What Is A Pre-Approval and Why Do You Need It Before You Start Looking?

One of the most common mistakes buyers make is falling in love with a property before they know what they can actually borrow. They spend weeks inspecting homes, get emotionally attached to something, make an offer and then find out the finance doesn't stack up.

A pre-approval solves that problem before it starts.

What Is a Pre-Approval?

A pre-approval, sometimes called conditional approval, indicative approval or approval in principle, is a written indication from a lender that they're prepared to lend you up to a certain amount, based on an assessment of your financial situation.

It's not a guaranteed loan, but it is a formal assessment of your finances through a credit assessor. There are still conditions that need to be met before a full approval is issued, including the valuation of the property you're buying. But it gives you the confidence to go out and purchase knowing what you can borrow and within what limits.

Think of it as the lender saying: based on everything we know about your finances right now, we're comfortable lending you up to this amount.

A Pre-Approval vs Borrowing Capacity Estimate

These are not the same thing, and it's worth understanding the difference.

A borrowing capacity estimate, like the kind you get from an online calculator or an informal conversation, is just that, an estimate. It's based on numbers you've entered yourself with no verification of your actual situation.

A pre-approval involves a real application. The lender reviews your payslips, bank statements, tax returns, existing debts and credit history. They run a credit check. They apply their serviceability assessment. The number they come back with is based on verified information, which makes it far more reliable.

It's also worth knowing that not all pre-approvals are equal. There are two types and the difference matters.

• System generated pre-approval is an automated assessment run through a lender's system. It's quick but it's a lighter touch. It doesn't involve a full review of your documents and carries less weight than a full assessment. A lot of buyers don't realise this is what they've received, which means it can fall over when it gets to the full assessment stage.

• Full assessment pre-approval involves a credit assessor actually reviewing your documents, verifying your income and expenses, and making a proper lending decision. It takes a little longer but carries much more weight when you're making offers or bidding at auction. This is the type of pre-approval we recommend pursuing.

When you're making offers on properties, especially at auction where there's no cooling off period, a full assessment pre-approval carries genuine weight. A system generated one or an estimate from a calculator doesn't.

Why You Need It Before You Start Looking

• You'll know your actual budget. Without a pre-approval, you're guessing. You might spend weeks looking at properties in a price range you can't actually borrow for, or miss out on properties that were actually within reach because you underestimated your capacity.

• You'll be taken more seriously. Real estate agents and vendors know the difference between a buyer with a pre-approval and a buyer who's just browsing. When you make an offer with a pre-approval in place, you're seen as a serious, qualified buyer rather than someone who still has homework to do.

• You'll be ready to move at auction. If you're planning to bid at auction, a pre-approval is essential. There's no cooling off period and no finance clause at auction. If your bid wins, you're committed. Having a pre-approval means you've already done the heavy lifting on finance before you raise your hand.

• You can act quickly when the right property comes up. The Camden and South West Sydney market, as well as the Inner West, can move fast. Properties in popular suburbs regularly sell within two to three weeks of listing. If you're waiting to sort your finance after you find a property, you'll often miss out. A pre-approval lets you move decisively.

How Long Does a Pre-Approval Last?

Most lenders issue a pre-approval for 90 days from the date it's issued. If you haven't found a property and exchanged contracts within that time, you'll need to reapply.

This is worth keeping in mind when you time your application. If you're just starting to browse and you're realistically six months away from buying, there's no rush to get a pre-approval right now. But once you're actively looking and attending inspections, it's time to get it sorted.

If your pre-approval expires before you find a property, you will need to reapply so this means going through the assessment process again.

What a Pre-Approval Does Not Guarantee

A pre-approval is conditional, and it's worth being clear about what it doesn't guarantee.

It doesn't guarantee the property will be approved. The lender still needs to assess the property itself. Some property types, very small apartments, certain postcodes, unusual construction types, or properties with structural issues, may not meet a lender's security requirements even if your borrowing capacity is fine.

It doesn't guarantee your rate or the loan product. Rates and products can change between pre-approval and formal approval, particularly if the process takes several months.

It doesn't protect you if your situation changes. If you change jobs, take on new debt, or your income drops between pre-approval and settlement, the lender may reassess your application. Don't make major financial changes while you're in the process.

Ready to Get Pre-Approved?

If you're thinking about buying in the next few months, now is a good time to start the conversation. We'll review your financial situation, identify which lenders suit you best, and manage the pre-approval process from start to finish.

You can find out more about our pre-approval service here or just get in touch directly and we'll walk you through it.

Get in touch today and let's get you pre-approved.