Beginner buyer article.

When buying property, most people don't usually have a spare half a million or more in cash sitting around. To deal with the shortfall, financial institutions such as banks offer buyers the opportunity to lend the money and pay it back over an agreed period of time, often decades, with interest.

Needless to say, the conditions under which people are able to borrow money from lending institutions are very specific. In Australia especially, the financial industry is regulated very carefully in order to try to ensure both businesses and consumers behave in an ethical way that will not have a significantly negative impact on the wider economy.

In 2018, as the real estate market in Australia began to change, so too did lending practices, as big banks responded to outcomes from the Financial Services Royal Commission. Among other findings, very simply, the commission found many banks hadn't been doing their homework thoroughly enough before determining how much to offer potential real estate buyers.

In a nutshell, as well as other issues, banks seemingly weren't diving into the regular spending of their would-be lenders deeply enough to understand just how much of their household income was being spent on day-to-day and other costs. As a result, household expenses were potentially underestimated and banks offered buyers more than some could comfortably afford to pay back.

Following the commission, banks tightened up their processes and as a result, during 2018, getting a loan was a much more difficult, cumbersome and long-winded process for many buyers.

What did stricter loan processes mean for the real estate market?

While there were many factors affecting the property market in 2018 -- after a boom of such magnificent proportions, it was due to even out a little -- this change in lending practices seemingly did have some impact on results.

A move away from high-risk loans, and the introduction of tighter processes for investor loans, combined with more paperwork, meant less people taking out home loans.

Though media articles screamed of crashes and projected plummets, in actual fact, the 'dip' has not been as significant (and certainly not dire) as may predicted.

What is finance pre-approval and can you get it?

When buying a property at auction, every bid you make is binding. If you are the highest bidder at the end of the auction and your bid has surpassed the reserve set by the property owner, the hammer will fall and you will be legally obliged to proceed with the sale.

Once the hammer has fallen, realising you're a little short on cash and you won't be able to proceed with the sale is not an option. In fact, if you do decide not to go ahead, the property owner can pursue you legally, with an aim to collect your deposit anyway, and perhaps even the difference between what you bid and the price for which the property eventually sells.

Making sure the bank will lend you what you need BEFORE bidding is very important, and having finance pre-approval is step one in the process.

If you are buying by private treaty or another non-auction method, ensuring you have finance is also a very good practice.

Getting finance pre-approval essentially means meeting with your bank (or shopping around to find another lending institution) and undertaking the paperwork that enables them to assess you.

Based on the results of the assessment, the lender can give you an indication they will approve you for a loan of a certain amount, should you find a suitable property and your circumstances don't change. Pre-approval often is given for a set period, and can expire.

A finance pre-approval isn't a definite thumbs up, but it gives you a solid indication of what you can reasonably offer to purchase a property, that's why you might sometimes hear it referred to as an 'indicative approval'.

3 quick tips to help you prepare for finance pre-approval

One of the toughest parts of buying a property for the first time, is knowing all the steps -- and there are a lot of them.

While searching for a property is important, step one really should be chatting to your lending institution so you can work out if you are really in a position to purchase, and how much they might lend to you.

These three tips will help you prepare, before you go to the bank or broker:

1. Do your own assessment. Before you visit the bank or broker, make sure you really understand your own financial situation. When you apply for your mortgage, in addition to the credit check likely undertaken during pre-approval, the lender will also (hopefully quite thoroughly post the commission) review your other financial commitments, such as existing loans, credit cards, your income and of course how much of that income you are spending and on what.

Prepare for your assessment by first reviewing these things for yourself. If you already have a budget, work out how closely you're sticking to it and if there are regular costs you aren't accounting for. If you don't have a budget, now is the time to put on paper what you spend and where.

2. Shop around. While you might be loyal -- and many people are -- or you might just be lazy, only visiting your own bank can put you at a big financial disadvantage. Do your research online and shop around -- find a lender with competitive rates and good service, or use a broker to do it for you.

3. Be prepared for unexpected costs. Many first time buyers don't realise that, as well as stamp duty and solicitor fees, you may be required to pay lender's mortgage insurance -- a cost associated with the bank insuring itself against any loss should you not be able to repay them. This can run into thousands of dollars, but is quite standard. Before meeting with your lender, do your research so you know what to expect and go to your meeting armed with the right questions.