How to Prepare for Your First Home Loan

Table of Contents

• Step 1: Assess Your Financial Position and Borrowing Power
• Step 2: Get Your Mortgage Pre-Approval Process Started
• Step 3: Gather Required Documentation for Your Loan Application
• Step 4: Understand First Home Buyer Grants and Victoria Support
• Step 5: Build Your Deposit and Genuine Savings
• Step 6: Check and Improve Your Credit Score
• What Happens After Pre-Approval: The Real Work Begins
• Frequently Asked Questions

Last Updated: September 22, 2026

Getting approved for your first home loan feels like the final hurdle, but first home loan preparation is where most buyers stumble. It’s not. Most buyers miss the 30 steps that happen before and after pre-approval. This guide covers the financial groundwork, the paperwork lenders demand, and the critical steps most guides skip. By the end, you’ll know exactly where you stand and what comes next.

Step 1: Assess Your Financial Position and Borrowing Power

Before you contact a lender, know your own numbers. Lenders will calculate your borrowing power, but that doesn’t mean you should borrow everything they offer. Just because you can borrow $600,000 doesn’t mean you should.

Start by calculating your genuine savings and disposable income. According to Australian Bureau of Statistics lending data, the number of new owner-occupier first home buyer loan commitments fell by 2.9% in the June quarter, while the value of commitments rose by 0.2%. This tells you the market is tightening. Lenders are more selective about who they approve.

Add up what you’ve saved for a deposit. Track your monthly income and expenses for the last three months. Lenders want to see consistent income and controlled spending. If your expenses spike or your income fluctuates, document why. Explain it upfront rather than hoping they don’t notice.

Calculate your current debts:

• Credit card balances
• Car loans
• Student loans
• Personal loans
• Any other liabilities

Lenders factor all of this into your borrowing power. A $10,000 car loan reduces your borrowing capacity more than most buyers realise. The same applies to credit card debt, even if you’re paying it off monthly.

Step 2: Get Your Mortgage Pre-Approval Process Started

Pre-approval is the foundation of your first home loan preparation. Without it, you’re shopping blind. The mortgage pre-approval process can take several business days if your documents are in order. Start early. Contact your bank, a mortgage broker, or both. Brokers often have access to multiple lenders and can shop around for better rates.

During pre-approval, the lender reviews your income, expenses, and debts, runs a credit check, and assesses your deposit and savings history. They issue a pre-approval letter stating how much they’ll lend you, at what rate, and for how long (valid 90 days). It’s conditional, the lender still needs to value the property and confirm employment before settlement. But it’s your starting point. It tells you your real budget and which suburbs and property types are within reach.

You need pre-approval before you start seriously looking. Otherwise, you’ll fall in love with properties you can’t afford, waste time on unsuitable options, or miss opportunities.

Step 3: Gather Required Documentation for Your Loan Application

Lenders want proof. They want to see payslips, tax returns, bank statements, and proof of identity. They want to verify every claim you make about your income and savings. The Victorian Government provides official guidance for first home buyers emphasising the importance of gathering specific documentation before applying.

Here’s exactly what you need:

Proof of identity:

• Passport, driver’s licence, or birth certificate
• Current utility bill or council rates notice showing your name and address

Income verification:

• Last two payslips (most recent plus one before)
• Last two years of tax returns and notices of assessment
• If self-employed: last two years of financial statements and tax returns
• If you receive government benefits: letter from Centrelink or relevant agency

Savings and deposit proof:

• Bank statements for the last three months
• Evidence of genuine savings (showing deposits over time, not a lump sum)
• If gifted funds: statutory declaration from the gift-giver and bank statements showing the transfer

Employment verification:

• Employer contact details
• Employment contract or offer letter
• If recently changed jobs: letter from your new employer confirming your role and salary

Expense documentation:

• List of monthly commitments (rent, utilities, insurance, transport, childcare)
• Evidence of any regular payments (loan repayments, credit card statements)

Lenders scrutinise genuine savings carefully. They want to see money building up over months, not a sudden deposit. If you receive a gift, they’ll want a statutory declaration confirming it’s a gift, not a loan. Gather these documents now, don’t wait until you’ve found a property.

