How to get home loan pre-approval

The home loan approval process can be a difficult one to navigate so Canstar looks at how to get yourself one step ahead of the crowd when it comes to getting a home loan.

Home loan pre-approval is when your bank conditionally approves you for a loan before you’ve found a house to buy. Your lender checks your finances and assesses whether you’ll be able to successfully repay a loan and if they are happy you can, you’ll be granted pre-approval to borrow up to a certain amount. Most banks offer pre-approval which lasts for 3 to 6 months, giving you plenty of time to sort out the right home loan.

Canstar general manager Jose George explains:

“Pre-approval is by no means compulsory but can be a very useful thing to have while you hunt for the perfect home. Not only will it make you more attractive as a potential buyer, it can make the process of finding and buying your new home go a lot smoother and quicker.”

So, what happens in the home loan pre-approval process? How do you get it? And is it worth it?

How to get pre-approved for a mortgage

Applying for a home loan can be stressful but there are things you can do to increase your chances of getting pre-approved for a mortgage. Canstar have put together a list to help smooth out the application process and bring you one step closer to the great Kiwi dream.

1. Review your current finances

The first step in the home loan pre-approval process is doing some initial research into your own finances. Consider your income, your typical expenses, what assets you own and how much you owe. From there you can get a rough idea of how much you can afford to borrow. A written budget can help you not only to work out your current income versus expenditure, it will help with tracking your spending against savings goals. It’s also a demonstration that you are serious and are capable of sticking to a plan. To get started, download a few months’ worth of bank statements, take a good look at where your money goes and hopefully it’ll be obvious where you can start making savings. An online budget calculator may also help.

2. Demonstrate that you’ve been saving

Lenders like to see that you have the discipline needed to make regular savings so a demonstrated savings pattern will hold you in good stead and give you an upper hand in the mortgage approval stakes. According to Canstar’s first home buyer’s research, the level of evidence around savings history can vary quite significantly between providers. For example, TSB Bank requires evidence of savings amounting to 10% of the total loan, whereas Kiwibank, Westpac, ANZ and BNZ require evidence of 5% of savings. Evidence requirements also differ around how far back the savings history needs to go. Westpac requires proof of at least six months of saving, whereas Kiwibank, ANZ, TSB and BNZ need at least a three-month record of savings.

3.Get on top of your debt

Any personal debt you have will impact the amount the bank will lend you for a home. Pay off car and personal loans and even credit cards as much as possible before applying for a mortgage. The additional warning with credit cards is to try to stick to one and keep your credit limits low. Even if you don’t owe a cent on a card or cards, a lender could view it as possible future debt that you would have to repay. This could mean the amount they’d be willing to lend you, could be restricted.

4. Don’t cancel your good credit card

This is a mistake that can catch people out. If you’ve got a good record of paying off your credit card balance in full but are now focused on saving, don’t cancel your card (just stick it in the drawer) as that repayment history is giving your credit score a healthy glow.

5. Build yourself a healthy deposit

Once you’ve budgeted, cleared your debt and saved yourself a good deposit (anything over 10% of the value of what you want to borrow is good, but 20% or more is better) you’re starting to look attractive to lenders.

6.Consider what sort of home loan you are applying for?

After reviewing your finances, you should also research the different types of home loans available. Fixed rate, floating rate, offset and revolving are just a few of the different options for you to consider. Do your homework before you approach potential lenders so that by the time you start talking to them you already have a good idea of what will suit your situation.

7. Fill in the pre-approval application with a lender

Having got an idea of the sort of loan you’re after, it’s then a simple matter of applying to your bank for pre-approval. Most banks let you apply online, over the phone, or in person at a branch. Your application will initially require some basic personal information in order to verify your identity – such as your name, address, and age.

Once you’ve sat down with your lender, they will assess your financial situation, including your credit rating.

Your credit rating, a numerical score that rates your ability to pay back credit on time, is determined by your credit report, which is a record of your loans, credit cards and other credit products over the past several years, including any defaults or bankruptcies.

Having analysed your finances, your lender will then decide whether or not you’re eligible for the pre-approval that you’d like to take out. If they think you’re capable of repaying a home loan, then they will likely to be granted!

George concludes:

“Pre-approval has several benefits when house hunting. Firstly, it gives you a clear idea of what you can afford but it also gives you the ability of putting a genuine offer to the vendors as soon as you’re happy you’ve found the right property. It also demonstrates to the vendors you are serious, and if there are a few people interested in the property, it may just make you that bit more attractive as a buyer. In Canstar’s opinion, the home loan pre-approval process takes some time and effort to get, but it’s definitely worth it for the freedom and peace of mind it provides.”

ENDS

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