Is A Home Loan Pre-Approval Worth Anything?

over 4 years ago

When you have so many factors depending on a timely loan approval, it’s worth taking steps to make sure that approval happens as quickly as possible. A pre-approval can give buyers the confidence to begin looking for a property with some idea of how much they might be able to spend.

There are many benefits to pre-approval, but there are some downsides as well. Let’s look at whether a pre-approval is worth your time.

What is pre-approval?

A home loan pre-approval means that a lender has agreed that under the right circumstances, they will offer you a loan. However, the loan hasn’t actually been approved – a pre-approval is an agreement in theory, but there are still plenty of reasons why the loan might not go ahead. It means that your application looks good in regard to your basic numbers, but hasn’t actually been reviewed yet.

There are different names for a home loan pre-approval – conditional approval, indicative approval, approval in principle, or Home seeker, for example. Regardless of what it’s called, a pre-approval lets you know that you meet the basic criteria for a loan, and how much you could theoretically borrow.

You don’t have to have a pre-approval to get a loan, but it can give you a head start as you look for a property.

Some advantages to a home loan pre-approval

For most people, getting a pre-approval is a logical and beneficial first step in the process of securing a home loan. Here are some reasons that a pre-approval is worth having before you start to look for properties:

Confidence. A pre-approval doesn’t guarantee anything, but it can help give the buyer an idea of who is likely to lend to them.
Budget. A pre-approval can help set a budget, as it will generally outline the maximum funds so you know what you’re working with.
Attractive. A pre-approval can make you a more attractive option to sellers and could give you the edge if a number of people are making bids. It means you’ve put effort into deciding on this property and you’re much less likely to be declined for financing.

Some disadvantages of a home loan pre-approval

Not concrete. A written and signed pre-approval from a lender is going to carry more weight than a two-minute pre-approval completed on the internet, but either way, it’s not a concrete offer.
No obligation. The lender has no obligation to meet the terms of the pre-approval. In fact, in most cases, it hasn’t even been assessed by the lender. It’s all theoretical and still very much subject to enquiry.
Credit issues. A pre-approval will be visible on your credit history as a loan enquiry. If you have a number of these enquiries within a short space of time, especially if they’re with different lenders, it can make you appear financially unstable.
Read the fine print. Some lenders offer “on the spot” approvals that are actually just pre-approvals. They can be useful tools but are still subject to assessment by the lender.

Why your loan might still be declined

If you have submitted your details and been given an estimate, it’s disappointing to think that the loan still might be declined. Here are some reasons your pre-approved loan still might not go through.

Unsuitable property. If the bank doesn’t think your chosen property is a good risk, your loan will be denied even with a pre-approval.
Mortgage insurance. If you are required to have LMI or Lender’s Mortgage Insurance, your loan application will need to be independently assessed by the insurance company. If the loan company approves but the insurer doesn’t, the loan won’t go ahead.
An ineffectual pre-approval. If your pre-approval hasn’t been assessed by the actual credit department, it doesn’t carry much weight when you go to apply. It might give you a very rough idea in terms of numbers, but you’re starting the loan process almost as if you didn’t have one.
The situation changes. If you suddenly lose your job or have to spend some of your deposit, your loan might not go ahead even with the pre-approval. Interest rates might have risen, affecting your ability to pay off your loan.
You reach the expiry. Pre-approvals generally have a 30-90 day expiry. Once that date has passed, you’ll need to get re-approved.

Does a home loan pre-approval therefore carry any weight?

Getting a pre-approval is a common first step for people looking to take out a home loan, and for good reason. Not only does it make sense to talk to a lender about your ability to borrow, it’s also important to know how much you might be able to access before you start looking.

That being said, a pre-approval doesn’t actually guarantee that when you do formally apply, you will be approved. There are many different reasons why a pre-approved loan might not be given, so it’s important to consider that possibility.

All pre-approvals are not equal. A quick pre-approval that hasn’t been run by the credit department or the Lender’s Mortgage Insurer means very little. A written pre-approval that has been checked and signed by the lender still isn’t binding, but it does carry a lot more weight.

A solid pre-approval does give you significantly increased confidence that a loan will be approved when you find a suitable property. It can also increase your attractiveness to a seller – if you present a solid, written pre-approval when submitting your offer, your offer is far more likely to be accepted than someone who doesn’t have one, even potentially if you offered a bit less.

If you’re looking for a property, a home loan pre-approval is a great first step to finding out whether you are likely to be accepted for a loan, and how much you might be able to access. Remember to ensure your pre-approval has gone through as many checks as possible, so that when it comes time to make an offer on a property you have the confidence that everything will go smoothly.