Untitled Document

Is a conditional approval better than a mortgage prequalification?

conditional approval
Reading Time: 4 minutes

At face value, it looks simple enough to pick out your dream home online. Google a local real estate agent and sign a few papers. But anyone who’s gone through the process before — patiently waiting to get a brand-new set of keys in hand — will tell you delays are possible.

Buying a house doesn’t have to be hard when you’re working with the right people. We’re a lender that exists to make buying a house easy. When you take care of your financials before you place an offer on a house, it can make buying that much smoother.

“All buyers should start their home search with a conditional loan approval. This can be submitted with an offer to purchase,” John Powell, Chief Development Officer of Help-U-Sell Real Estate, says. “This gives the seller a certain confidence level that a buyer can perform.”

Are you making this homebuying mistake?

If you’re in the market for a house, then you’ve probably heard the term “prequalification” before. Prequalification is the first step in the mortgage process. This is where you meet with a lender. Give them all your financial information. Find out what kind of loan and house you qualify for.

Prequalification is an important step that shouldn’t be skipped when buying a house. But it’s only one piece of the puzzle.

conditional approval

Buying a house can be easy. Click here to prequalify online.

“A conditional approval is granted once a homebuyer has provided the basic documents necessary to secure a mortgage. And this is usually a bit better than a prequalification, which is more generic in nature,” David Bakke, personal finance expert at Money Crashers, says. “You’ll usually need to provide a little more detailed documentation before you’re officially approved. It benefits a buyer because it shows a potential seller that you have the means to purchase the home.” Sellers are more likely to accept your offer if they believe they won’t have any issues.

You can think of it this way. Prequalification is a critical first step. But it’s an estimate. Not a guarantee. The next step is what so many homeowners miss in the hustle, bustle, and excitement of shopping for a house. It’s what can help ensure you’ll actually get into the home you have your eye on.

Ryan Fitzgerald, owner of Raleigh Realty, explains, “A conditional approval is actually stronger than a prequalification. Though the word ‘conditional’ sounds misleading. The conditional approval, or ‘Loan Commitment Letter‘ as it is sometimes called, is the highest form of a guarantee a lender can give.” Receiving this letter means your approval is based on having already been reviewed by an underwriter. Compare this to a prequalification, Fitzgerald says, which still needs to go through underwriting with some additional hoops to jump through.

Accepting an offer from a buyer with a full loan commitment is the next best thing to a cash sale.

There’s another way to take the first step and get prequalified online. Download our free LoanFly app today.

The second step we urge you not to forget

Prequalification comes first. And a conditional approval is a close second.

“A conditional approval simply means the lender has reviewed the application and supporting documentation and agrees to do the loan subject to certain conditions. Such as getting an appraisal that supports the purchase price, verifying assets and employment gain before closing, etc.” Casey Fleming, author of The Loan Guide: How to Get the Best Possible Mortgage, says.

In this step, you’ll complete an official loan application (versus a prequalification estimate). And your income, assets, and debts will be verified. Though a name like “conditional” comes off as confusing, as Fitzgerald said, it offers the highest level of loan prequalification you can get. Once all your info has been put under the microscope and reviewed by an underwriter, you’ll have the weightiest type of prequalification in your back pocket as you shop for a new house.

A lender offers this preliminary approval based on the limited information they have at the time. In addition to receiving an appraisal, a lender will also need to check financials. A lender may review a buyer’s credit report, as well as employment history, income, and cash on hand, to confirm assets and employment. All these factors are verified prior to final loan approval, Powell explains. A lender will also need a contract on a specific property. Powell says, “The loan approval is conditioned on the property qualifying for the loan and also appraising for a high enough value.”

That’s right. A loan underwriter must approve a home’s appraisal after a property has been found.

“A reason it’s ‘conditional’ is because a lender needs to ensure the home appraises,” Fitzgerald says. “The lender is giving you money, and they need to make sure your home is at least worth the amount of money they are giving to you.”

In a nutshell, this is what mortgage underwriting is all about. A loan underwriter is tasked with the job of measuring risk attached to a certain loan product. Making sure a mortgage loan meets a lender’s minimum guidelines — in this case, by issuing a conditional approval — keeps all parties safe.

When all goes according to plan, a conditional approval benefits both the lender and the borrower. By taking this next step and gathering more information, a lender can make a faster and more efficient decision on behalf of a borrower. A borrower will then use their conditional approval to make a stronger offer to a seller. Everybody wins.

The takeaway: Why a conditional approval is a big win for a buyer

conditional approval

If you’re ready to buy a house, getting prequalified before house-hunting is a must. And a conditional approval is what comes next.

Remember:

  • Prequalification is based on estimates. A conditional approval is based on documented information.
  • A conditional approval verifies your income, assets, and credit.
  • This approval is a written conditional commitment from your lender.
  • The approval tells sellers and your realtor that you’re serious about buying.
  • The conditional approval gives you some of the strongest negotiating power when you put an offer on a house. Once you find a home, your loan can close faster.

Questions about getting a conditional approval? Our loan officers throughout the U.S. are always happy to help.

For buyers on a time crunch, our loan officers recommend securing a conditional approval as soon as you can. You can contact a loan officer to get the process started. We’re here to make buying a house easy. And if you find yourself in a tight seller’s market, Fitzgerald says, a conditional approval can go a long way to helping you win in a multiple offer situation. Compared to a regular prequalification, a conditional approval skips you several steps forward. You’ll move closer to the front of the line.

For educational purposes only. Please contact your qualified professional for specific guidance.

Sources are deemed reliable but not guaranteed.