Shopping for a home loan can seem confusing as there are many different ways to get approved. The two most commonly confused are conditional mortgage approval and pre-approval. While they sound similar, they have a few vast differences.
We look at how they compare below.
What is a Pre-Approval?
The pre-approval is the first step when you are shopping for a home. When you contact a lender and submit a mortgage application, they run your credit. From there, they ask for proof of your income with paystubs, W-2s, and possibly tax returns.
From this quick assessment, the lender makes the decision. If they decide you are a good candidate for the desired loan, they’ll issue a pre-approval. This is not a guarantee for a loan. At this point, you probably don’t even have a home picked out. It’s a basic assessment of what you can afford to borrow and what the lender is willing to provide.
When a loan officer provides the initial approval, it’s based on what you tell him along with what your credit report states. If you are honest and can prove what you said is true, then you should be in good shape to get the loan.
What is a Conditional Approval?
A conditional approval often goes a little deeper than a pre-approval. This is as close to a loan commitment as you can get without actually closing on the loan. This type of approval basically lets sellers know that you have the loan as long as you can satisfy the conditions they state. Typically, those conditions have to do with the chosen property.
The main difference between this and the pre-approval is the depth of evaluation the underwriter does. At this point, the bank is basically ready to lend you the money based on your qualifying factors; they are just waiting to make sure the home passes their standards as well, as that is the collateral.
Losing a Conditional Approval
Just because you have a conditional, approval doesn’t mean you will automatically get the loan. There are still ways it can fall through. The most common ways include:
- The home is not worth the amount you bid on it
- The home does not pass the loan program or city’s codes
- You damaged your credit in between the original approval and the closing
- You lost your job or your income changed
Basically, you need to get your financial status exactly the same as it was when you applied for the loan to keep the conditional approval. If anything changes and the lender find out about it, your chances of approval decrease.
Before you count your money and assume you can buy a home, make sure you can meet the conditions of the loan and keep your qualifying factors the same. It may sound impossible, but it’s only for a matter of a few weeks to a few months. Once you close on the loan, you are free to do what you want with your financial life. Of course, you still need to be able to pay your mortgage, but they can’t take the mortgage away from you unless you stop making your payments.