There are a few terms in property that get used as though they mean the same thing. Pre-approval and formal approval are two of the big ones.
A buyer may understandably say, “My finance is approved,” when what they actually have is pre-approval. That’s a great start—but when construction is involved, it doesn’t necessarily mean it’s time to roll out the excavator just yet.
Pre-approval gives the buyer an indication of what they may be able to borrow. Formal approval generally comes later, once the lender has assessed the complete project, including the land, building contract, plans, specifications and completed value.
For builders and housing industry partners, knowing exactly where a buyer sits in that process can help set clearer expectations and prevent a project from becoming stuck between signing the contract and starting on site.
In this week’s update, I’ve unpacked the difference between pre-approval and formal approval, what lenders need to assess, and how a little early preparation can help keep a new build moving.
From Pre-Approval To Formal Approval
When a buyer says their finance is approved, it is worth confirming whether they have pre-approval or formal approval. They are both important, but they represent two very different stages of the construction-finance process.
What Does Pre-Approval Mean?
Pre-approval provides an initial indication of how much a buyer may be able to borrow. The lender will generally consider their income, expenses, existing debts, deposit or equity and credit history.
However, pre-approval remains conditional. The lender may not have assessed the actual block of land, building contract, plans or completed value of the proposed home.
It is a valuable starting point—but not necessarily confirmation that construction can begin.
What Changes At Formal Approval?
Formal approval generally occurs after the lender has assessed both the buyer and the project as a whole.
For a construction loan, this may require:
- A signed fixed-price building contract
- Final plans, specifications and inclusions
- Details of any contract variations
- Council-approved plans or a building permit, where required
- Updated financial documents
- Evidence of the buyer’s available funds or equity
- An “as-if-complete” valuation
The completed valuation is particularly important. The lender uses it to estimate the property’s value once construction is complete and to calculate the loan-to-value ratio.
If the valuation is lower than the combined land and construction costs, the buyer may need to contribute additional funds or make changes to the project before formal approval can proceed.
Approval Does Not Always Mean Ready To Draw
Even after formal approval, there may still be a few steps before the first construction payment can be released.
The buyer may need to sign their loan documents, satisfy any remaining conditions, provide outstanding permits or insurance documents and contribute their required funds.
Once the loan is ready to draw, payments are generally released progressively as agreed stages—such as base, frame, lock-up, fixing and completion—are reached.
What This Means For Housing Industry Referrers
For builders, developers and other housing industry partners, knowing where the buyer sits in the finance process can help create more realistic timelines.
Rather than simply asking whether finance is approved, it can be helpful to establish:
- Whether the buyer has pre-approval or formal approval
- Whether the building contract has been assessed
- Whether the completed valuation has been returned
- Whether loan documents have been signed
- Whether the lender is ready to accept the first progress-payment request
If a client is unsure whether their approval is conditional or formal, a quick financial check up front can save plenty of back-and-forth later.
Send them our way, and we can confirm where things stand, what is still outstanding, and the next step needed to keep their build moving.
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These rates are variable and based on a $500,000 loan with principal and interest payments over 30 years (as of May 2026):
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The rates below are 1-year fixed rates based on a $500,000 loan, with principal and interest payments over a 30-year loan term (May 2026):
