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Is Your Home Loan Pre-Approval Reliable?

Your approval may be withdrawn!

Has your home loan been pre-approved?

Because they’re only “indicative”, many people find themselves in a situation where they win a property at auction only to have their loan approval withdrawn.

You’ll then go into a mad rush to find another lender to approve your loan or to get a family member to help you before you lose your 10% deposit. Can you ever truly rely on a pre-approval?

What is a pre-approval?

A pre-approval is also known as a conditional approval (St George Bank and ANZ), indicative approval, approval in principle (Westpac uses the acronym AIP) or Homeseeker (CBA).

It’s only an indication from a lender that they are willing to approve your loan when you lodge a full application.

In the vast majority of cases, a pre-approval isn’t fully assessed by the lender and often hasn’t even been to their credit department or their lenders mortgage insurer!

The lender is under no obligation to formally approve your loan when you find a property.

It’s common for most people to seek a pre-approval before looking for a property to buy.

This way they know that they have the finance to fund the purchase and can make an offer on a place that they like.

Some people choose not to get a pre-approval and in doing so are taking a risk because they have no indication that they can get approved for a loan.

What are the benefits of getting a pre-approval?

Although it’s not a formal or unconditional approval, a home loan pre-approval gives you an accurate idea of your borrowing power.

By knowing your price range, you can spend time looking at properties that are more within your price range.

You’ll also have the confidence in making an offer on a property and have the upper hand in a highly competitive real estate market.

It’s often the buyer with a pre-approval that gazumps ill-prepared buyers because the vendor or seller has more confidence that the buyer is serious and ready to act.

In some cases, the vendor will even take the sales listing off and accept an offer below the asking price knowing they can make quicker sale than dealing with someone with no pre-approval.

What are the conditions of full approval?

Pre-approvals have conditions that must be fulfilled, before the loan becomes formally approved.

Below is an example of a pre-approval letter that lists the conditions that need to be met:

This conditional approval is valid for a period of 90 days from 01/01/2018. Subject to the following details being confirmed, we’ll send the applicant a loan offer:

  1. That all information supplied to us for assessing your client’s eligibility is true and correct.
  2. That we have received all documentation necessary to verify your client’s deposit, security, assets, liabilities and income.
  3. Verification of your client’s personal and financial details.
  4. Our satisfactory assessment (including a valuation) of any property offered as security for your client’s loan(s).
  5. Whether Lenders Mortgage Insurance (LMI) is required. If it is required (generally when the loan amount is for more than 80% of the value of the security property) the loan(s) will be provided only if the insurer agrees to provide the insurance. Your client will also need to pay the Lenders Mortgage Insurance premium.

Please note that this response doesn’t constitute a Loan Offer that your client can accept.

No further processing is provided at this stage – please retain all supporting documentation until you’re ready to convert to an unconditional approval.

As you can see, the lender hasn’t actually assessed the home loan application!

The details have been entered in their system and the loan appears acceptable.

A reliable pre-approval has far fewer conditions and has been assessed by a credit officer that works for the lender.

On the spot approvals

There are many lenders who advertise pre-approvals online or via the branch, “in as little as 30 minutes”.

The reality is that this is a sales tool used by lenders to get people to apply for a home loan.

These applications aren’t sent to the lender’s credit department for full assessment, and because of that, they are effectively worthless.

Don’t assume that a bank manager knows the credit policies of the bank that they work for.

They are sales staff, their job is to bring in new mortgage applications, not to assess them.

How do I know if I have a "real" pre-approval?

Our mortgage brokers always request that your pre-approval be fully assessed by the bank.

If for some reason a full assessment isn’t possible, then they will advise you that your pre-approval isn’t completely reliable.

To get a reliable pre-approval, you’ll need to submit a full mortgage application.

