The Difference Between Conditional Approval and Unconditional Approval in Australia
Home loans are packed with unfamiliar terms and jargon. What is conditional approval? Do you need it? The process of buying a house should be an enjoyable experience. Yet, negotiating a mortgage and navigating pre-approval and unconditional approval can be challenging. At what stage do you actually receive the loan?
Don’t worry; we’ll break down exactly what conditional and unconditional approval means and exactly when you will receive your money so that you can complete your property search with peace of mind.
What Is Conditional Approval?
Conditional approval means that you meet the lender’s requirements for approval in principle. Also known as pre-approval, it’s essentially the first stage of your mortgage application.
With your broker, you will submit all documents and evidence about your financial situation. The lender will examine your case and offer a home loan conditional approval.
Some lenders offer conditional approvals within minutes; others might take 24 hours to get back to you. This normally depends on the application process – if you apply online, you’ll get an immediate response, whereas phone applications can take longer.
However, bear in mind that you cannot rely on conditional approval as evidence that you have secured a home loan. Only when the bank offers unconditional approval should you begin to celebrate. That’s not to say conditional approval is unnecessary – it’s an important step in the home buying process and has many benefits.
Do I Need Conditional Approval?
Conditional approval is an inevitable part of the home buying journey. When you submit your loan application, lenders will offer conditional approval first, even if you already know the details of the property you wish to buy.
However, if you aren’t sure yet about your dream home, getting conditional approval is an excellent way to establish your borrowing power. Not everyone knows how much they can afford to spend on a property. However, with knowledge of the loan amount and a clearer idea of your budget, you’ll show real estate agents that you’re serious.
Plus, you’ll avoid wasting time looking at properties outside of your budget.
When Should I Apply for Conditional Approval?
It’s never too early to apply for conditional approval. Most brokers will recommend that home buyers get a clear idea of their home loan options sooner rather than later. Not only will this save time shopping around for a dream property, but it will also allow time to reassess your financial situation or needs should your application get rejected.
For example, as an expat, many lenders are wary of offering a home loan to someone with foreign income. Therefore, an early application will enable time to smooth out your application and present your financial position in the best possible light. With the help of a foreign national and expat home loan specialist like Odin Mortgage, your home loan application should sail smoothly.
However, be aware of applying too early. Some lenders’ conditional approval only lasts for a certain limit, e.g. 90 days is common. Although, if it expires, you can apply again.
We recommend the best time to apply is after you have a rough estimate of how much you should borrow and what you can afford to repay. While you don’t need an exact property in mind for conditional approval, it’s sensible to understand the local property market and rough suburbs.
Get a free Australian mortgage assessment today.
How Do I Apply?
The conditional approval process is simple. First, you need to gather all your paperwork. This should include:
- Proof of ID
- Proof of income
- Proof of expenses
Secondly, you should shop around for different home loan products. There are many different options available on the market, so take time to consider what features suit your needs. As an expat, all the same options are available to you as to permanent citizens. A home lending specialist can assist your decision should you desire.
Next, you should submit your application. Many lenders let you apply online. However, some require a phone call or in-person meeting. Then, wait until you have received conditional approval.
Common Approval Conditions
Typically, conditionally approved loans depend on the size of the borrower’s deposit. Australian expats are usually expected to have a deposit of 20% of the property valuation. This is calculated using the loan to value ratio. Also known as the LVR, lenders use this to judge your reliability. However, they may not consider 100% of expats net income if you earn in a foreign currency.
If your LVR is 80% or higher, you might still get conditional approval. Yet, you will probably be asked to pay Lender’s Mortgage Insurance which can add a hefty additional expense to your home loan.
Lenders will also want to look at bank statements or gift letters to evidence your income and ability to save.
Advantages Of A Conditional Loan Approval
We’ve already covered how conditional approval will improve your bargaining power in the home buying process. Real estate agents and vendors will consider your negotiations a more serious prospect if you know the general nature of your loan amount.
In addition, getting conditional approval should speed up the closing process. When assessing your position, the lender might take some time considering your documents. If this is a lengthy process, you risk losing the property or drawing out the closing process unnecessarily while the lender takes the time to formally assess your application.
Plus, if your application is denied, you risk being locked into a contract without the finance to pay for the property. On the whole, it is considered far more sensible to seek conditional approval early on.
What Happens After Conditional Loan Approval?
Once you get conditional approval, the next steps involved get you closer to formal approval. Firstly, the lender will verify all your information before they offer final approval. They might also need to undertake a valuation of the property once you have provided details. This is so they can ensure that the loan amount isn’t greater than the property’s worth.
They will then confirm the loan conditions with you before offering unconditional approval.
Don’t get too complacent, however. In some instances, the lender may withdraw their offer after the pre-approval stage. This would typically only happen if your financial situation significantly dropped or if they were to find an error on your application. Therefore, it’s vital that, throughout the home buying journey, you maintain your credit score and complete transparency.
Get a free Australian mortgage assessment today.
What Is Unconditional Approval?
When you have received unconditional approval, it’s finally time to pop the corks and celebrate. Essentially, unconditional approval means that you meet all their requirements, have passed their verification checks, and the bank is ready to lend you the money.
With full approval, you are ready to close the deal and purchase the house of your dreams. It’s crucial that you don’t make an unconditional offer on a house before you have been formally approved in writing. Many homebuyers make the mistake of taking home loan pre-approval as a guarantee of financing.
What Are the Timeframes?
As mentioned, conditional approvals are often given with time limits. The most common timeframe is around 90 days. Therefore, within three months of applying for pre-approval, you should identify the property you wish to purchase and secure unconditional approval.
If you already have conditional approval, unconditional approval can take anywhere between a day to one week. Different lenders have varying time frames. After loan approval, the next stage is to settle the house.
Settlement is when the ownership of the house passes from the seller to the buyer. This typically occurs between 1-2 months after signing the contract and paying your deposit. The settlement date is written into the contract. Most lenders won’t offer a settlement period of fewer than 30 days as they might struggle to organise the finances in time.
Next, your lender will supply the loan, you’ll pay stamp duty and other expenses, and then the keys are yours.
Conditional approval is a simple part of the home loan application process. However, it’s crucial that you don’t mistake it for full approval. Don’t make any offers you cannot go back on until you have secured unconditional approval from your lender. If you’re not sure whether you have been conditionally or unconditionally approved, speak to your mortgage broker about your application.
Frequently Asked Questions
Does conditional approval mean approved?
Conditional approval is offered when your mortgage application meets all of the lender’s requirements. However, it is not a guarantee of a loan. Only when the lender has thoroughly checked your situation will they offer unconditional approval.
Is conditional approval a good thing?
Conditional approval gives you a good idea of your budget. This will help you save time and effort house hunting for properties that you cannot afford. Plus, vendors and estate agents might take you more seriously.
Can you be denied after a conditional approval?
A lender might reject your loan application after you have been offered conditional approval. This is usually because your financial situation dramatically changes or if they find something incorrect in your application.
What happens after a conditional approval?
After conditional approval, the lender will verify your application. In the meantime, you need to submit details of the property. Then, provided you still meet their requirements, the lender will offer you unconditional approval.
How long does conditional approval last?
Conditional approval time frames vary from lender to lender. Usually, it lasts around 90 days before expiring. Therefore, you need to secure a property within three months.