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Home loan pre-approval: a step-by-step guide

Real estate agent showing a young couple a new house. (Source: Getty)
When buying your first home, booking in for property inspections should not be your first move. (Source: Getty) (courtneyk via Getty Images)

For those new to the property market, it's common to feel a bit overwhelmed, confused and stressed out, especially given the fact it's one of life’s biggest investments.

Knowing where to start can be one of the biggest challenges, with most people believing that booking in for property inspections or searching online are the best ways.

Did you know it’s useless doing the above without a home loan pre-approval?

Why? Well it’s just like looking at a Gucci handbag without knowing you can realistically afford it; you’ll be left disappointed.

What’s a home loan pre-approval?

Getting a home loan pre-approval is the most important part of your home-buying journey as it essentially gives you an indication of how much money you can borrow and spend towards the purchase of a property (either to live in or for an investment).

After meeting the specified criteria, lenders often provide a formal indication to home buyers on the certain amount of money they will lend them, should their personal circumstances remain the same.

It’s important to remember that pre-approval is not a guarantee of funds, so it’s best not to put all your eggs in one basket, and to be flexible.

There are multiple benefits of getting a home loan pre-approval, including the fact it’s free to conduct - unlike other formal home loan applications.

It also provides a good indication of the types of properties that are within your price range, thus allowing you to narrow down your options much easier.

Your chances of gaining attention from vendors and real estate agents is heightened, as a home loan pre-approval can indicate your seriousness about an offer, and your financial stability.

If you’re won over by the idea of home loan pre-approvals, here is the step-by-step guide to secure one.

1. Do your research

Composite image of the NAB, Westpac, ANZ and Commonwealth Bank logos. (Source: Getty)
Rather than opting for an incumbent bank, look into the variety of lending options available. (Source: Getty) (PETER PARKS via Getty Images)

Like all decisions, it’s a good idea to start the process by doing your research into suitable home loan providers. The home loan market is highly competitive and with hundreds of providers vying for your attention, it shouldn't be difficult to compare your options and find one that suits your needs.

Rather than opting for an incumbent bank, try to expand your pool and look into the variety of lending options available such as neobanks and digital non-bank lenders.

2. Fill out an application form

Next, it’s time to fill out the all-important application form. These may differ from lender to lender but, generally, the following details are requested (not limited to):

  • Current income amount

  • Current job (and sometimes job history)

  • Assets

  • Expenses

  • Debts

To ensure your application is successful, you should check that outstanding debts are paid off in a timely manner and your credit rating is in a good condition.

Note: If you default or miss your monthly payments on buy-now-pay-later platforms (BNPL) such as Afterpay or Klarna, they can reserve the right to report the defaults to credit reporting agencies. Once these appear on your credit file, your credit score is affected.

3. Provide the requested supporting documentation

Along with filling out an application, many lenders will request a range of different supporting documentation including (but not limited to):

  • Recent pay slips (up to six months worth in some cases)

  • Recent tax returns

  • Recent income statements

  • Recent PAYG summaries

  • Multiple forms of identification (including a drivers licence, birth certificate or passport)

  • Loan statements associated with existing loans (this doesn’t necessarily mean other home loans, but could be for your car or credit cards)

4. Demonstrate proof of your funds

It can be difficult for lenders to offer you a home loan pre-approval without understanding your financial position.

Because of this, many lenders ask you to provide evidence in the form of bank statements, equity, shares, term deposits, or anything else you have available to prove you’ll be able to eventually pay back your home loan in the not-too-distant future.

If you can’t provide any of these documents, your lender may be hesitant because they don’t want to provide funds without the guarantee you’ll be able to make repayments.

5. Lender evaluation

Once you submit all of the above materials, it’s up to your lender to evaluate your borrower risk and make the decision of whether or not you’ll be granted home loan pre-approval.

If you’re successful, it’s likely your lender will then outline the terms and conditions of your home loan pre-approval offer, the period it is valid for, and a roadmap of next steps.

Now it’s time for you to commence your search for your dream home.

Brodie Haupt is co-founder and CEO of WLTH.

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