This means providing the following:

  • A completed and signed application form.
  • Evidence of your income such as payslips and/or tax returns.
  • Evidence of your savings such as bank statements.
  • Evidence of your current debts such as credit cards, personal loans and home loans.
  • Identification documents, e.g. a drivers license (if you’re not an existing customer of the lender).

You may have to wait anywhere between one to five days for the credit department to assess your application and issue an approval.

Is it reliable?

If you’re not sure if your pre-approval can be relied upon, ask your mortgage broker/bank manager the following questions:

  • Has my application been accepted by the credit department?
  • Has the Lenders Mortgage Insurer approved my application?
  • What are the conditions of my approval?
  • Can I bid in an auction based on this pre-approval?

If you used our services to get your pre-approval, then please contact us on 1300 889 743 and we’ll help to explain any conditions on your pre-approval.

Common reasons for a decline

Have you received pre-approval and found a property to purchase?

There are several reasons why your loan may still be declined when you apply for formal approval.

The pre-approval was worthless

If you had an “on the spot approval” or system generated approval, your home loan was never really approved to begin with.
In this case, your loan will be declined because it doesn’t meet (and never did meet) the lender’s policy.

The LMI provider declines your home loan

Your bank may approve the loan but if your loan amount is more than 80% of the property value, then the bank may need approval from their Lenders Mortgage Insurer as well.

Often a loan is pre-approved by a bank but when the customer finds a property, the loan is then referred to the LMI provider who has different guidelines to the lender.

Ultimately, it could be the insurer that refuses to cover your loan which means your application will be declined.

The security property is unacceptable

The property that you’re buying isn’t assessed when you apply for a pre-approval.
When you inform the bank of the type of security property you’re purchasing, they may not approve the loan because of the risk involved.
You can find a list of the types of properties that are usually unacceptable to lender on our property types page.
Most people aren’t aware that their bank may not accept inner city apartments, units under 50m2 or hobby farms, so they often buy them without first checking with their bank.

The pre-approval has expired

Pre-approvals are typically valid for 3 to 6 months, depending on the lender.

If it takes you longer than this to find a property then your pre-approval will no longer be valid.

Your situation has changed

If you change jobs, get a car loan, a credit card or some other aspect of your situation changes since your loan was pre-approved, the lender will re-assess your application.

If you no longer meet their lending policy, your loan will be declined.

The lender’s policy has changed

Some lenders will honour pre-approvals that are lodged before their policy changes, others will only formally approve your loan if it meets their new lending policies.

Most lenders tweak their lending policy on a monthly basis.

Interest rates have increased

If interest rates increase then the maximum amount you can borrow will decrease.

First home buyers often get a pre-approval for the maximum loan amount possible.

This means that if the rates increase, their formal approval for that loan amount may be declined.

Please note that if interest rates increase or the lender’s policy changes, your lender won’t notify you that your approval is no longer valid.

Their systems aren’t set up to give these kind of notifications.

Which lenders tend to give unreliable pre-approvals?

Our mortgage brokers always request your pre-approval to be fully assessed by the bank.

If for some reason a full assessment isn’t possible, then they will advise you that your pre-approval isn’t completely reliable.

There are several lenders who frequently give unreliable pre-approvals:

  • St George Bank: St George’s pre-approvals don’t always go to their credit department and almost never go to their Lenders Mortgage Insurer.
  • Westpac Bank: Westpac’s pre-approvals are system generated and don’t go to their credit department.
  • Suncorp Metway: Suncorp’s pre-approvals go to a file owner, but not to a credit officer for formal assessment. Their credit department often disagrees with the pre-approval that was issued by the file owner.
  • ANZ Bank: ANZ branches often give on the spot pre-approvals that aren’t reliable as they haven’t been to the credit department for assessment.
  • NAB: NAB’s pre-approvals generally don’t go to their credit department for approval, they are often just an assessment of the customer’s borrowing capacity.
  • Rams Home Loans: Rams doesn’t offer pre-approvals, only a confirmation that you appear to be able to afford the loan.
  • On the spot pre-approvals: All major banks offer on the spot pre-approvals which aren’t reliable. You must request a full assessment from their credit department!

