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Steps to a Smooth Loan Process (Part 3: The Conditional Loan Approval)

Picture this scenario: you’ve worked hard for years stashing as much of your hard earned pay check in the bank along the way as possible. You’ve managed your credit wisely and built up an 800 FICO score. Instead of dining at fancy restaurants or spending nights out on the town with friends, you’ve opted for home cooked meals, nature walks, and snuggling up with your significant other watching the latest hit movie on Netflix. Finally, you have accumulated enough savings for a down payment on a home without having to raid your emergency savings funds. You select a realtor and he/she asks you to get pre-approved for a loan first. So you contact a lender and after answering just a few questions about your income, assets, credit and liabilities, the lender issues you the a pre-approval letter. You give it to your realtor and think you’re all set. The perfect home comes on the market so you rush to submit an offer and cross your fingers! The next day your realtor calls with bad news: the seller has already selected another “more qualified” buyer. Feeling disappointed and frustrated, you wonder how can anyone be more qualified?

They had a conditional loan approval while you just had a pre-approval.

What is a conditional loan approval?

The conditional loan approval is a statement from a lender asserting that the lender is willing to loan a specific amount of funds to the potential borrower after meeting specific conditions. The letter or form, however, is not a guarantee that the borrower will receive the funds needed to make the purchase. The letter will indicate a list of conditions that must be satisfied prior to receiving final loan approval such as an acceptable appraisal & title report to confirm that the property’s value and characteristics meet the lender’s guidelines.

What is the difference between a conditional loan approval and a pre-approval letter? (Click to a view sample of each letter)

The key difference is the conditional loan approval is issued only after an underwriter has reviewed your income, assets and credit report, whereas a pre-approval is issued after a loan officer has reviewed your financials. Sometimes loan officers may issue you a pre-approval letter without even reviewing any of your financial documents! Thus, the conditional loan approval carries the most weight because your finances have been thoroughly reviewed by the individual who has the authority to grant your loan.

Think of it this way…obtaining only a pre-approval is like not studying for a final exam. You will take the exam, but you have a lower chance of passing the class. With such a big transaction, you must prepare yourself as much as possible by obtaining the conditional loan approval.

Why should you obtain a conditional loan approval before making an offer on a home?

  1. A conditional loan approval can be the deciding factor for your offer being accepted from other pre-approved buyer candidates.
  2. You chose only to get pre-approved and keep losing to other buyers.
  3. If a quick closing is important to you or a negotiating factor, a conditional loan approval could get you to closing in just 10-15 days, as opposed to 20-30 days, because you have already completed most of the loan processing in advance.
  4. Buying a home is a stressful time with so many unknowns, especially if you already own a home and your purchase is contingent upon that sale. Obtain your conditional loan approval early to better balance the tasks required to purchase a home.
  5. If you plan to purchase a new construction, many builders require the buyer to have a conditional loan approval before breaking ground on construction. After all, you are asking them to build a property to your exact specifications so they want to make sure you can obtain financing.

When should you consider waiting to obtain a conditional loan approval before making an offer on a home?

You do not plan to purchase a home within 3-months. Most lenders require all credit documents to be dated within 90-days of funding.

“My realtor only said to provide a pre-approval letter.”

When representing a buyer on a home purchase, the best realtors have always been pushing their clients to obtain the conditional loan approval, not just the pre-approval to give them the most ammunition to successfully negotiate the best deal for their client. However, I find it surprising how few realtors currently request the conditional loan approval from their client in the beginning of the process. With the new TILA-RESPA Integrated Disclosures (TRID) and mandatory additional waiting periods for a loan closing now in effect, it’s even more imperative for borrowers to obtain a conditional loan approval prior to submitting an offer on a home. My hope is for realtors to better inform and educate their clients alongside the mortgage consultants, to help potential buyers secure their new home. Making the conditional loan approval the norm for the industry will help combat the increased waiting periods from these recent regulatory changes.