Conditional approval is a step in the home buying process that might occur before you get your final mortgage approval. If your lender tells you that you’re “conditionally approved,” you might be wondering how it differs from initial mortgage approval to buy or refinance a home.
Let’s take a look at the different types of mortgage approval and how they are applied during your homeownership journey.
What Does Conditionally Approved Mean?
Conditional approval is when a mortgage lender is mostly satisfied with your loan application but requires you to meet certain additional criteria before you can be fully approved. Being conditionally approved doesn’t guarantee final mortgage approval, only that the lender will finance your home once you meet their pending conditions.
Conditional approval occurs near the end of the mortgage application process. Specifically, after you’ve made an offer and submitted your loan application, but before final, also known as formal, approval.
A request for additional documentation may occur at this time, for example, once the client provides the necessary documentation to get their loan set up and verified. This may include the following documentation:
- Employment and income verification
- Pay stubs
- Tax returns
- Bank statements
- Debt obligations (credit cards or loans)
- Utility bills
- Asset statements
If the underwriter – the person who determines whether you meet the guidelines for a particular loan – thinks most of your information looks good but needs further documentation or clarification before you’re fully approved, they’ll issue a conditional approval.
When you’re working on a refinance, you skip initial mortgage approval and move directly to conditional approval because you don’t have to find a house and execute a purchase agreement.
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What A Mortgage Approval Actually Means
If you’re shopping for a new home, it’s a good idea to get an estimate of what you can afford before hitting the pavement. There are several different types of approvals you might get to start your home buying journey.
Let’s take a look at common approvals you might encounter when you first start shopping for a mortgage.
Prequalified Approval
A prequalified approval is the easiest form of mortgage approval to get. To get a prequalified approval, a soft pull on your credit is performed to see your median FICO® Score and the existing monthly debt on your credit report. The lender will also ask you for a verbal statement regarding your income and assets.
Your monthly debts are compared to your monthly income to get your debt-to-income ratio (DTI). Your verbal statement about your assets is used to determine how much you might be able to afford for a down payment.
However, because your income and assets aren’t verified with hard documentation, a prequalified approval only serves as a broad estimate of what you might be able to afford.
Preapproval
Lenders traditionally give you what’s known as a preapproval, which can give you a more specific idea of the rates and terms of the mortgage you qualify for.
Provided the lender asks the right questions and gets the appropriate documentation upfront, a preapproval can give you all the confidence you need when you’re putting an offer on a home. Preapproval is considered stronger than prequalification. This is because your lender will run a hard credit check, pull your full credit report and likely ask for bank statements and other asset verification.
However, not all mortgage preapprovals are the same. The requirements for a preapproval can vary depending on the mortgage lender. They may even offer a couple of different types of preapprovals with varying expiration dates.
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Conditional Approval Vs. Initial Mortgage Approval
People often confuse conditional approval with the initial mortgage approval you get to shop for a home.
Loans are initially approved by a loan officer who has reviewed your income and credit information. Your information must be checked and approved before a decision can be made on your final loan application.
As mentioned above, your income and assets may or may not be verified by an underwriter at the time of your initial mortgage approval, depending on the level of approval you opt for or what your lender asks for upfront. After your information is reviewed, you’ll receive an approval letter stating your eligibility for the loan up to a specified amount. This is enough for you to shop for and make an offer on a home.
Conditional approval comes after initial approval and requires an underwriter to dig deeper into your income, credit and finances. This kind of approval may occur after you’ve made an offer on a home. Once you’ve submitted your application, an underwriter conducts a strict documentation review before your loan is conditionally approved. At this point, they may contact you to request additional information or documentation. Often this will be documentation that was missing from your original application, or additional information underwriters discover they need when reviewing your loan.
If the conditions aren’t met, you may not be able to close on the loan.
Meeting The Conditions Of Your Conditional Loan Approval
There are a few common conditions attached to a conditional home loan approval.
Additional documentation, such as pay stubs or paperwork for business income and tax documentation is often required for final approval. Even though some of this documentation has been reviewed upfront, your lender may ask for more based on the loan’s requirements.
As an example, let’s say that a young couple is buying their first home, and a family member wants to give them $5,000 for the down payment. Because a check in that amount is typically considered a large deposit, the underwriter wants the source of the money verified before they can close. In this case, the relative and the couple would have to provide a gift letter and some documentation on the funds transfer. Once this is done, they will be cleared to close the loan.
Depending on your loan’s guidelines, an underwriter may request written verification of employment from your employer or additional asset statements.
Conditional approval can also require purchase agreement addendums. These can include the following:
- Title verification
- Getting a home appraisal
- Getting a home inspection
- Purchasing homeowners insurance
- Calculating the loan-to-value ratio (LTV)
LTV is the reverse of your down payment when you’re purchasing a home and the inverse of your equity amount for a refinance.
The conditional approval process can also include confirmation that there are no unexpected liens or judgments on the home.
Can You Be Denied After A Conditional Approval?
Clients with conditional approval of a home loan are at risk of denial if they fail to meet any of the conditions laid out by the lender.
Here are a few reasons why a client might be denied:
- The underwriter can’t verify the data provided by the client.
- The home the client is trying to purchase has an unexpected lien.
- The client has a bankruptcy judgment on their record that wasn’t priorly disclosed.
- The home inspection or home appraisal came in with unexpected issues.
- The client experienced a decrease in income.
- The client had negative entries on their credit report.
Your loan may also be denied if any additional information you submit doesn’t match what the lender received at the time of the initial mortgage approval.
There are several circumstances you could experience and actions you could take as a buyer that might affect your ability to get approved for a loan. For example, if you experience a loss of income or buy a new car while applying for a mortgage, this could throw off your DTI. The lender may deny your loan because you no longer make enough to cover your debts, or your total debt payments are too high.
What Happens After A Conditional Approval?
Once the underwriter has received the information and documents needed to meet your pending conditions, you’ll receive “unconditional approval,” also known as “formal approval.” Unconditional approval means that your loan officer is ready to move toward closing the sale.
How Long Does Underwriting Take After Conditional Approval?
The underwriting process can take anywhere from a few days to a few weeks, depending on additional requests the underwriter makes. You can help speed the process along by communicating with your lender and having all your necessary documents available.
The Bottom Line
Conditional approval is often a step in the process from preapproval to full mortgage approval. If you can meet the conditions set by your lender, you will be on your way to getting a mortgage on your new home.
Victoria Araj
Victoria Araj is a Staff Writer for Rocket Companies who has held roles in mortgage banking, public relations and more in her 15-plus years of experience. She has a bachelor’s degree in journalism with an emphasis in political science from Michigan State University, and a master’s degree in public administration from the University of Michigan.
