If you are a first-time home buyer, it’s important to be aware of the different stages of a home loan approval before you reach the settlement stage. Although it can be confusing at first, getting complete information about it is important as it will help you gain a better understanding of the home loan process.
There are three different stages of a home loan approval, including a pre-approval, a conditional approval, and an unconditional or formal home loan approval. In order to understand how you can get to the formal home loan, you should know what conditional approval and pre-approval are.
This is the first step in the approval process. It only gives you an indication as to whether your application will be approved or not. In a pre-approval process, the lender evaluates your financial information and lets you know if your application will be approved or not.
Unlike a formal home loan approval, it isn’t binding on any party. Even if a bank gives you a pre-approval, you are not bound to honour it. Similarly, a lender has no obligation to issue a loan on the basis of this approval. The main purpose of pre-approval is that it gives you a general idea of the amount you can apply for.
Pre-approval comes in handy when you are looking for a house. It gives the seller an impression that you are serious about buying a property. However, buyers should be cautious when bidding at the auction. Just because you’ve got a pre-approval, doesn’t mean you will get the settlement. Although, it strengthens your position at the auction, having a winning bid can be problematic if the lender refuses to convert it into a formal home loan approval.
Next comes the conditional approval. This shows that a lender agrees to approve the loan subject to certain conditions. The conditional approval is given after banks assess your financial position and receive all the supporting documents for evaluation. They agree to extend your loan as long as you meet the conditions.
One of the approval conditions is about the property valuation.
The lender wants to look at the valuation of a property you are interested in, to identify if it matches:
- The loan amount you will be offered
- The LVR (loan to value ratio)
Conditional approval can also mean that banks need more documentation to further assess your financial position. They might need an employment letter or a bank statement to evaluate your financial health.
When you are given a conditional approval, don’t jump to conclusions. It might mean that your bank needs more information before they issue a formal home loan approval. However, just like the pre-approval, you or the bank is not required to honour the approval.
Formal Home Loan Approval
This is the final approval you get before the settlement. Getting a formal home loan approval means the lender is satisfied with your financial situation and is willing to give you a loan for the property you wish to purchase. A letter is issued to the borrower, confirming the approval. The bank may still need some documentation before the settlement, but it is quite normal in case of complex applications. For example, if you wish to borrow a loan amount of over 80 percent of the property price, you might also have to get an approval for lender’s mortgage insurance.
At this stage, you receive the loan offer documents. Even at this point, you are not bound to accept the offer. But if you sign the documents, it means that you agree to the terms and conditions and wish to proceed to the settlement. A formal approval can take anywhere from a day to one week.
What Happens after the Formal Approval?
Once you get the formal home loan approval and sign the documents, the final step is the loan settlement. A lender would fix a date to transfer the property in your name, which usually takes a period of 30 days. However, the number of days varies from one case to another and it can also be negotiated by the new and current owner. After all the formalities are completed and the property is transferred to your name, you become the new owner.
Speak to Hunter Galloway about this process today.