Getting your home loan mortgage pre-approved

Getting Pre-approved

Get your home loan pre-approved

What's a pre-approval and how's this different to an Approval? And how can you increase the chances of getting that approval?

What is a home loan pre-approval?

A home loan pre-approval is an offer of finance from a bank or specialist lender. This pre-approval is written confirmation of the amount that you can borrow up to.
They would have calculated this amount based on your income and expenses; essentially, how much can you afford to service?
You would normally receive a pre-approval when you’re starting out on your house hunt and haven’t found the property that you want to buy yet.

Instead of a pre-approval, when can I get an home loan approval?

Once you know which property you want to put an offer on, let the bank know and they will review the application again with this property in mind.
They will then decide how much they are willing to lend for this particular property; for example, for standard residential houses they will lend up to 80% LVR, but apartments they might only lend up to 50% for some, or 80% for others (this usually depends on the size of the apartment). So, you’re not likely to receive a full approval until you’ve found the property you’d like to buy.
Your approval may still have conditions on things you need to do, or provide, before drawdown/settlement. These are normally documents that they need to receive before they can send the money to your solicitor – think proof of deposit, undertakings if you’re borrowing or being gifted money from family, KiwiSaver withdrawal pre-approvals. You just need to make sure that the bank receives these documents well before you need to settle on the property.

How do I increase the chances of a home loan approval?

There’s no magic formula on how to guarantee an approval, but with a little knowledge on what the banks look at when assessing an application, you can certainly increase the chances of getting that big green tick.

Clean credit record – Your credit report provides your payment history for your loans and credits such as credit cards, car financing, hire purchases and possibly your utilities bills. Make sure all your payment obligations are up to date, and if you’ve got any defaults, make sure they’re all taken care of before you apply for your home loan. Take note of the number of companies you apply for credit with as lenders can see the number of credit checks, and by who, that have been run on you. The more credit checks that have been run, the more financially distressed you may look.

Tidy up your expenses – While we’ve heard in the media in recent times of people being declined home loans because of too many visits to their favourite fried chicken joint, there is a bit more behind the tabloidy headline. Banks look at transaction statements to see what your overall expenses are and how that compares to the income you’re bringing in each payday. Expenses would include the necessities (utilities and food for example) and any discretionary spending. What is considered ‘discretionary’ is subjective to everyone of course, but before you go out for that lunch/dinner/coffee/beer etc, think about how that might look to the bank, and also how it impacts your overall savings plan.

At the end of the day, the bank calculates an Uncommitted Monthly Income (UMI) which is how much of your income is left over after all your expenses, (essentials, non-essentials, and loan repayments) are deducted. The higher the UMI, the higher your chances are of an approval. Before you swipe your eftpos card, consider if it really is necessary.

"Consider that someone you don’t know is going to go through your bank statements over the last 3 months, page after page. Have a look at your own statements - Does it look like you manage your income well, are conservative and actively saving for your new home? Or show minimal restraint with the eftpos card and lack of budgeting in place" (Ben, Tella Ops)

Steady job and income – Job stability and no probation period is important. The longer your employment the more secure the bank feels you will maintain employment and the ongoing and consistent income to pay for the loan. If you have changed jobs recently, it’s worthwhile to explain the reason for the change and the benefit of doing so.

Banks look for a stable level of income, so if your pays fluctuate due to hours, overtime, or commissions, often the lowest pay received will be accepted, or an average over the year.

Good size deposit – the bigger the deposit, the higher the chances of an approval. Not only does it show that you can manage your income and have the ability to save, but it also means that there is a higher chance that the bank is allowed to lend you the money. Banks are restricted by how much of their home loans have a deposit of less than 10%, so if you’ve managed to get a 20% deposit (or even more if you can), you’ve just improved your chances of the approval.