Your Life

Unconditional vs. conditional loan approval: What’s the difference?

- October 26, 2021 3 MIN READ
What is conditional loan approval

Receiving “conditional” loan approval from your lender gives you the confidence to start house hunting in earnest, but it’s still not a done deal.

Finding the perfect property takes time, and so does securing the perfect home loan. You can’t rush these things. Don’t wait until you’re standing on the nature strip, trying to outbid your rivals, to start asking whether you can actually afford to borrow the money.

Before you get your heart set on a home, you need to know roughly how much you can afford to spend and whether your lender will grant you a loan. It seems like a Catch 22 – you don’t know how much you need to borrow until you put in a successful bid or offer, but you can’t do that with confidence until you know how much you’ll need to borrow.

You don’t want to find your dream home only to discover that you can’t afford it.

Find out how much you can borrow

That’s where conditional loan approval comes in. It’s also known as “pre-approval”. Think of it like a tentative agreement with your lender that gives you an indication of how much they are likely to lend you.

Conditional loan approval ensures that you know your borrowing power – giving you the go-ahead to hunt for the perfect property within your budget.

At this stage, your lender is not guaranteeing the loan, but it offers a level of certainty. Pre-approval isn’t compulsory, but it’s a good idea to avoid disappointment.

When you apply for conditional loan approval, your lender will ask plenty of questions in order to determine your borrowing limit. They will take into account aspects like your employment status and income, your living expenses, credit rating and other debts. They need to know you can afford to service the loan.

You’ll likely need to provide your last two payslips, your most recent group certificate or tax return, and your bank statements for the last three months.

Lenders tend to assess your repayments at a slightly higher interest rate than the loan you’ve applied for. This ensures you/they have a buffer in case interest rates rise.

Read the fine print

It’s important to know whether there are any limitations on your conditional loan approval.

For example, some lenders offer pre-approval on the understanding that a property won’t be less than 50 m² internally and that the land won’t be greater than 2 hectares. They generally expect the property to be in good condition, with standard title and zoning in a major town or city. If your property doesn’t meet those conditions, the loan can be declined.

Keep in mind, if you’re pre-approved for a $1 million loan, that doesn’t mean you can afford to put in a $1 million bid on a property. You need to allow for a range of other costs such as stamp duty, mortgage transfer fees, conveyancing and legal fees. You can find out more about those costs here.

Also allow for Lenders Mortgage Insurance (LMI) if you are borrowing more than 80 per cent of the property purchase price. When you are subject to LMI, you must also be approved by the lender’s insurer.

Make your move

Be warned, conditional loan approval doesn’t last forever. It typically expires after 90 days. This is because most lenders realise that your financial situation may change in that time. That includes the likelihood of switching jobs or taking on new debt like a credit card or car loan.

Try to maintain the status quo at that time. Otherwise you might need to go through the entire pre-approval process again.

Conditional loan approval gives you the green light to start looking seriously at suitable properties, but remember: you can’t sign on the dotted line and buy a home until you take the next step and your loan is unconditionally approved by your lender.

Unconditional loan approval

To give you full or unconditional approval, your lender will want to see things like a valuation on the property, inspection reports and copy of the Contract of Sale. Approval might also include the requirement to sell an existing property.

Once your lender is satisfied with all your paperwork, they will provide unconditional home loan approval. This is also known as formal approval or full approval.

At this point, your loan is formally approved and they’re willing to lend you the money. This unconditional approval means you can now settle your property.

Keep in mind, unconditional loan approval doesn’t last forever either. It typically expires after three to six months, so keep things moving.