What Is Mortgage Pre-Approval? Everything You Need To Know

Mortgage pre-approval means a lender is willing to lend you money and has pre-made some home loan offers for you based on your current financial situation (income, debts, credit score).

As a borrower, it helps you get an idea of what kinds of loans you could get, what your limits are, and how the entire home loan market works if you’ve never had a home loan before. If you’re someone in the home-buying process, pre-approvals will come in handy as they tell you what you could be eligible for in the market. 

We’ll explore home loan pre-approvals in more detail here so you can understand what they are, how to get pre-approved, and more.

What is Mortgage Pre-Approval?

Getting pre-approved for a home loan means a lender checks your current financial situation (income, debts, credit score) and is willing to lend you money. As part of this process, they’ll tailor some offers based on your financial situation to give you an idea of the loans you could benefit from.

Let’s look at the benefits of getting pre-approved for a home loan:

• Gives you an idea of your borrowing limits, helping you search for property with a budget you can possibly work with.

• Faster closing time for the actual loan since your financials may already be reviewed.

• Better negotiation power since you know your limits with the pre-approval in hand.

Mortgage pre-approvals are a great way to enter the home loan market. You’ll be more confident in the house-hunting process if you’re pre-approved for a home loan, as they equip you with info related to your eligibility and limits.

However, it’s important to note that pre-approvals do not automatically qualify you for a home loan. They do not guarantee finance and are not equivalent to a home loan approval. 

The sole purpose of pre-approvals is to give you an idea of the loan products and limits you may qualify for, subject to change based on further assessments by the lender. 

Difference Between Home Loan Pre-Approval and Pre-Qualification

These two terms are often used interchangeably, but there are key differences.

The main differences being:

• How in-depth the lenders go to review your finances.

• And how strong of an estimate of your eligibility and limits they yield.

A mortgage pre-qualification is a quick estimate of how much you can borrow. Although you’ll usually provide basic financial info, like your income and debts, there are no formal verification processes involved. 

And you can likely get an estimate in 5 minutes if you call up a lender on the phone.

Pre-approvals are more valuable as they’re more in-depth and formal. The lender reviews and verifies your financials here (with documentation of income, assets, and liabilities) and even does a soft inquiry on your credit, which shows up on your credit report. 

They give you more accurate estimates. And since the pre-approved offers are made after a thorough verification process, they hold more weight with lenders and are closer to an actual home loan approval.

10 Tips to Get Pre-Approved for a Mortgage

While certain aspects of the home loan process are beyond your control, such as market conditions, there are steps you can take to enhance your application. 

Ensuring you have all the required documents is crucial, recognising that approval processes may vary among different lenders is also crucial, that's where Koalify’s mortgage broker experts can help.

To facilitate a smooth home loan application, consider the following tips:

1. Obtain Approval Early

Once you have approval from a lender, you have the confidence in knowing a lender is prepared to provide you a loan to help with your desired property purchase. 

This will involve presenting your proof of income, recent bank statements, employment details, and other essential documents for approval, a vital step in expediting the process. Koalify brokers offers a digital secure portal for swift and easy mortgage approval.

2. Your Credit Score Is Important!

Regularly check your credit rating through agencies like Equifax, Experian, or Illion. Correct any errors promptly, as lenders favour applicants with high credit scores. Paying for any credit cards, bills on time and minimising existing debts enhance your credit score. 

It's important not to apply to multiple lenders or credit providers in a short amount of time as this can also impact your overall credit score. Koalify mortgage brokers can run a free credit check on your behalf without impacting your credit score

3. Maintain a Stable Source of Income

Avoid changing jobs before applying for a mortgage, as a consistent employment history strengthens your application and increases the chances of approval.  

Lenders prefer borrowers with steady income, particularly those with a prolonged tenure at the same employer. However, it is ok if you have had a pay rise or changed jobs recently, as there are lenders that do accept that. 

If you’re thinking about purchasing in the near future, speak with a Koalify mortgage broker before making any changes to your income so we can advise if this impacts your ability to obtain an approval.

