While on your home-buying journey, you have probably frequently heard the term 'conditional approval' used, especially during the approval process.
Conditional approval indicates that your loan has been assessed, the underwriting decision is mostly in your favour, and you've received approval in principle. However, you will have to meet a few conditions before final approval can be granted on your mortgage loan.
Is Conditional Approval a Good Sign?
Getting conditional approval from your mortgage lender is indeed a good sign. It indicates a high probability that you will get full approval. With condition approval, real estate agents will take you more seriously when showing you around homes for sale. In addition, if you are refinancing an existing loan, you will likely get a better mortgage rate than your existing loan.
Ultimately, it is imperative you follow up on what your loan officer needs. Doing this as quickly as possible will speed up the approval process.
Does Conditional Approval Mean an Approved Home Loan?
No, conditional approval is not the same as an approved home loan. An approved loan means that all conditions have been met and you are good to go.
In short, when you receive conditional approval on a mortgage, it builds more support for your loan application than a home loan pre-approval alone. However, you should not treat conditional approvals as a guarantee of formal approval on your mortgage.
Conditional Approval Process - How to Apply for Conditional Approval?
There are several steps and conditions to progress through before your conditional approval application can be submitted. While we go in-depth into the specifics all home owners must submit for approval, it should be noted that each broker is likely to have their own stipulations for conditional approval.
Some may first advise you to get conditional pre-approval from a lender when looking for a suitable home loan. They may only be willing to offer home loans on particular types of homes. Always compare the properties you are looking at against the conditions your broker has set, or search for a broker that suits the property of your choosing.
When preparing your application these are some of the critical things that your mortgage underwriter will be looking for during the approval process:
Financial Position and Credit Report
As part of the underwriting process, a mortgage underwriter will assess several aspects of your financial and personal life to ensure you have the financial stability for owning a home.
These can be:
- Your financial documents and credit history
- Your income and bank statements to verify your employment status and monthly income
- Other financial details, including your assets and liabilities, or personal loans, to assess your borrowing capacity
Identity and Eligibility Documentation
- Passport, driver's licence or other government-issued photo ID
- Birth certificate
- Possible extra documentation, such as a breakdown of your monthly living expenses. This will help them ensure you have enough to cover your mortgage repayments
When assessing your home loan application, you will need to offer proof of having purchased homeowners insurance before finance disbursal. This verification ensures you can cover any repair bills after a potential incident.
On top of the usual documentation, you may need to provide additional evidence of your financial stability if your lender asks for it. This can be a variety of documentation, including:
- A breakdown of your living costs; this can include aspects like food and transport
- A written explanation of recent large withdrawals from your bank account
- If you are using gift funds to make a down payment or deposit, you will need to submit a gift letter.
- You may receive other requests based on your underwriter's comprehensive analysis.
During verification, if your mortgage underwriter notices that some critical requirements are unmet, they may reject your loan application. You get conditionally approved if your application is in order and requires just a little additional information.
How Long Does Conditional Approval Take?
It may take a few days or 1-2 weeks to get conditional loan approval. The timeline is based on several aspects of the process. Namely, your financial situation and how accurately and honestly you've provided your information, or even the underwriter’s comprehensive analysis of your application.
Lending services vary across lenders, so it is advisable to speak to your lender and get a realistic idea of how long your conditional approval may take.
How Long Is Conditional Approval Valid For?
Conditional approvals usually have a 3-month validity from the date they're granted. However, this varies across different lenders.
It is essential to research budgets, your preferred property type and repayments so that you're not under any pressure when you find a property.
You may need to reapply if you do not finalise a deal within the conditional approval period. Further, your lender will run a credit check whenever you apply for new purchase loans. This may affect your credit score.
For this reason, most home buyers apply for conditional approval only once they're sure about their financial situation and serious about their property search. It is advisable to give your lender a clear idea in advance so they can recommend the best course of action.
How Long After Conditional Approval is Final Approval?
The average time you can expect to wait for your home loan approval after conditional approval is around 2 weeks. As with most lending services, this depends on your bank or lender.
A foolproof way to ensure a speedy closing process is to respond quickly to issues and queries during underwriting.
What Happens After Conditional Approval?
Once you’ve found a suitable property and received conditional approval, ensure that your lender gives you a written confirmation. It should also specify the duration for which the conditional approval is valid.
