One of the first things that a real estate professional recommends to a potential home buyer is to obtain a pre-approval in order to demonstrate to the seller that the buyer is serious about their purchase. However, encouraging borrowers to obtain a pre-conditional approval instead may offer more advantages to the customer, the lender, and the seller. Automating the pre-conditional approval process can streamline the lending experience and improve the efficiency of the transaction.
Benefits of a Pre-Conditional Approval
A pre-conditional approval, in comparison to other types of loan approvals, benefits not only the lender and buyer, but equally the seller as well.
Here are some of the top benefits:
- Faster closing: The time between when a borrower submits an application until they officially close the loan can be lengthy. This can lead to the borrower losing out on a purchase, as well as the lender losing out on the business. Speeding up this process with a pre-conditional approval can help the lender close more loans. Additionally, an automated pre-conditional approval platform manages all verification steps and conditions upfront, so the seller only has to run title after the pre-conditional approval, significantly decreasing the amount of time it takes to close to as little as two weeks.
- Improved customer satisfaction: A streamlined process also makes the transaction easier for the borrower, thus increasing their satisfaction. Customers who are satisfied with the experience are more likely to borrow through the same lender in the future.
- Informed customers: Informed customers can help speed up the process. A pre-conditional approval notifies potential buyers of the specific conditions they must complete to be approved for the loan.
- More competitive offers: Conditional offers involve the initial evaluation of loan documents, and they tend to close faster than pre-approvals. Conditional approvals may also be needed when buying certain types of properties, like new builds, so offering them allows lenders to reach new customers.
Pre-conditional approvals improve the buyer experience. Because buyers are unable to look at homes until they have some type of approval, a conditional approval allows them to begin the process, increasing the chances that they will close the loan. While a pre-conditional approval does not promise lending, it does begin the process so that the borrower can be more aware of their options.
How To Improve the Efficiency of Conditional Loan Approvals
Efficiency is key when issuing pre-approvals, whether it is a pre-qualification, pre-approval, or pre-conditional approval. A lot goes into the pre-approval process, including employment verification, income checks, bank statements, and documentation of the borrower’s assets. Many of the inefficiencies with the borrowing process are due to a lack of information. Missing or incomplete documents can slow down the approval process and lead to the borrower becoming frustrated.
If the process takes too long, it could lead to the borrower losing out on funding possibly even giving up on the transaction, decreasing the number of loans closed for the lender.
The typical approval process requires the borrower to submit all their information and then wait for the underwriter to evaluate their application. Depending on the number of applications that an underwriter is assigned to, this process could take weeks or up to an average of 60 days.The typical loan process takes an average of 60 days. With an automated system, this time can be shortened by as much as 60%. An automated system makes loan expectations clearer, so the borrower knows what to submit and when to submit it.
The capability to do this is usually done when a lender offers upfront underwriting. This process is faster, so borrowers know exactly what to expect with the loan process. Following these criteria also increases the chances of receiving an approval.
Determining Criteria for a Conditional Approval
When an automated system issues a pre-conditional approval, it does not guarantee a loan to the borrower. A conditional approval states that the underwriter, or system, has already evaluated the initial documents and that this information did not raise any red flags. Pre-conditional approval still requires that the borrower submits all necessary documents and meets the requirements of the loan. If they don’t, they can still be denied funding.
This process can be automated by assigning specific criteria when evaluating applications. A few criteria that a lender might include with a conditional mortgage approval offer includes:
- The home must meet a certain appraisal value.
- The borrower must submit certification of current employment.
- The borrower must submit the most recent year’s tax return.
- The borrower must sell their home at or above its value.
Because each borrower’s situation is different, additional documents may be needed during the process. The conditional approval provides the buyer with specific conditions they must meet to close the intended loan, based on their details. The loan is not approved until the intended borrower meets all of the required conditions. Some of these conditions may be a formality, including tax returns or an appraisal. Other criteria are dependent on certain factors, like selling their home.
Minimize Risk With Mortgage Loan Conditional Approvals
While an automated approval process can speed up the process, it does raise some concerns with some lending institutions who worry about the accuracy of risk consideration when issuing a loan. Even though the path to pre-conditional loan approval with an automated system is faster, it still involves minimal risk. Certain automated programs, like Lendsmart, can provide smaller lending institutions with the technology and resources they need to streamline the lending process.
Ultimately, the final lending decision comes from an underwriter, not the automated program. Because the final approval decision is made through the financial institution, they still have complete control over lending requirements, reducing the chance of a computer error. Risk is decreased further by specifically listing the criteria the lender needs to meet to close the loan.
Lenders often express frustrations with the slow, disorganized process of approval. While many lenders offer automated pre-approvals, few offer fast conditional approvals. Changes in interest rates and economic times can affect the demand for mortgage loans. This can make it difficult for lenders to prepare for upcoming application surges. When an automated system is in place, lenders can efficiently meet the increase and decrease of loan demands, while still ensuring minimal risk.