Formal Approval:
1. Conditional Commitment: Formal approval represents a conditional commitment from the lender to provide the loan amount requested by the borrower. It is based on the borrower's creditworthiness, income, and other relevant financial information that has been thoroughly reviewed and assessed by the lender.
2. Underwriting Process: To reach formal approval, the loan application undergoes a comprehensive underwriting process, during which the lender verifies the accuracy of the borrower's financial statements, credit history, and other supporting documents. This process ensures that the borrower meets the lender's guidelines and criteria for loan eligibility.
3. Loan Terms: Upon formal approval, the lender provides the borrower with a detailed loan estimate outlining the loan terms, interest rate, monthly payments, and other associated costs. This allows the borrower to review the specific conditions and make an informed decision about proceeding with the loan.
4. Appraisal: In most cases, formal approval is subject to a satisfactory appraisal of the property that is being purchased or refinanced. The appraisal confirms that the property's value meets or exceeds the loan amount.
Approved in Principle:
1. Initial Assessment: Approved in principle is an initial indication from the lender that the borrower is likely to qualify for a loan based on the preliminary information provided. It is not a binding commitment or a final approval.
2. Limited Review: Unlike formal approval, approved in principle is based on a less thorough review of the borrower's financial situation. It serves as a preliminary assessment of the borrower's creditworthiness and loan eligibility.
3. Non-Binding: Approved in principle is subject to change and does not guarantee that the lender will ultimately approve the loan. The lender may require additional documentation and verification before making a final decision.
4. Loan Terms Not Finalized: The loan terms, interest rate, and other details are not finalized at the approved-in-principle stage. These details will be provided during formal approval, assuming the borrower meets all the necessary requirements.
In summary, formal approval represents a more advanced and binding stage in the loan application process, where the lender has thoroughly assessed the borrower's financial situation and provided a conditional commitment for the loan. Approved in principle, on the other hand, is an initial assessment that indicates a likelihood of loan eligibility but is not a final approval or a guarantee of the loan.