How Is Conditional Approval Different From Approval?
When you inquire about qualifying for a home loan, you’ll likely hear the term “conditionally approved” but might not be sure what that means or how it differs from an initial mortgage approval to buy or refinance a home.
The article below can help you as you go through the process to understand the difference between these terms.
What Does Conditionally Approved Mean?
A conditional approval happens when a lender is otherwise satisfied with your loan application, but requires you to meet certain criteria before you can be fully approved. Being conditionally approved doesn’t guarantee you’ll be approved in the end, only that the lender is willing to loan you the money should you meet their pending conditions.
This may occur once the client has provided the necessary documentation to get their loan set up and had it 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 a few things taken care of before you’re fully approved, they’ll issue a conditional approval at this point.
When you’re working on a refinance, you would skip initial mortgage approval and move directly to getting a conditional approval because you don’t have to go through the process of finding a house and executing a purchase agreement.
What A Mortgage Approval Actually Means
Here are some basic definitions around an initial mortgage approval.
If you’re shopping for a new home, it’s a good idea to get an idea of what you can afford before hitting the pavement. Lenders traditionally give you what’s known as a preapproval, which can give you an idea of the rates and terms you may qualify for.
Provided the lender asks the right questions and gets the appropriate documentation upfront, the preapproval system can give you all the confidence you need when you’re putting an offer on a home.
However, not all preapprovals are the same. The definition of preapproval can vary depending on which lender you speak with. They may even offer a couple of different types of preapproval with varying expiration dates.
To help clear this up, we’ve broken down the mortgage approval process into a few different levels. Take a look below:
Prequalified Approval is the easiest form of mortgage approval to get. In order to get a prequalification, your credit report is pulled to get a look at your median FICO® Score and at the existing monthly debt you have showing up in your credit report. You’re also asked for a verbal statement regarding your income and assets that you have saved.
Your monthly debts are compared to your monthly income to get what’s called your debt-to-income ratio (DTI). Your statement on assets is used to determine how much you might be able to afford for a down payment.
However, because it’s a Prequalified Approval and income and assets aren’t actually backed up with hard documentation, this really serves as just an estimate of what you might be able to afford.
A Verified Approval with Rocket Mortgage® starts the same way as a Prequalified Approval does. Your credit report is pulled to get a look at your median FICO® Score and a look at your existing debts.
The difference here is that Rocket Mortgage will verify your income and assets for you, giving you an extremely accurate picture of exactly how much you can afford. This is also very important for sellers and their real estate agents. If they know your data is verified, they’ll have much more confidence that your offer is serious and may close.
During the Verified Approval process, you share income and asset documentation with us like W-2s, bank statements and tax returns. These will be reviewed by our team within 24 hours and you’ll receive a letter detailing exactly how much you can afford.
This should give you the confidence to go forward and make your offer. If through no fault of your own you don’t close after getting a Verified Approval, we’ll give you $1,000.¹
Conditional Approval Vs. Initial Mortgage Approval
People often confuse conditional approval and the approval you get to shop for a home.
Loans are initially approved by a Home Loan Expert who has reviewed your income and credit information. Your information must be verified and approved before a decision can be made.
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 a loan up to a specified amount.
Conditional approval comes after your initial approval and involves going a little deeper. An underwriter conducts a strict documentation review before your loan is conditionally approved.
If the conditions aren’t met, the client might not be able to close on the loan.
Conditions For A Conditional Loan Approval
There are a few common conditions attached to a conditional home loan approval.
Additional documentation, such as pay stubs, paperwork for business income and tax documentation, is often required for final approval. Even if some of this documentation has been reviewed upfront, your lender may ask for more paperwork based on the loan option you’re trying to qualify for.
As an example, let’s say that a young couple is buying their first home, and grandma wants to give them $5,000 for the down payment. A check in that amount is considered a large deposit, and the underwriter wants the source verified before they can close. In this case, grandma and the couple would just have to provide a gift letter and some documentation on the funds transfer. Once this is done, they would be cleared to close the loan.
Other things that might receive additional scrutiny include written verification of employment from your employer or additional asset statements, depending on what’s needed for your loan.
Conditional approval can also require purchase agreement addendums. These can include the following:
- Title verification
- Getting a home appraisal
- Having a home inspection done
- Purchasing homeowners insurance
- Calculating the loan-to-value ratio (LTV)
The LTV is the reverse of your down payment in a purchase situation, or the inverse of your equity amount in a refinance.
This 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 a conditional approval for a home loan are at risk for 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 is unable to verify the data provided by the client.
- The home the client is trying to purchase has an unexpected lien.
- The client has a judgment on their record.
- 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 of the additional information you submit doesn’t match up with what the lender was given at the time of the initial mortgage approval. If you have a loss of income or buy a new car at the same time you’re trying to get your mortgage, this could throw off your DTI and cause the lender to deny your loan on the basis that it’s now 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 called a “formal approval.” Receiving unconditional approval means that your loan officer is ready to move forward towards 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 what further requests the underwriter asks for. You can help speed this process along by communicating with your lender and having all of 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 the mortgage on your new home.
Interested in getting your own mortgage approval process started? You can apply online with Rocket Mortgage® today and take that first step toward owning your new home.
¹Participation in the Verified Approval program is based on an underwriter’s comprehensive analysis of your credit, income, employment status, debt, property, insurance, appraisal and a satisfactory title report/search. If new information materially changes the underwriting decision resulting in a denial of your credit request, if the loan fails to close for a reason outside of Rocket Mortgage’s control, or if you no longer want to proceed with the loan, your participation in the program will be discontinued. If your eligibility in the program does not change and your mortgage loan does not close, you will receive $1,000. This offer does not apply to new purchase loans submitted to Rocket Mortgage through a mortgage broker. Additional conditions or exclusions may apply. Verified Approval within 24 hours of receipt of all requested documentation.