Also, discuss with your lender the documents required and the pathway to get fully approved. The quicker you submit the required details, the faster you will move to final approval.
Remember that you will need to have identified a suitable property and be ready to sign the contract to finalise your loan. In most cases, the final mortgage approval process involves your lender doing a valuation on your new property.
Once your lender has formally assessed and approved your application, they will send a formal letter confirming that you have received their unconditional approval.
Can You Be Denied After a Conditional Approval?
Firstly, conditional mortgage approval is not a guarantee that you will get approved for a loan. Sometimes a home buyer may find their final mortgage loan fails because certain conditions are not met.
These instances may be:
- Taking on new debt
- Taking on a new job in with less pay
- If your documents cannot be verified
- You cannot meet the loan conditions before the due date
- You default on rental payments
To minimise these chances of your mortgage approval falling through, you should be in touch with your loan officer to ensure that you are keeping up with the conditions that need to be met.
Pros and Cons of Conditional Approval
There are several pros and cons to consider when applying for conditional approval on your home loan.
Pros of Conditional Approval
- More Negotiating Power
Having conditional approval will grant you more negotiating power when making an offer on a home. The seller will know that you are already conditionally approved for a loan up to a certain amount. This may help you gain an advantage over other buyers who don't have this same level of assurance.
- Realistic Picture
Conditional approval can also give you a more realistic picture of how much you can afford to borrow. This way, you can start your home search within your loan limit, saving you a lot of financial stress in the long run.
- Greater Confidence
Conditional approvals can be particularly beneficial when bidding at an auction or buying at a private sale. Having approval in place may place you over other buyers competing for the same property, as the seller knows you are a serious contender.
- Speeds the Closing Process
Underwriting can be a time-consuming process. If you’ve already been conditionally approved, finalising the closing documents can take less time. This improves your chances of getting a home loan quicker than home buyers applying for a loan after finding a property.
Cons of Conditional Approval
- Lengthy Process - No Guarantee
The process of obtaining conditional approval can sometimes be lengthy, and there is no guarantee that you will receive final approval. Changes in your financial situation, government regulations, property value and/or condition could all lead to a declined final loan.
Likewise, you should be careful not to pay a significantly higher price than the property's market value. Doing so may affect your lender's decision to grant or approve your home loan.
- May Impact Your Credit History
When you apply for conditional approval, it will reflect as a loan enquiry on your credit report. Therefore, if you're seeking conditional approval, you should restrict your application to one lender only.
Applying with multiple lenders may result in successive credit checks. This may give the idea that you do not have a strong financial position. For the same reason, you should apply only when you are sure about your decision to purchase a new property.
- Limited Validity
The conditional approval is usually only valid for a set period, typically 90 days. This means you will need to move quickly to find a property and have all the necessary documentation before the conditional approval expires.
Conditional Approval vs Pre-Approval
While both terms are used interchangeably, there is a subtle difference between conditional approval and pre-approval.
Conditional approval implies that your loan has been assessed and approved in principle. However, more information is needed before you can be granted unconditional approval.
In a home loan pre-approval, the lender gives you an indication of how much they are ready to lend based on your provided information. To get you pre-approved, your lender will assess your credit score and overall financial situation. This will help them determine which loans could match your circumstances, your borrowing power, and the interest rate on your loan.
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Is Conditional Approval Guaranteed?
No, conditional approval is not guaranteed. When assessing your application, if the underwriter finds any concerns, they may decline your application outright.
In some cases, however, they may issue conditional approval if they feel confident that you can address these concerns.
Can You Get Conditional Approval from Multiple Lenders?
Seeking multiple conditional approvals may affect your credit score and ability to access home finance. This is because your lender will run a credit check whenever you apply for conditional approval, which will reflect as a loan enquiry on your credit report.
Excessive loan applications may lead lenders to think you’re in financial difficulties. This will affect your chances of getting approved.
Instead, it's more practical to seek professional advice from a mortgage broker to choose a suitable home loan with convenient features that match your requirements.
Can You Bid at Auction with Conditional Approval?
Yes, conditional approvals can be particularly advantageous when bidding at an auction or buying at a private sale.
When buying through a private sale you may be able to make an offer ‘subject to finance’. This will help you in case your lender denies unconditional approval later. Discuss your options with your broker, as strict time limits generally apply when making this offer.
The information in this article is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.