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Should you get home loan pre-approval before looking for a property?

Vidhu Bajaj avatar
Vidhu Bajaj
- 5 min read
Should you get home loan pre-approval before looking for a property?

Growing up, many of us imagine our perfect house. And when it's time to buy one, we naturally want a place that matches the dream as closely as possible. But what if you set your heart on a house only to realise you can't afford it. 

Most people don't buy a house with cash; instead, they apply for a home loan. However, understanding how much you can borrow isn't straightforward. While online calculators give you an idea, they don't guarantee loan approval. That's where mortgage pre-approval comes in. 

A mortgage pre-approval can tell you how much the lender is ready to offer you based on your finances. When you apply, the bank or lender reviews your income, expenses, and existing loans to assess your ability to repay. They'll also run a credit check on you to assess your creditworthiness. 

Having a pre-approval can give you confidence about your spending capacity, enabling you to focus on houses that fit your budget. A pre-approval may even boost your credibility with sellers during negotiations.

But keep in mind that while a pre-approval could be helpful, it doesn't guarantee final approval. It is conditional upon the property meeting the lender's criteria and no negative changes in your financial situation. 

So, should you look at a property first or the mortgage?

There's no set rule that requires you to search for a house before locking in your finances or vice versa. It's a matter of personal preference. However, searching for suitable home loans before zeroing down on a property may have some potential benefits, such as: 

1. Knowing your limits

Before you start dreaming about a house, it could help to figure out how much you can actually afford. Knowing your budget can help you find a home that fits your financial picture. It saves you from the heartbreak of falling for a place that's out of your reach. 

2. Check your eligibility for a home loan

Applying for pre-approval could help you assess your eligibility for a home loan. It can help you identify any potential issues that could impact your mortgage application. For instance, it’s not uncommon for borrowers to discover they have problems on their credit file when they apply for pre-approval. 

3. Potentially speed up the financing process

Searching for the perfect property requires time, and when you find one you like, you don't want to miss out because your finances aren't ready. 

Getting a mortgage approval can be a surprisingly lengthy process – partly because unexpected obstacles often appear. The danger of submitting your application after the purchase is that your loan might not be approved in time. 

With pre-approval in place, you can make an offer on a property with more confidence. Once your offer is accepted, the final approval process is also likely to speed up, bringing you closer to owning your home sooner. 

4. Give yourself options

Another possibility with buying first and organising finance later is that there might be only a limited number of lenders able to approve a mortgage in your restricted time frame. That could force you to accept a home loan with a higher interest rate, higher fees, less flexibility, or fewer features. 

5. Improve your negotiating position

Sometimes it’s not the buyer with the highest offer who gets the home but the buyer with the surest offer. Why? The reason is that some sellers want to make quick sales and may hesitate to do business with those without pre-approval. That’s why pre-approved buyers may have an advantage in negotiations over buyers who don’t have finance in place. 

Here's a step-by-step guide on how to apply for home loan pre-approval

1. Compare lenders

Begin by comparing various lenders to find the best deal for your unique situation. While interest rates are crucial, also consider fees and features offered by each lender to ensure a competitive overall package. 

2. Check eligibility

Ensure you meet the lender's eligibility criteria to enhance your approval chances. Having stable employment and income are typically required to qualify. It’s also worth checking your credit score before applying to gauge your creditworthiness. You’ll typically need your credit score to be in the good to excellent range to qualify. 

Most lenders require you to pay an upfront deposit as one of the eligibility requirements. This amount is generally equal to 20% of the property’s price, but some lenders may allow you to borrow with a lesser deposit, though you may need to pay for Lender’s Mortgage Insurance (LMI)

You’ll also need to ensure that at least a part of your deposit is saved from your income over time to meet the genuine savings requirement. 

3. Gather the necessary documents

Collect essential documents demonstrating your ability to repay the loan. These may include: 

  • Proof of identity (passport, driver's licence)
  • Income proofs (payslips, bank statements, tax returns)
  • Evidence of savings, investments, and liabilities (bank statements, credit card bills) 

4. Submit pre-approval application

Once your documentation is ready, submit your home loan pre-approval application either online or in person, following your lender's requirements. Be patient as the lender will assess your financial information and credit history - a process that may take a few working days. 

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Product database updated 16 Jun, 2024

This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.