A common trap for home buyers is to assume that they have home loan approval in place when, in reality, no such approval has been granted.
The risk here is that you could make an unconditional offer to buy a property, only to discover that you don’t have approval for a home loan.
This is why a golden rule to remember is that a loan cannot be formally approved until your lender has examined your personal ID, plus written evidence of your income and outgoings, and of course, your deposit. Just entering a few details on a lender’s website for instance will not result in home loan approval.
With various types of approval to navigate, it’s important to understand the difference between conditional approval and unconditional approval
What is conditional approval?
Conditional approval means that your loan has been assessed and approved – in principle at least – though the lender needs more information before you can be granted formal, or ‘unconditional’ approval, which is the end game that home buyers work towards.
The extra information a lender may require with conditional approval can include recent pay slips, a valuation of the property you’re buying or a fully signed and dated contract of sale.
However, there is a whole variety of conditions a bank may impose before formally approving your home loan. As a guide, some lenders won’t even consider your home loan application until you’ve found the property you want to buy.
Of course, bank’s want your business. But a phone call from your lender saying that your loan is approved is not a cue to pop the champagne corks. You simply can’t afford to rely on this.
Unless you have a written letter from your lender stating that your loan is conditionally approved – and setting out each of the conditions you need to meet – you cannot assume that your home loan is almost ready to go.
What is unconditional approval?
The way to distinguish between conditional and unconditional approval is by remembering that the word ‘unconditional’ means ‘no strings attached’. So unconditional home loan approval is what you’re looking for.
Unconditional approval means that a lender has taken the time to formally assess all your paperwork, and your signed loan application, and decided to offer you a home loan based on the property you have chosen to buy.
Without any further conditions left to satisfy, your lender will send a formal letter stating that you have unconditional loan approval. And that’s when it’s time to celebrate.
Conditional approvals and formal approvals don’t last indefinitely. They typically have a timeframe of three months but even then, nothing is set in stone prior to settlement.
A lender can still pull out of the deal prior to settlement for a number of reasons such as fraud or error, or more likely, if they believe your financial situation has changed significantly since you first applied for a loan.
This complexity all highlights the need to speak with your Mortgage Choice broker to be sure you have the right sort of approval in place to move forward with your home purchase.