Getting finance for a new property is a major worry for most prospective buyers. First-home buyers sometimes end up in a fix when they can’t borrow enough to cover the price of their desired property. To avoid this, it helps to determine how much money you could borrow before you start looking for properties to buy. An online calculator could help you estimate how much you can borrow for a house. However, if you’re serious about buying a property, it may help to go one step ahead and get pre-approval for a home loan.
What is home loan pre-approval?
A home loan pre-approval, or a conditional pre-approval, is an initial step in the home-buying process. Once you’ve shortlisted a lender, you can apply to them for pre-approval to get an estimate of how much money you can borrow for your purchase.
To obtain a home loan pre-approval, you’ll typically need to provide the lender with a range of financial documents, including your salary slips, tax returns, and past few months’ bank statements. The lender will also perform a credit check on you before determining how much they are willing to lend you.
It’s important to remember that a home loan pre-approval differs from pre-qualification or the instant online pre-approvals some lenders offer. An instant pre-approval or loan pre-qualification is generally based on the information provided by you. The lender only carries out a basic review of this information, without thoroughly analysing your credit history. However, a lender only grants a pre-approval after assessing your financial situation and reviewing your ability to repay the loan.
Why do you need a home loan pre-approval?
Getting pre-approved for a home loan isn’t mandatory, but it could certainly be helpful on your home loan journey. There are several ways in which getting pre-approved for a home loan could be useful:
- The primary benefit of a home loan pre-approval is that it can help you determine your budget for purchasing a home. By knowing how much you can borrow, you can narrow your search and avoid looking at properties outside your budget.
- If you’re buying at an auction, a home loan pre-approval could give you an edge, as you already have a fair idea of how much you can spend. As the lender has already reviewed your financial status, the likelihood of your mortgage application going through is higher, unless your financial situation has changed for the worse.
- In a competitive housing market, if sellers know that you have a mortgage pre-approval, they are likely to take your offer seriously. A mortgage pre-approval shows that you are a serious buyer prepared to make an offer.
- A home loan pre-approval could also speed up the application process once you find a house you wish to buy. As the lender has already reviewed your finances and performed a credit check, getting the final approval on your loan is usually straightforward and not time-consuming. ‘Usually’ because the lenders’ decision is still not final at the pre-approval stage.
It is conditional upon two factors – that your financial situation hasn’t changed for the worse since you were pre-approved for the loan and the property you plan to purchase is suitable. The lender will order a property valuation to determine the property’s suitability for a loan before giving final approval. Know what not to do during your mortgage approval.
How to prepare for a home loan pre-approval
To obtain a home loan pre-approval, you’ll need to gather various financial documents to prove your income. This will typically include the following:
- Past few months’ salary slips
- Tax returns for at least a couple of years
- Last three months’ bank statements
Once you have the documents ready, remember to shop around for lenders and compare the interest rates and terms they offer. Select a lender that offers you the best value for your money in terms of interest rates, fees and benefits. You could also consult a mortgage broker to find the best deals for your situation and learn more about the features you need in your home loan.
By Vidhu Bajaj,
Hashching Content Writer