The difference between conditional and unconditional home loan approval

During the loan application process, there are a range of different steps you’ll take. From pre-approval to conditional, then unconditional approval it can be confusing to understand what stage you’re at and what it means.

Being pre-approved or conditional approval means the lender is approving your loan application in principle. This means they’ve taken a good look at your financial situation and borrowing power and determined at face value you’re a good fit for them and the loan is a good fit for you.

Once you’ve decided to make an offer or attend an auction to purchase a property, you’ll apply for the loan to be unconditionally approved.

The main difference between the two steps is conditional approval means they have assessed the initial information provided and are happy to lend to you, subject to certain conditions being met.  Unconditional approval means you are fully approved for the loan and the property is yours once it settles.

What is conditional approval?

Conditional home loan approval (also known as pre-approval or approval in principle) occurs when your home loan application has been assessed and approved but the lender still needs some further information from you. The term means, you are approved subject to certain “conditions” being met. Examples of further information you might be asked to supply include:

• Updated payslips
• Valuation of the property
• Fully signed and dated contract of sale

Conditional home loan approval happens early in the process, usually before you’ve found a property. It’s important to note there are different levels of conditional approval. Some lenders offer a computer-generated pre-approval upfront, which means no one has looked at the information you’ve submitted but based on what you have input they believe you qualify for the loan.

When you apply for formal or unconditional approval, you may have a few extra pieces of information required compared with someone who has a fully credit assessed pre-approval.

Entourage regularly gets clients to undertake a fully assessed pre-approval where possible. It means the lender has looked at your financials and done a credit check and your pre-approval is a lot more reliable.

If the lender has already seen all of this, then the conditions to convert your loan to a formal approval will generally be less onerous.

Conditional approval does still mean there is a chance your loan application could be rejected if the conditions imposed by the lender aren’t met. For example, if the valuation on the property comes in under what you have offered or if there is an adverse finding on your credit report.

What are the advantages of getting conditional approval?

Conditional approval has many advantages, such as:

• Let’s agent know you are a serious buyer and they may show you the property before other buyers
• Knowing what you can afford to buy
• Saving time – you won’t waste time looking at property you can’t afford
• Security – you can confidently make offers knowing you can afford them

Is there a difference between pre-approval and conditional approval?

Most lenders and brokers use these terms interchangeably. Some may refer to conditional approval as taking place after you’ve made an offer on a property and the lender goes through the process of ordering the valuation and asking for your updated payslips, etc.

Whether you are pre-approved or conditionally approved, there are still further steps you are required to take in order to finalise your purchase of a property.

Remember conditional approval is indicative not a guarantee of the loan

We generally recommend our clients apply for their maximum borrowing limit when they apply for their conditional approval. It means they know exactly what their upper limit is. We don’t usually recommend they buy at the absolute max though, as the borrowing limit is just indicative and if certain variables change or aren’t what you initially thought (such as expenses being higher than you first thought) then your limit might be lower.

Another thing to remember is that you must pay things like stamp duty, mortgage fees, conveyancing and possibly Lenders Mortgage Insurance too. These extra costs can add tens of thousands to your upfront bill so make sure your broker gives you a “total funds required” figure, as well as what you are conditionally approved for.

Your Entourage broker will give you the approximate total funds required during your initial meeting to ensure you don’t stretch yourself too far.

What happens if I make an unconditional offer on a property without a pre-approval?

In some cases, people will make unconditional offers or bid at an auction without a pre-approval/conditional approval. The risk here is that you may find your loan application gets rejected by the lender or you aren’t able to meet the conditions, but you are still committed to the purchase.

If you need to withdraw the offer you’ve made due to your loan not being approved (and don’t have a finance clause in the contract to fall back on) you may be at risk of losing your deposit.

We generally recommend our clients get conditional approval (aka pre-approval) first before making an offer or bidding at auction. It just ensures that if something unforeseen occurs, you have a way of withdrawing from the contract without losing your deposit. If you are bidding, it means you know what your limit is and you don’t face having to cover a shortfall.

What is unconditional home loan approval?

Once all the conditions set out by the lender have been satisfactorily met, you will receive confirmation that you have been given unconditional approval. Unconditional approval means the lender has looked at everything from your finances to your credit history, valued the property and agreed that it all looks good.

At this stage a formal letter of unconditional home loan approval will be provided. You will need to provide a copy of this to your conveyancer who’ll supply it to the vendor and their agent. This is particularly important if you are required to have finance approved by a particular date in the contract.

What happens after unconditional approval?

The lender will send out your loan documents for you to sign or ask you to go into a branch for signing. This is generally within a week of unconditional approval being granted. It’s important you read through the loan documents carefully to check for errors which can occur from time to time. Some people prefer to send these through to their solicitor to check and ensure everything is in order.

Some errors which can occur from time to time include the incorrect spelling of names or incorrect address of the purchase property. Sometimes the bank may make a mistake with the interest rate or fees so it’s always worth checking the contracts carefully.

From there things like ensuring you have appropriate building insurance need to happen and booking in your pre-settlement inspection to ensure the property is in the same condition as when you signed your contracts.

Will my unconditional approval expire if I have a long settlement period?

Yes, it could. Most approvals are for a set period (anywhere from three to six months) so it is important to know you may be required to resubmit your financials again if the unconditional approval expires before settlement.

If there is an issue with a long settlement period, your Entourage broker will let you know and ensure you are kept in the loop at every step along the way.

Could my loan be rejected once unconditional approval is provided?

It is very unlikely that your loan would be declined after unconditional approval is given but it is still possible. The main reason this might happen would be if your financial circumstances change. For example, if you were to lose your job.

Another reason unconditional approval may be withdrawn would be if the lender finds there to be fraud or an error.

Finally, if you need approval by the LMI insurer it’s possible your unconditional approval could be rescinded. However, this is not very common, and most lenders won’t issue unconditional approval unless the LMI insurer has approved the loan application.

Frequently Asked Questions

How can a mortgage broker help me get conditional approval?

Mortgage brokers help lots of clients obtain conditional approval before they begin house hunting. They help you select a lender, prepare your home loan application and guide you on appropriate borrowing amounts and repayments based on your income and expenses.

If you need an approval urgently ahead of an auction, brokers are often able to expedite the process for you by leaning on their existing relationships or escalating your loan application within the bank.

What happens if my situation changes?

We generally don’t recommend to our clients to make any changes to their financial situation once they are conditionally approved. This includes things like changing jobs, changing income, selling assets or applying for more debt.

Any of these changes can have an impact on what the lender is willing to offer you and may void your conditional approval, meaning you won’t be able to make an offer with confidence.

If you do have a change to your circumstances unexpectedly, make sure you let your broker now as soon as possible as you might need to complete a new loan application or apply for changes to your existing approval.

What is the full process to obtain unconditional home loan approval with a mortgage broker?

1. Start by chatting with a broker. We’ll look at your deposit, income, expenses and credit history and help you understand what is available.
2. Prepare your application for conditional approval including providing bank statement and payslips.
3. Obtain conditional approval.
4. Find property, make an offer, bid at auction.
5. Submit loan application for unconditional approval.
6. Property valuation will be ordered by the lender.
7. Unconditional or formal home loan approval granted.
8. Sign your loan documents.
9. Settlement occurs organised by your conveyancer or solicitor.