Conditional approval: what is it and why do you need it?

Written by in Buying on October 21, 2019

Women in a meeting

Okay, you’ve found the one. You feel that special feeling that has inspired countless films, plays, books and paintings. You’re nervous, but you don’t know why. You’re excited, giddy and you don’t want to spend another moment in your old life. Yup, you just found the right home for you. So, what are the next steps? Aside from writing your new home a love letter, which would just be weird and potentially problematic, your first step might be in receiving conditional approval.

What is conditional approval?

Once you have talked to a financial adviser, saved a deposit for your home (will you save the full 20 per cent or take out Lenders Mortgage Insurance?), created a budget that will keep you on track financially and you have begun to check out homes on the market that match with your budget and expectations, and scoped out available loans, then it is time to look for conditional approval.

The meaning of conditional approval is simple: it’s approval for a home loan… that is conditional.

A lender will look at a number of factors when assessing your suitability for conditional approval. They will look at your credit history (learn about your credit score here), employment history, current savings and assets, income, job type, current loans and how much of a deposit you have available. Once they have this information, they will decide whether you qualify for conditional approval for a home loan, which usually lasts for a set period (often 90 days).

This expiry date on your conditional approval serves a number of purposes:

  1. It gives you an incentive to narrow down your search and find a home sooner than later (which is good news for a lender)
  2. It reduces the risk of you coming back to a lender for a loan and being denied a home loan due to changes in your financial situation.
  3. It demonstrates to agents and vendors that you are serious about securing a home, which gives you leverage in dealing with them.

What is the current process for receiving conditional approval?

Different lenders will have different requirements for receiving conditional approval, so be sure to ask them what you need when making an application. They also have different names for conditional approval: pre-approval, conditional approval, approval-in-principle. They all refer to the same thing so keep your eyes peeled for these terms.

Currently, you should seek out conditional approval when you have done your research into the real estate market, once you know your borrowing capacity and how much you can afford to pay off each month on your mortgage as well as once you have shopped around for various loans and understand the types of loans out there.

You will then typically fill out a conditional approval application online and then the lender/bank will assess the above criteria as well as even the specifics of the home you are interested in (i.e. postcode, condition, type of home, size). This happens before you apply for a loan, at which time a lender will require an inspection of the home to ascertain its value.

Note: many of the major lenders will require you to supply information on a specific property before you receive conditional approval for a home loan, rather than just providing conditional approval based on your desire to buy a home in the next few months.

What if I am denied conditional approval?

You may be denied conditional approval if a lender has not been able to verify the information you provide them or if the information you do provide them (see above) does not satisfy their standards for conditional approval for a home loan.

If this happens, while you can keep looking elsewhere for conditional approval, only do so if you are confident that you can service the type of loan you are seeking and are confident in your financial health. Being denied conditional approval can be a strong wakeup call to reassess your expectations and give you time to save more, strengthen your financial situation and make any changes necessary to give yourself a larger financial buffer when it comes to taking on such a significant form of debt.

What if I receive conditional approval, then I am denied a home loan once I find a home?

While receiving conditional approval is a great sign of your ability to buy a home, it is not a sure thing.

You can still be denied a home loan after receiving conditional approval if a property/building inspection by the lender/bank deems the property overvalued and decides that you are at risk of over-committing financially to the home.

While you can often bid at an auction or even put in an offer for a home privately with conditional approval, it is wise to set out purchase conditions on your offer (such as ‘subject to finance’) so that you do not find yourself in any way legally committed to purchasing a home without the necessary finance secured.

If you are denied a home loan from the same lender who approved you for conditional approval, make sure you speak with them about the reasons why and take their advice seriously. You may need to reconsider the type of home you want to buy and what your budget should be.