Diana Clement: Bid with confidence

Pre-approval tells you what the bank is willing to lend you and gives you confidence to bid at auction or make offers. Photo / File

If you're going shopping for a home, consider getting pre-approval for your mortgage. Pre-approval tells you what the bank is willing to lend you and gives you confidence to bid at auction or make offers.

The bank will look at your income and outgoings, including bills and living expenses, to determine what you can afford.

Each bank has its own criteria for how much of your income it thinks you'll spend each month.

Currently, says Craig Pettit, mortgage adviser at Loan Market, banks are quite happy to give pre-approval up to 80 per cent of the purchase price for homebuyers and 60 per cent for investors.

Banks can lend more than the 80 per cent to private homebuyers but they don't tend to pre-approve above 80 per cent, says Pettit. They will only offer more if there is a "live deal" on the table. Even then most people won't be successful.

If, for example, you have $800,000 pre-approval for a $1 million purchase and a $1.05m deal comes up, the bank might be willing to lend the extra $50,000 says Pettit.

As an independent mortgage adviser, Pettit represents 26 banks and financial institutions. Each lender has different credit criteria when it comes to assessing the affordability for clients, he says.

That includes a calculation for living costs and other incomes and expenditure. That might be that a homebuyer will spend roughly $700 a month per adult and $250 per child on living costs.

"Quite a few of the banks have different takes on all sorts of things," says Pettit. That includes things such as income from boarders and child support payments - both paying and receiving.

The banks tend to be conservative and stick to their rules to ensure they're not left holding the house if you find that you can't afford to pay the mortgage.

Pre-approval isn't an absolute certainty of getting the money. Pre-approval tells you how much you can borrow with your salary and financial commitments. In the words of the ASB, home loan pre-approval "is a conditional approval that we can lend you a certain amount of money, provided the property you purchase meets ASB's home loan criteria".

If you pick a property with problems you may not be able to buy it even if you're pre-approved. This could be an apartment, a leasehold property, a leaky home, or a number of other issues.

Pre-approval usually lasts three months and if your circumstances change in that time you may no longer qualify for the pre-approved loan.