4 Jul, 2019
While buying a home is an exciting life milestone, it can also be rather daunting. It almost feels like going through a lengthy audition process!
From securing a loan to having your offer accepted by the real estate agent, there’s a lot of ‘waiting by the phone for a verdict’ involved. The good news is, there’s one thing you can do to give you a little more confidence and security during the home-buying process – getting conditional approval.
So, what is conditional approval, what are the benefits and how do you go about getting it? Here, we give you the lowdown.
Conditional approval is a preliminary approval you get from a lender that indicates they would be willing to give you a home loan up to a certain limit. To do so, a lender will assess your eligibility in light of your current financial circumstances.
Yes, conditional approval and pre-approval are one in the same! Also known as an ‘approval in principle’ or ‘loan commitment letter’, conditional approval is the highest level of pre-approval you can get.
Conditional approval means different things to different financial lenders. So, be sure to check in with your lender about their specific definition, guidelines and timeframes. This will ensure you’re prepared for the process and will improve your chances of a successful application.
Yes, conditional approval is certainly a positive thing, 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 notable benefits.
Firstly, 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. Knowing what you can afford before you start looking for a property stops you wasting time and drooling over unaffordable homes. As a result, you have realistic expectations. Conditional approval also gives you more confidence to put an offer on homes that meet your requirements.
Another benefit of conditional approval is that helps you stand out from the competition and boosts your negotiating power. Many people who attend home inspections aren’t always there to buy that house. On most occasions, open home visitors are getting a feel for the market and doing their research. Some are also just seeing how the other half live.
However, when you arrive at an open inspection with conditional approval for your home loan, you place yourself in a different league to these other people. Agents and vendors view you as a serious buyer and may be more likely to accept your offer.
If you’re keen to buy a property that is going to auction, getting conditional approval is vital. Arranging your finance before auction enables you to bid confidentially. However, it’s important to note that you will need to be aware of market values and stay within these. Otherwise, you may find your lender values the property you’re looking to buy at less than you’ve agreed to pay. Consequently, you’ll then need to find funds from elsewhere to make up the shortfall.
Plus, if you place the winning bid, then you’ll also need to have the required 10% deposit, which the agent will ask for after the hammer falls. For instance, if you’re buying a home for $520,000, then you’ll need to have a deposit of $52,000 available.
The timeframe for conditional approval depends on the lender and how complex your application is. It can take anywhere from four hours up to two weeks for it to come through after you apply.
You may be wondering “does conditionally approved mean I got the loan?” Unfortunately not. As the name suggests, it means you currently satisfy the requirements for a loan up to that limit with your current circumstances. However, there is no ultimate guarantee that you will receive the home loan.
Your lender reserves the right to deny your application if your conditions have changed or you fail to meet any of the mortgage requirements for a loan. Some reasons you may fail to close on your home loan include:
For this reason, it’s important to 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 have been conditionally approved. Firstly, the lender will need to verify the information you provided in the pre-approval state to ensure you will be able to repay the loan.
They will also usually need to carry out a property valuation, to ensure your home loan does not exceed the value of the home. Then, they will confirm the conditions of the loan with you and whether you will need Lenders Mortgage Insurance (LMI). If applicable, they will need to seek approval from the insurance before you can receive your loan.
If you have been given conditional approval, it can take anywhere from one day to one week for formal approval to come through.
You will receive a letter from your lender confirming that your loan has been formally approved. This is when you know it’s time to celebrate!
After settlement, the lender will usually draw down the loan – meaning they’ll withdraw the amount paid at settlement from your loan account. Then, you will need to pay transfer duty or stamp duty, which normally occurs on settlement date. Then, the property will be transferred to your name and you’ll finally get to hold the keys to your brand new home in your hand!
Going for conditional approval isn’t too different to applying for the home loan itself. You’ll want to make sure the timing is right and you have all the necessary documents at the ready.
Before you apply, it’s best to have an idea of what kind of property you’d like to buy. After all, your conditional approval will only be valid for three months so you would need to re-apply if you don’t find a property within that time. Consider doing some preliminary research into what areas you’d like to buy in and the size and type of the property. This will also determine how much you need to borrow.
It’s also a good idea to contact a mortgage broker, as they will be able to help you compare hundreds of home loan products to determine which one is best for your needs. They will also be able to guide you through the application process.
Once you have determined which lender you would like to go with, it’s time to provide all the necessary documentation. Generally, they will require evidence of your identity, income, spending and residency status. They will also assess your assets (such as another property, car or shares) and any debt you have accrued (like a credit card, personal loans or other mortgages). At this stage, they will generally run a credit check, too. The lender will then be able to use this information to determine if you’re eligible for conditional approval.
Now, you know what conditional approval is, what it involves and how it can help you streamline buying a property. If you’re looking at buying a property in the near future, you may want to consider taking this important step so you can apply for a home loan with greater confidence and peace of mind.
An eChoice home loan expert will be in touch with you shortly.