Before a real estate agent will show you properties, he probably will do a pre-qualification to make sure you are eligible for a mortgage and to figure out what price range is realistic. This quick check, however, is based on your word about your income, debt and savings. Pre-approval and conditional pre-approval involve more rigorous scrutiny of your finances, which gives you leverage with a seller and speedier closing on the property.
Pre-approval comes from a lending institution, so you have to figure out which one you want to do business with before you can start the process. You must fill out a loan application and meet with a loan officer. Bring copies of your latest W-2s and recent pay stubs to prove your income, bank statements to prove you can make the down payment and documentation for any debt you have, such as credit card balances, student loans or car payments. The loan officer will review your documentation, call your references and run a credit check. After a careful review, she will give you a figure for which you are pre-approved.
The name is confusing because it sounds like less than a pre-approval, but in fact the opposite is true. More commonly called a “conditional approval” or “loan commitment letter,” this is the highest level of pre-approval you can bring to the table when you make an offer on a property. It carries more weight because it involves review by an underwriter rather than a loan officer, which means your finances have undergone greater scrutiny by a person who has the authority to grant loans. The approval might carry an expiration date.
What’s Conditional About it?
Because the bank holds the property as collateral against the loan, the lender wants to be certain the property is worth what you agree to pay for it. So, final approval for both types of pre-approvals is always conditional on the report of a bank appraiser. In addition, any pre-approval is based on your credit at the time you applied for the loan. If something significant changes in your personal finances -- for example, if you buy a car or shift from full-time work to part-time -- the lender could decide that you are more likely to default on the loan and it is long longer willing to take the risk.
Does it Matter?
A pre-approval strengthens your hand when you are bargaining with a seller because it shows that you are more likely to bring the deal to a successful conclusion. A conditional pre-approval, however, usually will carry more weight when competing offers come from other pre-approved buyer candidates. If speed is important to you, a conditional pre-approval could get you to closing in just 15 to 20 days because you have already done a lot of the processing in advance. A regular pre-approval will take longer.
- HomeLoanArtist.com: Difference between a Mortgage Prequal, Pre-Approval and Conditional Approval
- BankRate.com: Prequalified? You Have an Edge
- The Mortgage Professor: Mortgage Concepts Home Buyers Should Know
- MortageLoan.com: Your Commitment Letter: Firm or Conditional?
- Dunn and Bradstreet Credibility Corp: What Is a Conditional Loan Approval Letter?
A retired federal senior executive currently working as a management consultant and communications expert, Mary Bauer has written and edited for senior U.S. government audiences, including the White House, since 1984. She holds a Master of Arts in French from George Mason University and a Bachelor of Arts in English, French and international relations from Aquinas College.