4. Have Your Payslips and Tax Returns Ready

Gather financial documents, including payslips, tax returns and NOA (notice of assessments) in advance. Lenders typically request at least two consecutive payslips and 1 to 2 years of tax returns.

5. Minimise Any Unnecessary Expenses

Showcase responsible financial habits by living within your means. Limiting credit card spending, reducing credit limits, and maintaining a single credit card with a reasonable limit can positively impact your borrowing capacity. 

Lenders typically scrutinise the past three months of your spending to evaluate your borrowing capacity. To enhance your financial standing and ease the home loan application process, consider proactively curbing excessive expenditures at least six months before applying. 

Creating and adhering to a budget during this period not only streamlines your financial habits but also provides valuable insights into your affordability for monthly repayments when determining the size of your home loan. 

6. Save a Deposit

Aiming for a larger deposit can help strengthen your application and increase the approval chances, with lenders preferring for a deposit of at least 20%. This also helps to reduce the amount borrowed and mitigate lenders' mortgage insurance (LMI). 

Document your savings history, and be prepared to provide evidence of at least 5% of the purchase price.

Even better, we have lender partners who can assist you with a deposit as small as 5% and in some instances even a 0% deposit!

7. Consider a Longer Repayment Term

While a short repayment term may seem appealing, a longer term can enhance your eligibility and loan amount, although it results in more interest payments over the loan's life.

8. Avoid Applying to Multiple Lenders Simultaneously

Multiple loan applications can adversely affect your credit history. Also, applying for multiple unsecured loans (credit cards, car loans, personal loans) can adversely affect your credit history and impact the ability to obtain a home loan.

9. Consult a Mortgage Broker

Engage with a mortgage broker to assess your financial status and determine your affordability. Koalify is an online mortgage broker who can help facilitate easy calculation, comparison, and approval, ensuring your loan aligns with your goals.

10. Utilise Technology for Streamlined Applications

Leverage digital solutions, such as our borrowing power calculator, or repayment calculator to efficiently compare mortgage repayments. Transparency and honesty in disclosing relevant information are key to a successful application.

Mortgage Pre-Approval Requirements

For a mortgage pre-approval, lenders usually require you to have a healthy credit score, a good debt-to-income ratio, stable income, employment verification, etc.

To increase your chances of getting pre-approved and to get the best possible pre-approved offers, you should:

• Make sure you have a healthy credit score before applying. The credit score threshold varies by lender.

• Pay down debts to improve your debt-to-income ratio before applying.

• Make sure you have a stable income and employment history.

Can You Get Pre-Approval From Multiple Lenders?

The short answer is yes. But it’s not advisable.

Every time you apply for pre-approval, the lender will do a soft inquiry on your credit, which may affect your credit score. 

Lenders regard multiple inquiries in a short period as risky, as it suggests:

• You may be short on cash.

• You’re getting ready to take a lot of debt without careful consideration or management.

Since they both hint you as a risky customer, lenders may reject your pre-approval request.

What To Do After Getting a Pre-Approved Offer?

Getting a pre-approved mortgage offer means you can use it to guide your house search. Now that you have a basic idea of what you could get, it’ll help you search for houses that fit your budget.

Once you’re fully confident about getting the home loan, you can approach the lender with the pre-approval they offered you. You can use it to negotiate the best of terms with them.

How Long Does Mortgage Pre-Approval Take?

The time it takes to fully process a pre-approval request depends on the lender, but most lenders will reach back to you with offers in 1-3 days.

In some cases, this could take up to a week or even longer than that. Certain delays happen when:

• You submit incomplete documents.

• Your finances are complex (multiple sources of income, self-employed, or have existing debt).

How Long Is a Mortgage Pre-Approval Valid For?

Pre-approvals usually have a validity of 90 days or three months, but they may vary between lenders. Once they expire, you’ll have to apply for a new one.

Conclusion

Pre-approved mortgage offers give you a fairly accurate estimate of what kinds of home loans you could get and how much you may be eligible for.

It is of great significance since it helps you with the house-hunting process. Because you now have an estimated budget you can work with.

If you’re ready to get a home loan, Koalify can help you with the best possible offers from 30+ top lenders in Australia.

Ready to get your personalised pre-approved offer? Contact us today!

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