Home loan pre-approval for first home buyers

First home buyer pre-approval is a lender’s early indication that you may be eligible to borrow up to a set amount, based on the information you give them. It is not a final loan and it does not lock you in. According to ASIC’s Moneysmart, pre-approval lasts for 3 to 6 months and shows you are eligible to apply for a loan up to a certain amount, and it does not commit you to a loan. For most first home buyers it is the step that turns a rough budget into a real price range you can shop within.

This guide walks through what pre-approval is, what a lender looks at, the home loan pre-approval process step by step, and how long it lasts. Whether or not you qualify, and for how much, depends on your circumstances and the lender’s criteria.

What home loan pre-approval actually means

Pre-approval, sometimes called conditional approval, is a lender’s view of how much you may be able to borrow before you have found a property. It helps demonstrate your financial eligibility and sets the price range you can look at when searching for a property.

It is conditional, not guaranteed. The lender has not yet seen the specific property you want to buy, and has not done a property valuation. Final approval comes later, once you have an address, a contract and a valuation that the lender is comfortable with. Pre-approval is a useful signal to real estate agents and to yourself, not a promise that the money is locked in.

What a lender looks at for pre approval first home buyers

When you apply, a lender assesses three main areas:

• Your income and your existing financial commitments, such as other loans, credit cards and regular expenses.
• Your house deposit plus any additional savings you hold.
• Your credit score and credit report.

Regular saving matters here too. Consistent saving shows a lender you can budget and commit to repayments, and even small, consistent deposits into a savings account make a difference. The cleaner and more complete your picture across these three areas, the more straightforward the assessment tends to be.

Your deposit also shapes your loan to value ratio, or LVR, which is the size of your loan compared with the value of the property. For example, if you borrow $450,000 to buy a $600,000 home, your LVR is 75%. A larger deposit means a lower LVR, and that can affect both your costs and your options.

Deposit, LVR and lenders mortgage insurance

A 20% deposit of the purchase price plus buying costs lets you avoid paying lenders mortgage insurance, known as LMI. If your LVR is above 80%, you may need to pay LMI.

That said, a 20% deposit is not the only path in. The table below sets out the common deposit routes for first home buyers.

Whether you qualify for any scheme depends on your circumstances and the relevant rules at the time you apply.

To work out the deposit you need, start with the property price, add the buying costs, subtract what you can borrow, and the balance is your deposit. If you want to test different figures, try the borrowing power calculator to see how a deposit and income change the loan amount you may be able to support.

The First Home Super Saver Scheme is another option some first home buyers use to build a deposit. Under that scheme you can withdraw up to $15,000 of voluntary super contributions each year, and up to $50,000 in total, to help with a deposit.

The home loan pre approval process, step by step

The home loan pre-approval process follows a fairly consistent order. The exact steps and timing depend on the lender and your circumstances.

A mortgage broker can help at the start of this process. A good mortgage broker will understand your needs and goals, work out what you can afford to borrow, and find options to suit your situation. Brokers must act in your best interests when suggesting a loan for you. Lenders generally pay mortgage brokers a commission for distributing their products, so you do not pay the broker directly, and if a broker does charge you a fee they should set it out in a written quote.

How long pre-approval lasts and what comes next

Pre-approval lasts for 3 to 6 months. If it expires before you have bought, you can usually reapply, and the lender will reassess your situation against its criteria at that time.

While your pre-approval is current, keep your finances steady. Taking on new debt, changing jobs or making large unexplained withdrawals can change the picture the lender assessed, which may affect the outcome when you move to full approval. When you are comparing loans for the next stage, a comparison rate is useful: it is a single figure of the cost of the loan that includes the interest rate and most fees. Small differences in interest rates, costs and repayments can make a difference over the life of your home loan.

Frequently asked questions

Talk it through with the team at Finance Lab

Pre-approval is the point where a first home becomes a real plan rather than a maybe. If you want to understand what you may be able to borrow and how the process applies to your situation, the team at Finance Lab can walk you through it and compare options across lenders.