CONDITIONAL (LOAN) APPROVAL

When it comes to purchasing RE properties with a bank loan, buyers often find themselves at a disadvantage compared to cash buyers. This is because of the delays in getting bank approvals for the loan and delays in sellers getting the proceeds from the sale.

Let me share an example. A few years back, an Overseas Filipino Worker wanted to purchase a lot through a bank loan. Working for a foreign company overseas, they weren't sure they would be approved for a bank loan. Thus, they hesitated to pay earnest money, fearing that if their loan application were rejected, they would forfeit the "reservation" money. They prepared an offer letter that didn't require them to pay any amount.

Without any earnest money paid, the seller was free to entertain other buyers. Within the second week of awaiting their loan approval, a cash buyer came and concluded the transaction with the seller.

The problem in this story is traced to the uncertainty surrounding the loan application's approval. If they were confident that it would, they could have paid a sizeable amount and reserved the property.

The solution

In assessing bank loan applications, lenders evaluate two things: the borrower's financial capacity and the RE asset they intend to purchase. A typical notion buyers have is that they can only begin the loan application process once they've found an RE property to purchase.

Apparently, some banks offer a mechanism to solve this problem: "Conditional Approval" (CA). CAs allow buyers to begin the loan application process prior to finding a property they wish to purchase. This preliminary approval delineates the maximum property value feasible for purchase based on prevailing interest rates and the buyer's income sources.

Of course, the bank would still have to complete the loan application by assessing the property they intend to buy. But at the very least, it gives prospective buyers some level of comfort about paying earnest money, thereby minimizing the disadvantage of cash buyers.

JPRE: I've verified with BPI Home Loans that they do CAs. I'm not sure if other banks do this and why they haven't marketed this to their clients.