What is a Pre-Approval Home Loan?

So, you’re ready to buy a new home. Whether you’re a first-time home buyer or a seasoned pro, buying a home is a very exciting milestone. But with the excitement of the home buying process, there can be some stress. Especially if you’re not prepared. Which is why it’s always best to do everything to prepare as much as you can for the house hunting process.

Fortunately, there are simple steps that you can take to better prepare for your home buying journey. And we can help you get started. One of the most important preparations you can make when deciding to buy a home is obtaining a pre-approval home loan. Having a pre-approval loan can take away a lot of the stress that comes with buying a house, so that you can truly enjoy every second of this exciting milestone.

Read below to learn more about getting a home loan pre-approval and how to get started.

What is a pre-approval loan and how does it work?

A pre-approval loan is one in which a lender gives an approval in principle to loan you a specific amount of money based on preliminary information that you provide. For the home buying process, you would need to meet with a mortgage lender for your pre-approval loan, as a mortgage is the type of loan you’ll need to buy a house. The number that the mortgage lender gives you is the rough amount that you can expect to be approved for a loan.

Having this pre-approved home loan, gives you a better idea of how much you can afford to spend during your property search. Knowing how much a lender is willing to offer you allows you to set a budget for your new home. Once you’ve found the home that you want to purchase and provide the necessary requirements, the pre-approval loan officially gets approved, and the loan is yours.

Your pre-approval loan is very beneficial for a lot of reasons. For starters, knowing how much you’re approved for in-terms of a loan will give you a better idea of which houses are in your price range. This way, you don’t waste time looking at houses that aren’t in your budget. Pre-approval loans also let sellers know that you’re a serious buyer.

Types of Pre-Approval Loans

There are several types of pre-approval loans that you may come across when shopping for a home loan:

1. Conditional Approval

A conditional approval loan, also known as conditional pre approval, is a loan that is granted to a borrower subject to certain conditions being met. These conditions typically assess a person's borrowing capacity and include things like the borrower providing proof of income, proof of employment, and a good credit score. Once the borrower has provided all of the necessary documentation and the lender has reviewed it, the loan will be approved subject to the conditions being met.

2. Unconditional Approval

An unconditional approval loan, also known as unconditional pre approval, is a loan that is granted to a borrower without any conditions attached. This means that the borrower does not need to provide any additional documentation or information in order to receive the loan. Once the loan has been granted, the borrower can use the funds to purchase a property of their choice.

What's the difference?

Both conditional and unconditional pre approval loans have their own advantages and disadvantages. Conditional pre-approval loans are often preferred by lenders because they allow the lender to carefully assess the borrower's financial situation before granting the loan. This can help to reduce the risk of default and can also help to ensure that the borrower will be able to afford the loan payments.

On the other hand, unconditional pre-approval loans are preferred by borrowers because they do not require the borrower to provide any additional information or documentation. This can make the process of obtaining a loan much easier and more convenient for the borrower. In addition, unconditional pre approval loans can also help to speed up the process of purchasing a property, since the borrower does not need to wait for the lender to review their documentation before making an offer.

Conditional pre-approval loans are subject to certain conditions being met, while unconditional pre-approval loans are granted without any conditions attached. Both types of loans have their own advantages and disadvantages, and the right choice will depend on the individual borrower's situation.

The different types of interest rates for home loans

1. Fixed

A fixed interest rate loan means that the interest rate doesn't fluctuate during the fixed rate loan period. With a fixed rate loan, you’ll be able to predict all of your loan payments during the fixed period.

2. Variable

In contrast to a fixed loan, a variable interest rate loan does not have a fixed rate. With a variable interest rate loan, the interest rate charged on the outstanding balance fluctuates as market interest rates change.

3. Introductory rate

An introductory rate, also known as a honeymoon rate or discounted rate, is a special interest rate that is offered for a limited time, typically when you first take out a loan. This rate is usually lower than the standard variable rate and may be used to attract new borrowers.

4. Combination

A combination loan is exactly as it sounds, a combination of the two types of loans. This happens when you combine two separate mortgage loans granted by the same lender.

Discuss with your lender to find out which options you’re qualified for and which would be best for your financial situation. Once you’ve determined which loan type is best for your situation, you’ll have to fill out a pre-approval loan application with your lender. This can be a gruelling process, so it’s something that should only be done if you’re serious about buying a home.

Once you’ve filled out your loan application, this will be reviewed and, hopefully, you’ll be approved for a certain loan amount and interest rate. This pre-approval letter is something you should keep with you throughout the home buying process. Not only does it give you the best sense of what your budget is for home buying, it also shows sellers how serious you are about purchasing a home.

Also note that a pre-approval loan doesn’t 100% mean you’re qualified. Factors that could void your approval include:

• Changes to your personal circumstances

• Changes to government regulations

• A negative valuation of the property

• A change in the property's condition

• Changes to personal circumstances (income)

Again, it is important to consider the type of interest rate that is most suitable for your financial situation and goals. A fixed rate may be preferred if you want the security of consistent monthly loan repayments, while a variable rate may be more suitable if you are able to take advantage of falling interest rates. It is also a good idea to compare interest rates from multiple lenders to find the best deal.

How long does the process take?

Ideally, you should receive your pre-approval letter within 10 days, letting you know if you’re qualified or not. Because it can take around 10 days to find out if you’re approved for a pre-approval loan, it’s a good idea to apply ahead of time, before home shopping, so that you’re better prepared.