Read on to find out how you can get your loan fully assessed by the bank.

Why don't lenders give reliable pre-approvals?

Assessing a loan application costs the banks a significant amount of money, as the credit staff they use to assess loans are usually highly trained and well paid.

The general public is often unaware of the behind the scenes work involved in arranging pre-approvals.

This work can include credit checks, employment verification, fraud checks, credit scoring, data verification and finally a decision.

Australian banks are always trying to reduce the costs associated with doing business.

In 2008, several lenders stopped doing a full assessment of pre-approvals, as many pre-approvals didn’t convert into a settled loan.

In doing so, they increased their bottom line, but left many people at risk of losing their deposit by committing to buy a property at auction, that they couldn’t finance.

What if I'm buying at auction?

If you’re buying at auction then you must have a reliable pre-approval!

Don’t bid at an auction using an “on the spot” pre-approval.

Your loan must have been fully assessed by your lender.

There are other risks with buying at an auction, so it’s necessary to discuss this with your conveyancer or solicitor before bidding on a property.

If your pre-approval isn’t reliable, it’s important to request a cooling off period or finance clause (depending on the state you’re in).

This will give your lender enough time to formally approve your loan, before you pay a 10% deposit and commit to buying a property.

How can we help?

Our mortgage brokers have all worked in the credit department for major lenders.

Their high level of knowledge and experience means they know which bank will approve your loan.

We know which lenders offer reliable pre-approvals and how to get the other lenders to fully assess your application.

Don’t risk losing your deposit at auction!

Please complete our free assessment form or call us on 1300 889 743 and one of our mortgage brokers can make sure you get the finance you need to purchase a property.

  • T Cook

    I’m purchasing a land and construct home on it after 3-4 months. Can I settle my land first and have a pre-approval for Construction so that I wouldn’t have to bother about the approval later on?

  • Hi T Cook,

    Yes, you can apply for a land and construction loan together in the same application. You can settle on the land first and the construction loan draw downs will start as per the building plan provided by the licensed builder, meaning the lender will pay you at various stages of construction based on the construction schedule.

  • Pearson

    I recently got an online pre-approval for a home loan. Will this be reliable or not?

  • Hello Pearson,

    Online pre-approvals and other on-the-spot pre-approvals aren’t usually sent to the lender’s credit department for full assessment. What this means is that when you actually find a property and apply for the home loan later on, it’s only now going to be assessed by the credit department leaving the pre-approval effectively worthless.

  • Robby D

    Using the info on this page, I made sure the credit department of the bank looked into my pre-approval and so I believe I now have a reliable one. So now I look for a property and move on to getting formal approval, right?

  • Hey Robby D,

    Yes, once your home loan has been reliably pre-approved by your lender, you can start looking for your new home. However, do be sure to check out our page on what to do after you’ve been pre-approved so you can avoid making some common mistakes, especially if you’re a first home buyer. Here’s the link to the page:
    https://www.homeloanexperts.com.au/home-loan-articles/after-you-have-been-pre-approved/

  • ri

    Do after getting preapproval comes finding a property then having it valued and assessed before getting formal approval. Is there any way to speed up formal approval?

  • We can actually order up front valuations with many of our lenders, which enables the bank to skip the first two steps and go straight to formal approval. With most, we’re able to order this valuation before you apply for a home loan. This can help speed up formal approval. Do note that for very low risk applications, valuation may not be required.

  • Kenan

    This is good info to help with preapproval. Now is there anything else that I can read to help me prep for a home loan?

