Home Loan Pre-Approval Facts

Buying a home is typically the biggest financial transaction that any of us will make and, in the vast majority of cases, it can only be achieved with the help of a home loan, also referred to as a mortgage. Getting an agreement for a home loan isn't a foregone conclusion, however, so it pays to understand the pre-approval conditions that lenders commonly require.

Home loans are subject to credit status

Lenders, such as banks, need to weigh up the profit they will make from a home loan against the potential risk if the borrower is unable to keep up payments on the mortgage. They assess the risk of each home-loan applicant using a system which is called credit scoring. The way credit scoring works is that it looks at the applicant's previous record of managing financial products and, in particular, at their record with lending products such as loans, credit cards and overdrafts. Having a positive record of responsibly paying off and managing credit products puts a person in a stronger position than someone who has never used credit previously. And, not surprisingly, previous problems encountered with lending products impacts in a negative fashion upon a person's credit score and may make it difficult to obtain a home loan.

Home loans usually require an initial down payment

Most banks will require home loan applicants to pay a percentage of the price of the property up front. This is referred to as a down payment. The percentage of the property price that is required can vary from lender to lender, so it pays to shop around and be aware of the requirements. A 20 percent down payment on a property priced at $200,000 would be $40,000, so this requirement can be onerous, particularly for first-time buyers.

Rules on the amount you are allowed to borrow

Lenders apply their own rules in terms of how much they will lend to individuals, but this calculation will usually take into consideration the income of the applicant. For example, a bank might apply a rule that says that it will only lend up to three times the value of the applicant's annual salary. So if the applicant earns $30,000, then the lender would state that it will only lend up to $90,000. It's important to check the lender's rules on income multipliers, including how they deal with instances where two applicants are applying for the home loan.

Additional home loan pre-approval considerations

Home loans are secured loans, which means that the lender retains the right to take ownership of the property if the borrower defaults on payment. Typically, borrowers will be required to take out insurance alongside the home loan to provide protection in case of fire or other potential disaster. There are also age restrictions that apply for the sale of home loans. They cannot be provided to people under the age of 18 and lenders may apply an upper age limit, as well. Finally, some lenders typically only accept applications from people with whom they already have a banking relationship.

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