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What is conditional approval?

By Emma Smith

Conditional approval can be the first step in getting a home loan organised. It takes you further along in your journey towards finding the perfect property to buy.

If you’re looking for the perfect home and you’re like most people, you’ll be relying on a home loan to pay at least some of the cost. That means you’ll need to know what you can borrow before you can work out what you can afford to buy.

While an online borrowing power calculator can give you a good ballpark figure, the only way to know exactly how much you can borrow is to speak to a lender. That’s where conditional approval comes in.

What is conditional approval?

Conditional approval is a type of preliminary approval or “pre-approval” from a lender, indicating that you should be approved for a home loan up to a certain dollar limit. It’s an important early step in buying a home because it gives you a clear idea of what a lender is willing to give you, and therefore what you can afford.

Conditional approval isn’t a 100% fixed guarantee. As the name suggests it’s “conditional” on you supplying documents to substantiate a formal application for a home loan, and a valuation of the property.

Conditional approval can also be known as “approval-in-principle”. It’s an indication of what a lender will let you borrow, so it allows you to get your finances in order, and often comes with a timeline in which it is valid, for instance “90 days from application”.

That said, the term “conditional approval” can mean different things to different lenders, so be sure to compare like with like. Check with your bank or lender what they call it, how they define it, what it allows you to do, and what documents you will need to provide.

Why seek conditional approval?

Applying for conditional approval can be the first step in getting your home loan organised. It helps kick start the borrowing process, and while it will be based on a certain home loan product you may be able to vary some of the specific details later (such as fixed or variable interest rates).

There are several benefits to seeking conditional approval:

  • Conditional approval gives you a clearer idea of how much you can borrow and therefore your budget.
  • It shows real estate agents and vendors that you are serious and genuine in your property search.
  • Conditional approval gives you a realistic idea of what type of property you can afford, and so helps focus your property search on what is achievable.
  • It gives you confidence to make offers on private sales and to bid at auction.

Conditional approval is important for all property buyers who want a home loan, from first home buyers to investors and those who have equity in property already like upsizers or downsizers.

Can I buy a property with conditional approval?

Generally speaking, it is possible to buy property with conditional approval. But it will depend on the terms and conditions of your particular type of conditional approval and the terms of the sale. For example:

Bidding at auction: You can bid at auction with conditional approval but, if you’re the winning bidder, you’ll also need to be able to pay the deposit directly after the hammer falls. You’ll then need to deal with your lender to gain full approval, which typically involves a property valuation. So do your research up front and be careful not to bid more than the property’s fair market value.

Private treaty sales: Conditional approval allows you to make offers on private treaty sales “subject to finance”, so long as the vendor’s sale conditions permit this. Consult your conveyancer or lawyer and your lender before you make your offer, as you will typically need to set a timeframe in which your offer can be considered.

What’s the process of applying for conditional approval?

Conditional approval usually involves a simple application process.

In assessing you for conditional approval, a lender will consider your needs and objectives and generally look at four key things:

  1. How much you owe (any existing loans, credit cards, debts, outgoing costs etc)
  2. How much you own (any assets including cars, shares, savings etc)
  3. What you earn (including any money you receive from investments, rent and other sources)
  4. Your living costs (from food to transport, bills and more)

Most people apply for conditional approval when they’re serious about their property search. It pays to have done some preliminary research on budgets and repayments.

You should also have narrowed your property type and location down and have done some research on the property market. That’s because conditional approval comes with a timeframe, often around three months.

Once you’ve found the perfect property and you’ve been given conditional approval, you should check with your lender about which documents you’ll need to provide to turn your conditional approval into a home loan.

Article reproduced with permission from realestate.com

The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, REA recommends that you consider whether it is appropriate for your circumstances. REA recommends that you seek independent legal, financial, and taxation advice before acting on any information in this article.


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