With that being said, we don’t recommend applying for a pre-approval loan too early, as you only have a specified amount of time after receiving pre-approval to purchase your property. A good time frame to begin your application for the pre-approval home loan would be about 2 weeks before you want to begin home shopping. If you’ve gotten a late start, it is okay to begin the loan application process as soon as you begin looking for homes, as it does take some time to find a home that you want to put in an offer for. Also make sure to leave yourself enough time to explore the different loan options, so that you know what pre-approval loan you want to apply for, though this shouldn’t take more than one week.

The benefits of a pre-approval mortgage

Pre - approval is super beneficial, and something that homeowners should definitely look into. Here are the main benefits of obtaining a pre-approval mortgage:

• Pre-approval helps save you time during the home shopping process by giving you a set budget.

• Pre-approval lets sellers know that you’re serious about buying, giving you a leg up during the bidding process.

• Save money by having a firm budget with a pre-approval loan.

• Knowing your loanable amount can help you avoid exceeding your budget during bidding.

• Pre-approval will also allow you to make realistic decisions about which homes are in your budget.

How to get a pre-approval for your home loan

Here are the steps on how to get a pre-approval home loan in order to get ready to buy a new property:

1. The first thing you’ll have to do to get pre-approval for your home loan is you’ll have to talk to a mortgage lender. Mortgages are the types of loans taken out on houses, due to their interest rates. Don’t be afraid to shop around until you find the right mortgage lender for you.

2. In addition to finding a mortgage lender, you’ll also have to find the loan type that you want to apply for. Refer to the list of loan types above for more information. Because steps 1 and 2 can go hand in hand, you may do these in no particular order, or even in conjunction with each other.

3. Once you’ve decided on a lender and loan type, you’re ready to apply. To do this you’ll likely have to go online and fill out an application. You’ll have to answer a series of questions, including your financial situation, your work, income, assets, any debt (including both credit card and personal loan debt), and other investments. Your answers will give the lender a comprehensive understanding of your financial position so that they can determine if you’re qualified and what you’re qualified for. Qualification is based on these factors, as these factors let the lender know how much you’re likely going to be able to afford to pay off.

4. Once your application is received and reviewed, the lender will let you know if you qualify for a home loan. They’ll also let you know how much you’re qualified for.

Once you have your pre-approval letter, you’re ready to begin using it to start the home purchasing process.

What documents are required for a pre-approval?

In order to apply for a pre-approval home loan, you’ll need verification of a few different things. Here’s what you’ll need in order to prove your qualification for a pre-approval loan:

• Proof of Identity - Personal information and contact details

• Employment status

• Proof of income

• List of living expenses

• Proof of funds - the amount of money you have saved up for a deposit, if applicable

All of this will confirm your financial situation to the lender so that they’re able to determine whether or not you’re qualified for a mortgage loan.

What happens after you are pre-approved?

Once you’re pre-approved, you’re ready to begin looking for your home. But keep in mind that there is a time limit on your pre-approval. The pre-approval loan typically lasts for three months, though this can vary amongst lenders. Though if your financial situation changes within 90 days, you can renew your pre - approval loan. 

So from here, you’re going to want to start looking for a property as soon as possible before your pre-approval expires. Hopefully you’ll be able to find your dream home. If so, once you have found the home you want to purchase, the lender will start the actual home loan approval process. This includes verifying the property, insuring it and financing the contract sale.

Your lender will once again verify your financial situation in order to finalise the approval. Because of this it is so important that you don’t make any changes to your financial situation during this time. No new cars, new credit cards, even new debt. A pre-approval does not guarantee that you will get the loan. An evaluation of your credit history and other final checks is still needed for the formal approval of the loan.

From here you’ll have to complete any necessary paperwork for finalisation of the loan. Once approval is complete, you’re ready to live your life in your brand new home!

How to find the best pre-approval home loan deal

In order to find the best pre-approval home loan deal, it’s a smart idea to do a little shopping around. Don’t go with the first mortgage you see. There are different loan lengths, such as 15 years and 30 years. There are also different interest rates. So you may have a lower monthly payment with one loan, but a higher interest rate. Or vice versa.

Keep your financial situation and your future financial plans and goals in mind when choosing a home loan that you want to be pre-approved for. This will help you ensure that you end up with the best possible pre-approval deal.

With that being said though, you can shop around for different pre-approval mortgage loans by looking at loans and speaking to lenders, but don’t apply for multiple loans. Applying for multiple loans could ruin your chances of getting approved as it could mess with your financial status.

Final thoughts

The bottom line is that pre-approval is an excellent solution for homeowners that want a leg up during the home buying process.

In order to succeed, make sure you have all of your documentation ready and that you’re prepared to set aside time to look for the best pre-approval loan and fill out an application. Also make sure to keep everything mentioned in this article in mind throughout the process so that you don’t run into any bumps in the road.

If you are serious about buying, now is definitely the time to start the pre-approval process. But if you’re not quite sure yet, it may be best to wait. Consider where you’re at in the homebuying process and what your goals are for buying a home within the next few months before making any decisions.

But if you are ready to buy a home, we definitely recommend getting pre-approval for a home loan. So, if you’re ready to get started, book a call with First Home Advice and we can help you make sure you have everything you need to be prepared to buy your brand new home. We can assist you in determining the necessary steps to prepare for the purchase of your dream home, and provide expert advice and professional guidance along the way.

Good luck and happy mortgage/house hunting!