Erin Delahunty - 8 Feb, 2021
Australia’s property market is bouncing back strongly after the lows of the COVID-led economic downturn, with most metrics rapidly heading towards pre-pandemic levels.
Business intelligence firm CoreLogic reported that during the first week of November, 1,758 homes were auctioned across the capital cities, with a preliminary clearance rate of 73.2%. This compared with 2,412 at 70.6% the same time last year.
The Australian Banking Association reported in November that the number of deferred loans across the country had reduced by 70% from the pandemic peak.
As competition and confidence returns and auctions continue their rise to pre-Covid levels, buyers can give themselves an advantage in this strengthening market with a conditional approval for a home loan.
Conditional approval, available before you even have a property in mind, can give you the confidence of knowing how much you are likely to be able to borrow, something that’s vital if you’re considering bidding at auction.
A conditional approval is when a financial institution formally indicates how much they may be prepared to loan you to buy a property. As with any loan, they need to assess your financial circumstances first.
While they’re not a guarantee you’ll be approved for the loan you ultimately apply for, conditional approval can give you peace of mind when house hunting. You can approach potential purchases with a workable price range and show a potential seller you’re serious.
Going through the process will also give you a realistic picture of what you can afford before you even start looking, helping avoid a lot of stress and disappointment down the track.
Conditional approval and pre-approval are the same. Also known as an “approval in principle” or a “loan commitment letter”, conditional approval is the highest level of pre-approval.
“Unconditional approval” on the other hand, differs from conditional approvals in that it’s for a specific amount for a specific property, so the loan you apply for when you’ve found the property you want.
Conditional approvals can be given without any property in mind.
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The process for conditional approval varies across lenders, so check with your lender what specific definitions, guidelines and timeframes they have. This will ensure you’re prepared and improve your chances.
Some of the areas that may be assessed include:
One leading bank defines conditional home approval as “when a lender reviews your financial situation and creditworthiness to determine your eligibility for a home loan up to a certain limit.”
This information is a guide only and is an estimate only based on the past 12 months of aggregated online mortgage enquiries from eChoice and partner programs.
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Conditional approval is a real advantage, as it indicates you’re on the right track to purchase a home. While it’s not a compulsory step in the home-buying process, it has many benefits.
It gives you a good idea of how much you can afford. This means you can attend open houses with a strong idea of what’s in your ballpark. Rather than looking at property beyond your means, you focus on homes within your budget. It stops you wasting time on unaffordable homes.
Conditional approval also gives you more confidence to put an offer on homes that meet your requirements. And you can do it quickly.
Another benefit is it helps you stand out from the crowd and boosts your negotiating power. Many people who attend home inspections aren’t there to buy. Some are just getting a feel for the market, while others are simply having a “sticky-beak”.
When you arrive at an open with conditional approval, you put yourself in a different league to these people. Agents and vendors view you as a serious buyer and may be more likely to accept your offer.
Getting several conditional approvals in a short time with multiple institutions, however, can make you look financially unstable in the eyes of potential lenders and can have a negative effect on your credit rating.
If you’re looking to buy at auction, getting conditional approval is vital.
Arranging your finance beforehand enables you to bid with confidence. You still need to be aware of market values and stay within these, though. Otherwise, you may find your lender values the property you’re looking to buy at less than you’ve agreed to pay. If this happens, you’ll need to find the shortfall.
And if you place the winning bid, you’ll need to have the required 10 per cent deposit, which the agent will ask for after the hammer falls.
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The processes for conditional approvals vary across lenders. Some can provide them within 48 hours, some will take up to two weeks.
The faster your lender can get the information they need, the faster they can process your application, so having your documents ready is key.
A loan can be denied after conditional approval. As the name suggests, conditional approval means you currently satisfy the requirements for a loan, but there’s no guarantee you’ll ultimately receive the loan, as things change.
Lenders reserve the right to deny an application if your circumstances change and you then fail to meet a requirement. These change might include:
This is why it’s vital you notify your lender about any changes in your employment or financial situation after being conditionally approved.
There are a few steps involved in formalising your home loan once you’ve been conditionally approved. First, the lender will need to verify the information you provided in the pre-approval stage.
They’ll usually need to carry out a property valuation, to ensure your loan doesn’t exceed the value of the property.
The lender will then need to confirm the conditions of the loan with you and whether you’ll need Lenders Mortgage Insurance (LMI).
Unconditional approval means that a lender has taken the time to formally assess all your paperwork, and your signed loan application, and decided to offer you a home loan based on the property you have chosen to buy.
It indicates that your application is not subject to any terms and conditions and the lender has decided that there are no unresolved issues.
If you’ve been given conditional approval for a home loan, unconditional approval can take anywhere from one day to one week, depending on your lender.
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Settlement, which is when ownership of the house formally passes from the seller to the buyer, can range from 30 to 90 days after you’ve signed your contract and paid your deposit.
Generally, a settlement period of less than a month isn’t recommended, as some lenders may not be able to meet that deadline. The settlement date will be written into the contract.
After settlement, the lender will usually draw down the loan – meaning they’ll withdraw the amount paid at settlement from your loan account.
Next, you’ll need to pay transfer duty or stamp duty and then, the property will be transferred to your name and you’ll get the keys!
Applying for conditional approval isn’t that different to applying for a home loan.
It’s a good idea to contact a mortgage broker to help you compare hundreds of loan products and determine which one is best for you. They’ll also be able to guide you through the application process.
Once you’ve picked a lender, it’s time to provide the documentation. Generally, they’ll require evidence of your identity, income, spending and residency status. They’ll also assess your assets and debt you’ve accrued.
Most lenders will also now run a credit check. The lender will then be able to use this information to determine if you’re eligible for conditional approval.
Otherwise known as a valuation, the objective of an appraisal is for the lender to ensure the mortgage isn’t giving the borrower more than the property is worth. It’s rare the appraisal would be higher than the offer, but in this scenario, the buyer may have instant equity in their home.
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Words by Erin Delahunty
If you’re looking at buying a property soon, you may want to consider getting conditional approval, so you can house hunt with greater confidence. eChoice’s expert brokers can help with that process.