Step 4: Understand First Home Buyer Grants and Victoria Support

Most first-time buyers don’t understand grants and schemes or whether they qualify. That costs them tens of thousands. The First Home Loan Deposit Scheme (FHLDS) lets eligible first-home buyers purchase with a 5% deposit without paying lenders mortgage insurance (LMI). That’s significant, LMI can cost thousands. Avoid it and you’ve freed up capital or reduced your borrowing need.

To qualify for FHLDS, you must be a first-home buyer, the property must be under a set price threshold, and you must be an Australian citizen or permanent resident. The scheme is capped, apply early if eligible. Victoria also offers stamp duty concessions and exemptions for first-home buyers on established properties under certain price points. Verify current eligibility on the Victorian Government website.

Buyers often don’t factor grants into their negotiation strategy. If you qualify for a grant or stamp duty saving, that changes your negotiating position. You have more flexibility on price and can walk away from deals that don’t stack up. If you’re ineligible, your borrowing power is tighter and your LMI costs are higher.

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Confirm your eligibility for every scheme before you start looking. Speak to a mortgage broker who understands current Victorian schemes, they change regularly. Write down exactly what you qualify for: FHLDS eligibility, stamp duty exemption or concession, and any other state-specific assistance. Know your numbers. Know your advantage. Use it.

Step 5: Build Your Deposit and Genuine Savings

Your deposit is your skin in the game. The larger your deposit, the lower your risk to the lender and the better your interest rate. Most lenders want at least 5% of the purchase price. With 20%, you avoid lenders mortgage insurance entirely. With 10%, you pay LMI but have options. With 5%, your options narrow and your costs rise.

Saving a bigger deposit now saves you thousands in interest and insurance over the life of the loan. Set up a dedicated savings account and make regular deposits. Lenders want to see genuine savings, not a lump sum that appeared last month. Track your progress and know exactly where you stand.

Step 6: Check and Improve Your Credit Score

Your credit score matters. A lot. Lenders use it to assess your reliability. If you’ve missed payments, defaulted on debts, or had court judgements, your score suffers. A poor credit score means higher interest rates or rejection.

Check your credit report now. You can get a free credit report from Equifax or other credit reporting agencies. Look for errors. If something’s wrong, dispute it. If you’ve had defaults or missed payments, they’ll show up. Be prepared to explain them.

Improve your score before applying:

• Pay all bills on time
• Pay down credit card balances
• Don’t apply for new credit unnecessarily (each application shows up on your report)
• Close unused credit accounts
• Correct any errors on your report

If you have a poor credit history, don’t give up. Lenders understand that circumstances change. If you’ve had difficulties but have recovered, explain it. Show them you’ve stabilised your finances. Show them you’re reliable now.

A strong credit score can save you 0.5% or more on your interest rate. Over 25 years, that’s tens of thousands of dollars.

What Happens After Pre-Approval: The Real Work Begins

Pre-approval is a checkpoint, not the finish line. This is where most guides stop. This is where the real risk begins.

After pre-approval, you find a property, make an offer, and it’s accepted. Now the lender enters the verification phase. They’ll order a valuation. They’ll confirm your employment. They’ll check your credit again. They’ll review your bank statements for the settlement period. They’ll assess the property’s condition and title.

This phase typically runs 4-8 weeks. It’s the danger zone. Your pre-approval can be withdrawn if:

Your circumstances change. You lose your job. You take unpaid leave. You change employers and your new salary is lower. You take on new debt, a car loan, a credit card, even a phone contract. Any material change in your financial position can trigger a reassessment. Lenders see it as increased risk.

The property doesn’t meet the lender’s requirements. The valuation comes in lower than the purchase price. The property has structural issues, building defects, or title problems. The lender decides the security isn’t strong enough. They can withdraw their offer or reduce the amount they’ll lend.

Market conditions shift. Interest rates spike. The lender’s lending criteria tighten. Regulatory changes affect their risk appetite. It happens. Your pre-approval was conditional on market conditions remaining stable. They rarely do.

Your deposit shrinks. You’ve been saving for months.

Protect yourself during this phase: