When you're gearing up to buy a home, understanding the difference between a Conditional Approval vs Pre-Approval is crucial. Let’s break down these terms, their validity, typical conditions, and why they matter for your home-buying journey.
What is the Difference Between a Conditional Approval Vs Pre-Approval?
Pre-Approval | Conditional Approval | |
Definition | A lender’s estimate of how much you can borrow based on what you declare as your financial position. | A full loan approval subject to specific contions being met. |
Information Required | Basic financial details like income, expenses, assets and liabilities | More detailed review, including verification of income, assets, and employment and checking credit history |
Validity | Generally valid for 60-90 days. | Typically valid for up to 90 days. |
Purpose | Helps buyers understand their broad borrowing capacity. | Indicates lender's willingness to lend subject to conditions and provides more exact borrowing capacity. |
Impact on Property Search | Provides a budget range for house hunting. | Stronger indication of loan approval; can help in negotiations. Also generally can help turnaround time on a formal loan approval. |
Understanding Pre-Approval
What is Pre-Approval?
Pre-Approval is essentially an initial assessment by the lender to determine how much they may be willing to lend you. It's based on your current financial status, including income, expenses, assets and liabilities. If you're not really sure where to start, these can be a good starting point just to understand what a potential loan might look like.
Benefits of Pre-Approval
A quick, easy process which will give you an indication of borrowing capacity. But be careful, you should never make decisions based solely off a Pre-Approval as the lender generally hasn't double checked your income, expenses, credit history etc.
Understanding Conditional Approval
What is Conditional Approval?
Conditional Approval is a step further than pre-approval. It means the lender has assessed your application in more detail and is willing to lend you the money, provided certain conditions are met. These conditions will generally be things like:
Finding an acceptable security
Valuation of the new property
Confirming any other verifications not supplied upfront with the loan application
How to Obtain Conditional Approval?
To move from pre-approval to conditional approval, you will need to provide additional documentation and meet specific conditions set by the lender. This might involve:
Detailed financial statements
Verification of employment and income
Proof of savings and assets
The lender will thoroughly review this information and complete a 'credit assessment' before granting conditional approval.
Benefits of Conditional Approval
Stronger Negotiating Position: With conditional approval, your offer on a property is more robust and credible, as it indicates you are likely to secure financing.
Clear Conditions: Knowing what conditions you need to meet can help you prepare and avoid last-minute surprises.
Faster Settlement: Having conditional approval can expedite the final loan approval process, allowing for a quicker settlement. The lender doesn't need to start from scratch, they are generally just checking the security and signing off on any other conditions they have on the Conditional Approval.
How Long is a Conditional Approval Valid For?
Conditional Approvals generally last for up to 90 days. However, the validity can vary depending on the lender and the specific conditions attached to the approval. It’s important to stay in touch with your lender and broker to ensure that your approval remains valid, especially if your property search takes longer than expected.
Extending Conditional Approval
If your conditional approval is about to expire and you haven’t found a property yet, you can request an extension. Most lenders will require updated financial information to reassess your application before granting an extension. This might include:
Recent pay slips or tax returns
Updated bank statements
Updated Credit Check / Report
Any significant changes in your financial situation, such as taking on new debt or a change in employment, can impact your ability to extend conditional approval.
What are the Typical Conditions You'd See on a Conditional Approval?
Conditional Approvals come with specific requirements that need to be met before the final loan approval. Common conditions include:
Verification of Income: Providing recent pay slips, tax returns, or bank statements.
Property Valuation: The property must be valued by an independent valuer to ensure it meets the lender's criteria. Typically the lender instructs and take care of this
Proof of Savings: Demonstrating genuine savings over a period of time.
Debt Clearance: Paying off certain debts or closing credit accounts.
Why Understanding These Approvals Matters
Both Conditional Approval and Pre-Approval play significant roles in your property purchase process, but they serve different purposes.
My general advice is if you're looking for some quick indications, Pre-Approval is what you need, but if you're serious about buying a place, you absolutely must have a Conditional Approval to ensure you don't get any last minute surprises.
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