  • Hi Kenan,

    We have a guide for people who would like to increase their chances of approval or those that wish to be eligible for a better discount when the time is right. Please check out the preparing to apply page to learn about all this:
    https://www.homeloanexperts.com.au/home-loan-articles/preparing-to-apply/

  • michael

    hi i got a pre approval from one of the mortgage broker in melbourne, they send me the letter from westpac AIP, its got only westpac header in the letter with no name, phone number and signature, no company chop either. Its got the application number only. So i guess they havent really access my details right? The letter was probably send by the mortgage broker, why are they doing this? If i put down 10% deposit and realiased i cant borrow, they wont profit from my lost right?

  • Hi Michael,
    Westpac AIP letters are very light on the details. I’d say it is likely legitimate and that your loan has been pre-approved by Westpac.
    I don’t know of any way that your mortgage broker would benefit from you losing your deposit. Usually the real estate agent, developer, mortgage broker and conveyancer all want to see a transaction move to settlement.
    If you’re concerned you can send a copy of the AIP to info@homeloanexperts.com.au and mark it “attn Otto” and we’ll check it for you or you can call Westpac and give the 464 ref # to confirm it has been approved.

  • Btw Westpac isn’t the most competitive lender at the moment, there may be a better option out there for you. Of course it depends on your objectives and if there are other reasons why your broker chose Westpac such as their approval criteria.

  • michael

    one important thing i forgot to mention, i borrow loans from government when i was studying in UTS sydney and still own 21k and hasnt paid yet (i left australia as soon as i graduated and just came back 6 months ago), and i only need to pay if my annual salary is over 60k per year.

    Would that effect my borrowing? I asked the broker and they have no idea, and just kept saying i should not worry too much, and just go ahead and buy my second property(my first property i bought it with cash 6 months ago). What he said worries me more!!

  • michael

    me and my wife only submit pay slips, no tax return! Will the bank asked me to provide tax return which are not match with my payslips provided??

  • Hi Michael
    Payslips are all that is required for Westpac in most cases.
    If you have a HELP (HECs) debt then this should be declared in your application. Normally the repayments would be automatically calculated by the bank’s system based on your current income. As you’d be under the threshold it should make little difference.

  • Margaret Burows

    Does pre-approval also apply to purchasing land only or is the criteria different

  • Yes. A lender leaves the security property blank for a preapproval but there are different criteria for land loans. So please make sure they assesss your preapproval on the basis that you are buying land.

  • Karen Riddell

    Hi recently my husband and I put down a deposit on a block of land/ house and land package. However the land is off the plan and there for still to be pegged out. The valuer cant access the land as yet access road still being constructed so no valuation can take place my dellema is now how do we go about getting an approval from the bank we are using a broker.

  • Any approval you get now will not be reliable. Unfortunately you just have to wait until closer to settlement to get a reliable one.

  • Franz

    Hello Karen

    We are in a similar situation where we have put down a deposit for unregistered land with a registration date that far exceeds any pre-approval period. The advice that we were given was to make sure you are in a good financial position and remain so until your loan application. Avoid unnecessary credit enquiries (we set up a Veda account to monitor our score). Checking your borrowing capacity is about as close to an accurate indication of pre-approval you’re going to get in your situation and HLE has an excellent one. Hope this helps

  • That’s good advice Franz, you should become a broker!
    In regards to borrowing power our online calculator https://www.homeloanexperts.com.au/how-much-can-i-borrow/ is accurate for many customers but not for all customers. It’s best if you get a mortgage broker such as ourselves to do a quick assessment for you so you can be sure.
    What Franz said is correct about not applying for other loans or credit cards until settlement, don’t change jobs and save as much as you can.

  • Karen Riddell

    Thanks for the feedback yes we are going to ask for an extension of the contract due to not being able to get a valuation done hopefully its in the best interest of the developers to do this as they have released the land for sale prior. We will have to wait and see.

  • Karen Riddell

    Oh we wont be changing jobs so non of our financial position will change its just a matter of waiting and hoping the developers come to the party we are not going to put out selves in a position if for some unknown reason the bank knocks us back I am pretty sure we will be ok but just need to be sure.