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.

Let’s take a look at what the different types of approval look like 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 lend you money 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, i.e., once the client has provided 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.

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. 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, a preapproval 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 requirements for a preapproval can vary depending on the lender you speak with. They may even offer a couple of different types of preapprovals with varying expiration dates.

To help clear this up, we’ve broken the mortgage approval process down into different stages.

Prequalified Approval

A prequalified approval is the easiest form of mortgage approval to get. In order to get a prequalified approval, your credit report is pulled to get a look at your median FICO^® Score and the existing monthly debt that shows up in 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.

Verified Approval

A Verified Approval starts the same way a prequalified approval starts. Your credit report is pulled for a look at your median FICO^® Score and your existing debts.

The difference here is that your lender will verify your income and assets, giving you an extremely accurate picture of exactly how much you can afford. The verification of your credit and finances is also very important for sellers and their real estate agents. When they know your data is verified, they’ll have much more confidence that your offer is serious, and you’re more likely to close.

During the Verified Approval process, you share income and asset documentation with us, like W-2s, bank statements and tax returns. Our team will review your paperwork 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 an 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 initial mortgage 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 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.

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.

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 paperwork 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 would 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.
•  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.

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 any 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.

Interested in getting your own mortgage approval process started? Start the mortgage process online today and take that first step toward owning your new home.

¹ Participation 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.