Home loan pre-approval, explained

The short answer

A pre-approval tells you what you could borrow and lets you make offers with a realistic budget. It is a written indication from a specific lender, not a commitment to fund a specific purchase.

The lender still has to value the property you choose and complete its final assessment before it commits. Until that happens, the finance is not certain, whatever the pre-approval letter feels like.

The two kinds of pre-approval, and why it matters which you have

Not every pre-approval carries the same weight. The difference is whether a human credit assessor has actually looked at your documents.

An automated pre-approval is quick and it is better than nothing, but it can fall over when the documents are finally read. A fully assessed one is the one worth having before you make a serious offer.

Ask which one you have been given. If the answer is vague, treat it as the weaker kind.

What the conditions actually mean

Every pre-approval carries conditions, and they are not boilerplate. They are the specific things that have to hold true for the lender to proceed.

• The property has to be acceptable security to that lender, and its valuation has to support the purchase
• Your income, employment and commitments have to remain broadly as they were when assessed
• Any outstanding document the assessor asked for has to be provided
• The pre-approval applies to that lender only, and does not transfer to another one
• Any condition specific to your file, such as clearing a nominated debt, has to be satisfied

Read the property conditions carefully if you are looking at anything unusual. Small apartments, rural or lifestyle blocks, serviced apartments, homes with structural issues and properties in some postcodes are all treated cautiously by particular lenders.

What the lender looks at

The assessment is the same one that will happen again at formal approval, so nothing here is wasted work. The lender is testing capacity, conduct and credibility.

The documents to have ready

• Photo identification for every applicant
• Recent payslips, and often a year-to-date figure or a group certificate
• Two years of tax returns and financials if you are self-employed
• Bank statements covering your everyday accounts and savings
• Statements for credit cards, personal loans, car finance and buy-now-pay-later accounts
• Evidence of your deposit and of where it came from, particularly if it was gifted

Your recent account conduct matters as much as the balances. Dishonoured payments, gambling transactions and payday lending in your statements are all read closely, and they are read by a person.

What can undo a pre-approval

A pre-approval is a snapshot of your position at a moment in time. Change the position and the lender can reassess, and it will.

• Taking on a new credit card, car loan or buy-now-pay-later account
• Changing jobs, particularly into a probation period or into contract work
• A drop in overtime, bonus or commission income
• Large unexplained transfers in or out of your accounts
• A valuation that comes in under the contract price
• A change in the lender's own credit policy, which happens without notice

Pre-approvals do not run indefinitely, and the position is re-tested when you come back with a property. If your circumstances have moved in the meantime, expect to supply updated documents.

Pre-approval when you are building or buying off the plan

Buying an established house and building one are not the same exercise, and a pre-approval behaves differently in each. On a build, the lender is assessing a land contract and a building contract rather than a finished property.

That means the lender values the property as if complete, working from the plans and specifications. Variations to the build after approval can affect that valuation, so significant changes are worth raising before they are signed rather than after.

Off the plan is more exposed again, because settlement can be a long way off. A pre-approval obtained now reflects today's assessment, today's credit policy and today's assessment rate, and none of the three is fixed.

The practical answer in both cases is to keep the lender informed and your position stable. A file that has not changed since assessment is a file that reassesses quickly.

What a pre-approval does not do

It is worth being blunt about the limits, because most of the disappointment we see comes from expecting a pre-approval to do something it never did.

• It does not lock in an interest rate. Pricing is set when the loan is formally approved and documented
• It does not commit the lender to any particular property, however confident anyone sounds
• It does not transfer to another lender, and it does not transfer to a different loan structure
• It does not survive a material change in your income, employment or commitments
• It does not remove the need for a finance clause in your offer

None of that makes a pre-approval less worth having. It makes it worth understanding, which is a different point.

Applying to several lenders at once is a bad idea

Every pre-approval application to a lender is recorded as a credit enquiry on your file. Several enquiries in a short window is a pattern that credit assessors notice, and not favourably.

The way to avoid it is to work out which lender fits your circumstances before anything is submitted. A broker can compare policies without lodging anything, which costs you no enquiries at all.

Making an offer with a pre-approval in hand

The practical value of a pre-approval is that it changes how you are treated. Agents and sellers take a buyer with written finance backing more seriously than one who is still thinking about it.

It also stops you wasting weekends on properties that were never going to work. Knowing your ceiling is worth as much as knowing your budget.

Once your offer is accepted, the file moves to formal approval, where the lender values the property and issues its final decision. Any figure or position discussed before then is subject to lender approval and to your circumstances.