If you’re planning to buy a home, it’s likely that you’ll need to take out a mortgage. In doing so, you might come across various terms, and it’s important to understand the differences. Pre-approval and conditional approval both refer to loans, though they are slightly different from one another. Let’s take a look below.
A pre-approved loan is a useful thing to have as a buyer. You can obtain one by speaking to a loan officer, and filling out a loan application. You’ll need to provide several pieces of information to the lender, who can then calculate how much of a loan you qualify for. Documents that you will need include bank statements to prove you can afford the down payment, debt documentation to prove your debt to income ratio, and pay stubs and w-2’s to prove your income.
The loan officer will check your documentation, contact any references, and review your credit report in order to calculate how much you are able to borrow. You’ll then be given a pre-approval letter that states that you have been approved a loan up to a certain amount. This is a great tool to prove to sellers that you’re a serious buyer, with the financing needed to purchase their home.
Conditional loan approval is the next step up from a pre-approved loan. It differs in that your documentation and credit history has been scrutinized in more detail by a loan underwriter rather than just a loan officer. The underwriter will take a much deeper look at everything, and ensure that what was stated to the loan officer matches up with their documentation review. If it does, the underwriter will approve the loan, but will set a number of conditions.
The loan has moved forward, but won’t be finalized until all the conditions have been met. There’s still a chance that the loan will be denied, but typically only if the conditions set by the underwriter aren’t met, though there are of course exceptions.
What are the conditions?
The conditions set out on such a loan will differ from case to case, but they normally follow a standard procedure. Some of the most common conditions are as follows:
- Additional documentation: you may be required to provide additional documentation before you can close on the loan. This is a very common condition, and helps the lender ensure that your financial circumstances haven’t drastically changed since your application. Your most recent bank statements, w-2s, payslips, and credit documents will generally be required to ensure your debt to income ratio hasn’t significantly changed unfavorably.
- You must sell your current home first: another common condition that is typically placed on buyers that already have a mortgage on their current home. They will be approved the loan they need for the new home, as long as they sell their current home first and close the existing mortgage.
- Appraiser’s report: since the lender will use your new home as collateral against the loan, they need to be sure that you’re not paying above the market value for it. Should things go wrong, it’s important that they can make their money back. They will send out an appraiser to carry out a valuation on the home, and only if the price is right will they approve your loan.
- No liens or judgments on the home: additionally, the lender will also want to avoid financing a home that has unexpected liens or judgments on it. This will need to be confirmed before the loan is approved.
Your loan can be denied if it doesn’t meet the conditions set out by the underwriting, typically within a specified time frame. It’s especially important to take care with your credit while purchasing a home. If you take out any new lines of credit, such as car-loan, your debt to income ratio will change, and may no longer qualify for the loan. Also, try to avoid switching jobs, as this can also cause the underwriter to question if you’re in stable employment, or earning as much as you were previously.
What are the benefits of conditional approval?
Having conditional approval puts you in a stronger position as a buyer and can give you an edge in a hot market. It’s more appealing for a seller to choose a buyer who has conditional approval, rather than simple pre-approval, as the conditionally approved loan is further along in the process and less likely to be denied. Conditional approval is also useful if you want to close the deal quickly, as most of the processing has already been carried out.