Getting ready
If you're about 6 months away from starting to seriously house hunt, it's time to start preparing for pre-approval.
A pre-approval is an initial assessment from a lender confirming the maximum amount you could borrow for a home loan based on your income, expenses and existing debt.
Think of it as your financial green light from the bank, giving you a clear idea of the property price range that fits your budget.
Here are 3 key areas to focus on in the months leading up to pre-approval:
1. Your Deposit
If some of your deposit is from investments, inheritance, estates, or gifts from family, allow some time to access your funds and ensure your deposit is all ready to go when you need it.
Investments: Check your bank’s break period for any fixed-term investments or accounts that require a couple of months’ notice before funds can be withdrawn.
Inheritance: Handling the paperwork and transfer of funds can take up to 6 months.
Estates: Some estate payments can take up to 6 months to process, especially if there wasn’t a will.
Having your deposit funds ready well in advance helps avoid unexpected last-minute stress or a rushed process.
2. Strong money habits
Having consistent and disciplined money behaviour in your bank statements is an important part of getting pre-approved for a home loan.
✅ Having at least 6 months of solid saving and spending habits is a green flag for lenders.
🚩Lenders will be looking for any red flags, such as dishonours (late or missed payment on a bill) or irregular spending.
Most financial institutions will provide a pre-approval for 3 months, with the ability to extend it another 3 months if things take longer than expected.
The extension won't typically require another full assessment, but will need some up-to-date documents, so you'll want to maintain good money habits even after you've been pre-approved.
Required documents
- 3-6 months of bank statements
Most lenders will require 3-6 months of bank statements that show healthy saving habits and the state of your finances.
- Recent Payslip/s
You'll need to provide your most recent payslips to assess your income. This informs what you can afford to borrow.
- Credit check
Lenders will conduct a credit check themselves. The credit check will show how you manage your bills and any debt.
3. How much could you borrow?
When you're planning to buy your first home, it helps to know what you can realistically afford and to take into account the ongoing costs of running a home.
The amount you may be approved to borrow depends on your income and current expenses, and takes into account other costs of owning a home, like rates, insurance, and maintenance.
Calculate what you might comfortably be able to borrow
Getting clear on what you could borrow early on helps give you a better idea of what's realistically within reach when you start looking at houses.
▶️ A percentage of your income
Fixed repayments such as your mortgage payments and personal loans should make up between 30 and 40% of your total income.
If you know your income and existing loan payments, you can estimate what a lender will allow for mortgage repayments and from that, an indication of the loan amount you could probably afford.
❇️ Amount left after each month
It’s important you have some wriggle room, as rates can increase during the term of your mortgage. Lenders will calculate a ‘minimum surplus’ amount required each month after your fixed payments have gone out as part of their pre-approval.
💸 How much will I need to borrow?
Most financial institutions will lend up to 80% of a property's value, so you'll usually need a 20% deposit.
For first-home buyers, there are low-deposit home loan options where you may need only 10% deposit.
The Sorted mortgage calculator can provide a rough estimate of what your home loan repayments could be:
Check out our First Home Buyer Journey Guide:
Here
TO RECAP...
1. Access to funds
Ensure you have access to your deposit funds so you're not scrambling to make pay your home loan deposit at the last minute.
2. Strong money habits
Lenders look for certain green and red flags in your savings and spending habits as part of pre-approval, so be diligent with managing your money.
3. How much could you borrow
What you can borrow will depend on several different things, including your income and expenses each month.
Next Step -> Time to apply for Pre-approval
The fine print
Normal lending criteria and a $100 establishment fee applies to all new loans.