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Home Buying 101: What is Conditional Approval?

Couple reviewing their home loan pre-approval
If you’ve saved your deposit, you’ve done your research on where you’d like to buy, and you’re ready to buy your first home, it’s time to get conditional approval

This simple step is essential in working out how much you can realistically borrow. Find out more about what it is and how to apply.

You’ve saved up your deposit. You’ve worked with a financial adviser on a budget, and you’ve done some research on where you might want to buy. You’re almost ready to buy or build your first home.

Before you rush out to inspect all the properties, it’s time to work out how much you can afford to buy. It’s well worth making a trip to your bank or preferred lender to get conditional approval. 

This simple step can save you time in the long run by providing you with a buying budget. You’ll know that when you do find the house of your dreams, you can make a realistic offer on the spot. 

What is conditional approval?

Also known as pre-approval or approval-in-principal, conditional approval is exactly as it sounds — you’re conditionally approved for a home loan up to a certain amount. In other words, your bank or lender is willing to lend you a set amount of money, provided you can substantiate a formal loan application with documentation and a property valuation. 

Conditional approval is valid for 90 days, creating a timeline that will: 

  • help ensure your financial situation doesn’t change between conditional approval and applying for a loan
  • demonstrate to agents and sellers that you’re serious about buying. 

While it is a good first step in getting serious about buying your first home, keep in mind that it is not a guarantee that you will receive a home loan. You will need to take appropriate steps when: 

  • Bidding in an auction: You can bid at an auction with conditional approval, but bear in mind that if you have the winning bid, you will be required to pay the deposit when the auction is complete. 
  • Making an offer: You can make an offer on a private treaty sale subject to finance as long as the vendor’s conditions permit this. It’s always best to consult with your conveyancer or solicitor before making an offer to ensure you’re able to meet your legal obligations.  

How to apply for conditional approval

Applying for conditional approval is generally a pretty quick and easy process. You will have to complete an application with your bank or preferred lender. Each lender will have different requirements on what you need to provide, so it’s best to speak to them directly about what the application entails.  

They will then look at your finances, circumstances and goals, paying close attention to four key areas:

  • How much you owe (loans, debts, credit cards, etc)
  • How much you own (assets that can offset the loan such as cars, shares or savings)
  • How much you earn (work, investments, incoming rent, etc)
  • How much you spend on living expenses 

Keep in mind that there is an expiry date on your conditional approval, so you should only apply after you have your deposit saved up and you’ve done all your property research. You’ll want to have a pretty solid idea on what you’re looking for and where. 

When you do find the right home, speak to your bank or lender about what you need to provide to put in a formal loan application. 

Conditional approval denied

If you are denied conditional approval, it may be  because the lender is not able to verify the information in your application. This may be easily resolved with a quick conversation, or it may require more in-depth work. It just depends on your situation. 

You may also be denied because your financial circumstances don’t meet their standards for a home loan. In this case, you can try other lenders; however, you should be confident that you will be able to meet their requirements. Before you jump into another application, it’s worth taking a minute to reassess your finances. 

Applying for a home loan is a significant financial decision, and you want to make sure you are in the best possible situation to honour your commitments. If you’re not able to, the consequences can be devastating — both personally and financially. 

Home loan denied with conditional approval

As mentioned, conditional approval is not a guarantee that you will receive a home loan. It is possible to receive conditional approval and be denied for your loan. This can happen if your lender decides the property has been overvalued in the property valuation and you are at risk of over-committing yourself.  

Because this is a possibility, it is important to remember that any offers you make are subject to finance. It’s also a good idea to always consult with your conveyancer or solicitor before making an offer to ensure you’re not legally bound to any obligations that you’re not able to meet. 

If you are denied for a home loan, you will need to speak to your lender to find out the specific reasons why you’ve been denied and how you can fix it. 

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