Getting pre-approved before you shop for a home is the best thing you can do to boost your chances of winning the bid. Would a conditional approval be better, though? They sound the same, but are they?
Realistically, a conditional approval and a pre-approval are different. They have the same basis, but the conditional approval is actually the better approval to have in your arsenal when bidding on a home.
The Pre-Approval Process
Buyers that want to improve their chances of winning a bid on a home, usually get pre-approved for a loan first. This way they can walk into the home with a pre-approval letter in hand. In fact, many sellers and/or real estate agents won’t take the time to show a home if a buyer doesn’t have a pre-approval letter.
In order to get a pre-approval letter, you must formally apply for the loan. This means you choose a lender and you complete a loan application. Along with the loan application, you provide the income/asset documents that prove everything you stated in the loan application.
The loan officer handling your case will review all of the following:
- Paystubs covering the last 30 days
- W-s covering the last 2 years
- 2 months of bank statements from the account you’ll make the down payment and pay the closing costs
- Tax returns from the last 2 years if you are self-employed or work on commission
The loan officer will do some basic calculations and determine which type of loan and what loan amount you qualify to receive. This is the pre-approval. The process doesn’t go any further than the loan officer until you are ready to make the loan official and go through underwriting.
The lender will provide you with a letter that states the loan amount you may receive and the loan program you will use, such as FHA, conventional, or VA. This letter is what many sellers look for when allowing potential buyers into their home.
The conditional approval is everything from above, but it takes the process one step further. Rather than the loan officer reviewing the documents, the underwriter does the underwriting. During this process, the underwriter might come back with some questions or requirements for further documentation.
As you satisfy those conditions, the underwriter gives you a conditional approval. This means your income and assets meet the requirements for the loan amount and loan program you desire. The only conditions that should exist pertain to the home itself.
The most common conditions are the appraisal and title work. Because the home is the collateral the lender relies on should you default, they need to know a lot about the home.
In particular, the lender needs to make sure the home is worth at least as much as you agreed to pay for it. They also need to know that it is in good condition. An appraiser will write up a report that shows the condition of the home, any issues it has, along with its value. This way the lender can decide if the home is good collateral. For example, if the appraiser determined that the home is worth $50,000 less than you agreed to pay for it, the lender won’t approve your loan. The lender would be upside down in the investment. If you stopped making your payments, the lender would lose money on the deal because the home isn’t worth as much as they lent you.
The lender also needs to make sure the home is free of liens and that the chain of ownership is clean. In other words, they need to make sure the current owners don’t owe anyone money, such as the federal government, the county (taxes), or any contractors that did work on the home. If the lender let you buy the home with liens on it, the liens become your problem since they are tied to the real estate you bought.
The chain of ownership is also important because the lender needs to know that no one can come and claim ownership of the property. This would put the lender in a bad situation too. In order to protect themselves, lenders make sure the home is free to be transferred and then they require you to buy title insurance that protects the lender’s interest in the property should someone try to come back and claim ownership down the road.
As you can see, the pre-approval is a basic approval that assumes you can qualify for the loan barring any unforeseen circumstances. The conditional approval digs a little deeper and is dependent only on the condition, value, and title of the property.
If you can help it, a conditional approval will get you further with sellers. But, a pre-approval usually suffices when you need to get your foot in the door to see if a home is right for you. If you are serious about buying the home, you may want to step it up and get the conditional approval if you have time as it just shows another level of seriousness in buying the home, which sellers like to see.Click to See the Latest Mortgage Rates»