed the application to double-check that the numbers match—for example, that the income details entered match the payslips provided.

A formally approved loan is not subject to any further approval conditions

Read More: Loan Declined After Pre-approval | 26 Ways to Get Unconditional Approval

Again, you should ask your banker or broker the above questions. Still, you must be cautious of any system-generated approvals from St George Bank, Westpac Bank, Suncorp, ANZ, NAB or any other bank that gives on-the-spot pre-approvals. 

While many of these banks may complete a credit check and provide approval in principle, the credit department hasn’t assessed your application. Therefore, the bank could change its decision to lend you the money at a later date.

If you aren’t sure, get in touch with our team. Call us on 1300 088 065 or get in touch online so we can review it for you.

At Hunter Galloway, we work with lenders who will verify your income and deposit information to ensure you have a verified pre-approval.

We have been mentioning this quite a lot in this article, and this is because it is crucial to keep it in mind always. Getting a loan after a pre-approval is subject to getting your updated income information, obtaining a valuation to ensure the property is suitable and an updated credit file.

Sometimes, after the pre-approval, the type of property that you ultimately purchase may be deemed unacceptable. Some banks restrict lending for units, while others restrict you based on bushfires or flooding restrictions. So make sure the property you want to purchase is acceptable to the bank before getting the pre-approval. As a broad rule of thumb, make sure you double-check with your broker before buying any property that fits these criteria:

This is a really big issue. Let’s say the bank has taken the necessary steps and issued a fully assessed pre-approval. You’ve got your golden ticket, but this may be short-lived because, whilst you meet the lender’s criteria, you may not necessarily meet their mortgage insurance. For example, if your property is close to high-tension power lines, it might be acceptable to your bank but not to your insurer.

You should only get a pre-approval from one bank at a time to avoid damaging your credit score by making many applications in a short period. So, if another bank or lender announces a new, better rate, you must re-apply for a pre-approval (potentially damaging your credit file) or accept the increased costs of staying with your current lender.

Most pre-approvals only last for 90 days. Some banks will allow 180 days, but either way, if you cannot find the right home within that time frame, you’ll need to re-apply for another pre-approval. That means wasted time and effort on your part, plus you’ll have to hit your credit file again in 90 days for an updated pre-approval.

Now it’s time to go shopping! Follow these steps:

For example, you may be pre-approved for $500,000 but decide you want to only spend $450,000

When you’re looking online, be sure to select the bracket that you want to purchase in. So, let’s say you’re looking at a $500,000 purchase. You can search for houses between $400,000 and $500,000. An interesting thing we found in the past is that sometimes you’ll get higher-priced properties that come up in this bracket. So, reduce your bracket a little bit further—maybe from $300,000 to $500,000, which will give you a far larger range of properties to look at. The best part of these websites is that you can set up real estate alerts, so when properties you like come up on the market, you’ll get an email notification and be the first to view them.

You can use websites like Onthehouse and RP Data. Some sites like RP Data will charge you a fee to obtain a report or even require a subscription. Luckily, here at Hunter Galloway, we’ve got access to RP Data! Feel free to contact us for any reports you need; we’re only too happy to provide them.

At this point, it doesn’t hurt to get your conveyancer or solicitor to check over the contract before you go ahead. You want to ensure that you have standard finance clauses in the contract. Here at Hunter Galloway, we ensure that our first homeowners have the right terms to be competitive and protect them if anything goes wrong.

If you want to get a pre-approval or buy a home, speak with one of our experienced mortgage brokers to walk you through the next steps of home loans in Brisbane.

At Hunter Galloway, we help home buyers get ahead in this competitive market, and we give you the actual strategies that have helped other home buyers like you secure a property when there have been 5 other offers on the table! Enquire online or give us a call at 1300 088 065.

Unlike other mortgage brokers who are just one-person operations, we have an entire team of experts dedicated to helping make your home loan journey as simple as possible.

If you want to get started, please call us on 1300 088 065 or book a free assessment online to see how we can help.