Getting onto the property ladder is an exciting (and daunting) time, and one of the first steps that you should take is to get pre-approval from a bank. Pre-approval offers confidence (conditionally) as to what the bank will be able to lend you, and at what type of rate—think of it like getting a permission slip from a bank to start shopping around, which they calculate based on an initial assessment of your borrowing capacity.
Pre-approval typically takes between three and five days and up to two weeks in more complex scenarios, and by having pre-approval you will have confidence that you can make an offer for a property within your overall capacity.
Here are some tips to help you get ready to apply for a pre-approval so you can lock down that dream home faster.
Have Your Documentation Ready
You can fly solo, do your online research and approach a bank directly to apply for a pre-approval, or you can enlist a wingman and work with a mortgage broker (such as Finspo) to help make the process as smooth as possible.
Whatever your approach, having your financial information and documentation organised is a really important part of the process.
The Pre-Approval Process
Step 1: Paperwork
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You will need the usual forms of ID (things like Medicare, passport, drivers licence and utility bills).
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You will also need proof of income, three–six months of payslips and your recent ATO payment summary. If you are self-employed you will need your business financial statements and two latest tax returns.
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Documents like bank statements showing your current expenses and your debts. The bank wants to see what you spend in a month on household expenses, as well as any other loans or credit you have (think car loans, credit card debt, Buy Now Pay Later and the amount you spend on rent).
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They will also want to see proof of savings and deposits, which is also shown on your bank statements.
While this does sound like a lot to wrangle, Finspo has a range of online tools that can help you put this all together with as little stress as possible.
Step 2: Review
The lender will review your application and determine your eligibility for pre-approval
Step 3: Approval
If you are successful you will have pre-approval—but note that pre-approval is valid for a limited time, typically between three and six months. Once that time is up, you may need to update your financial information with the bank to get it extended or approved again.
Tips To Keep In Mind
Credit Cards And Debt
Banks usually like to see that you have any other debts under control and you have the capacity to afford these when you take out your new home loan. You can work with a broker to understand the impact that other debts might have on getting a pre-approval. Depending on your situation, you may need to commit to reducing other debts and credit card limits as part of the pre-approval process.
The Deposit
Most banks and lenders require you to have a healthy deposit for your home that can be added to the amount that they lend you. This is in addition to costs such as Stamp Duty that need to be factored in. Having a deposit of 20% or more (plus money for stamp duty and legal fees) is a good goal, and usually means you can avoid paying for Lenders Mortgage Insurance.
If you don’t have 20%, some banks do accept a lower deposit for certain borrowers (e.g. 5% or 10%) but you will probably need to pay for Lenders Mortgage Insurance as one of the overall approval conditions. It is also sometimes possible to get help in this area with things like a family guarantee, and this is something that you should explore with your bank or broker to understand whether it could be applicable to your situation.
Finding The Right Approach To Get Your Pre-Approval
It is always possible to obtain a pre-approval by approaching a bank directly. However, working with a digital mortgage broker such as Finspo means that you will have an expert on your side who can do a lot of the legwork of finding great options across over 40 lenders and literally thousands of products, and also do the negotiating for you regarding interest rates.
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Angus Gilfillan is the co-founder and CEO of Finspo, a free-to-use, digital-first mortgage broker.
Image credit: Urban List