It’s common when buying a home to meet with a bank or broker, in order to arrange pre-approval on finances. Pre-approval, also known as conditional approval, indicative approval or approval in principle is often the first step in a home loan application.

While having pre-approval isn’t a guarantee that your application will be approved, it confirms that you meet a lender’s criteria, subject to conditions. This can make your offer on a house appear more desirable and tell a seller that you are a serious buyer. It can give you a greater confidence as you approach house hunting or taking part in an auction, and can give you a more concrete idea of what sort of property you can afford.

The two types of pre-approvals

There are two main kinds of pre-approvals. Both require you to submit a full application and supporting documents like payslips and bank account records, personal details and information on income, expenses, assets and debts.

System Generated

A system generated pre-approval requires you to submit a full application and supporting documents, including payslips and bank account statements, but is assessed using an algorithm, as opposed to the lender's credit experts.

This approach is fast, sometimes instant, but because it is yet to be validated, it can’t be entirely relied upon, and can leave purchasers exposed because of discrepancies between how the data is viewed by the online system compared to the bank. A system-generated approval is not strong enough to make an unconditional offer on a home.

While not entirely conclusive, a system generated pre-approval is a great way to get an initial impression of your potential loan options. This approach is also more widely used that a full assessment.

Full assessment

A full assessment requires credit experts to look closely at your supplied documents and complete a credit check from an independent agency. There will likely be more detailed questions involved, and the process can take a number of days.

A full assessment approval may still have conditions, such as provisions around the value of the property you intend to purchase, and that the state of your finances do not undergo significant changes, but it is a stronger indication of where you stand.

If you’re not sure whether your pre-approval was system generated or a full assessment, it pays to reach out and ask your banker or broker for clarification.

Preapprovals can affect your credit score

While an online or system generated pre-approval does not impact your credit rating, a full assessment can. Each time a full assessment is completed, a credit check is run against your name, and multiple enquires in quick successful can suggest you’re financially unstable and can have a negative impact on your credit score.

Pre-approvals expire

A pre-approval is intended to last long enough for you to find a property, but they don’t last forever. They are usual valid for three to six months, because your financial position may change over the course of that time. It’s important to ask your lender how long your pre-approval will last, and what happens if you haven’t found your property in that time.

Your property may be deemed to be unsuitable

Because pre-approval often happens before a purchaser has found a property, a lender reserves the right to determine whether the property fits its guidelines. The price is a factor, but so is the category of property.

Here is a list from loans.com.au of potential properties that might be seen as undesirable and therefore are rejected.

• Highrise apartments
• Properties on unpaved roads
• Properties in remote areas
• Properties near large power lines
• Properties that are very run down
• Properties in particular suburbs
• Hobby farms

It’s a good idea to ask your lender if there are particular properties likely to be rejected.

If your circumstances change, you may lose your approval

Significant changes in financial circumstances require your lender to reassess your application. If you lose your job, change from full time to part-time or contract work, start a new job, have a child, are required to spend your deposit or take out a further loan or credit card that you did not disclose at the time of your application, you may no longer be eligible for final approval.

If any of these situations apply to you, you won’t necessarily lose your approval, but you will need to talk with your lender about the possible impacts on your finances.

Need more help?

The team at Barry Plant is more than happy to answer any further questions you have about the purchasing process. Reach out at any time, via phone on 03 5320 9300, or email us at [email protected]. At Barry Plant, it feels like home.

Further Information for Landlords and Tenants:

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https://www.barryplant.com.au/offices/ballarat/media-hub/blog/lets-talk-about-stamp-duty/

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https://www.barryplant.com.au/offices/ballarat/media-hub/blog/disclosure-statements-rental-properties/

Read this article for a summary of how the regional rental market is performing.

https://www.barryplant.com.au/offices/ballarat/media-hub/news/how-regional-rental-market-performing/

Planning to apply for a rental property? Understand the process here - https://www.barryplant.com.au/offices/ballarat/media-hub/blog/rental-inspections-and-applications/