You’ve found the home of your dreams and applied for a mortgage to buy it. Then, your lender says you’re “conditionally approved” for a mortgage. What does conditional approval mean?
Conditional approval is a step in the home-buying process that occurs after preapproval and before getting final approval on your mortgage loan. There are a few different types of mortgage approvals that happen before you are finally granted a home loan. Let’s take a look at what they are and how they are applied during your homeownership journey.
Key Takeaways:
- Conditional approval for a mortgage is a step that sometimes, but not always, occurs in the home-buying process. There are several steps involved in obtaining formal approval for a loan.
- Conditional approval by a lender happens toward the end of the approval process, usually after preapproval, when a lender or underwriter of the loan wants more information about your finances.
- If you are given conditional approval and meet any pending requirements to close on the loan, your loan will be formally approved.
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 generally occurs after preapproval and once the underwriter has completed an initial review of your full application – specifically, after you’ve made an offer and submitted your loan application, but before final, also known as formal, approval.
When you are asked to provide additional documentation, it may include the following:
- Employment and income verification
- Pay stubs
- Tax returns
- Bank statements
- Debt obligations (credit cards or loans)
- Utility bills
- Asset statements
The underwriter is the person who determines whether you meet the guidelines for a particular loan. If they think most of your information looks good but needs further documentation or clarification before you’re fully approved, they’ll issue a conditional approval.
Expert tip: When you refinance an original mortgage, you go straight to conditional approval while your application is being processed by the underwriter. This is because you don’t have to execute a purchase agreement on a home you already own.
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Types of Mortgage Approval
Here are some common approvals you will likely 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 serves only as a broad estimate of what you might be able to afford.
Preapproval
A preapproval provides a clear picture of the mortgage rates and terms you qualify for based on a thorough review of your finances. Unlike a simple prequalification, it carries more weight because lenders conduct a hard credit check, review your full credit report and typically require bank statements and other documentation to verify your assets.
When you have a preapproval letter from a lender, you can make a competitive offer on a home. And sellers and real estate agents may take preapproved buyers more seriously because they know their financing has been vetted.
Preapproval standards vary significantly between lenders. Some have more stringent requirements, while others offer different types of preapprovals, such as those with different expiration dates. Research various lenders to understand their specific mortgage approval requirements and how long a preapproval remains valid.
Conditional Approval
As mentioned, conditional approval is a step in the process that occurs after the preapproval and before the lender’s final sign-off on the mortgage. When you are conditionally approved for a home loan, it means the lender expects the mortgage to be approved if you meet specific conditions from the underwriter. For example, you may be asked to provide documentation, such as a gift letter or a written explanation about any recent large withdrawals from your bank account.
Final Approval
After the underwriter is satisfied with your application, the lender will send you a final approval letter letting you know you are approved to close on your new home. It’s the last step in the journey of applying for a home loan.
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Conditional Approval Vs. Preapproval
People often confuse conditional approval with the initial approval, or preapproval, which is the first step to help you shop for a home. When a loan officer approves your loan application, you’ll get your preapproval letter, which is based on your credit report, stated income and assets. Your income and assets may or may not be verified by an underwriter. The lender then issues a preapproval letter to help you understand the terms and estimate how much money you can likely borrow to buy a house.
Conditional approval occurs after both the preapproval and the underwriting process. If the underwriter has questions about any aspect of your financials, your loan officer may tell you your loan is in “conditional approval.” At this time, the underwriter may request additional documentation – either items that were missing from your original application or new information they need based on their detailed review.
Common requests include recent pay stubs, updated bank statements and explanations for specific transactions. Furnishing these items is critical to getting final approval; failure to provide the required documentation or satisfy the underwriter’s requests could prevent your loan from being finalized.
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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, paperwork for business income and tax forms, is often required for final approval. Depending on your loan’s guidelines, an underwriter may also request written verification of employment from your employer or additional asset statements.
Even though some of this documentation may have been reviewed up front, your lender may ask to reverify documents for freshness, especially income or asset statements, within 30 – 60 days of closing.
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.
Conditional approval can also require purchase agreement addenda. 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)
Conditional approval can also include confirmation that there are no unexpected liens or judgments on a home the borrower wants to buy.
Can You Be Denied After A Conditional Approval?
Yes. You can be denied a loan after a conditional approval if you fail to meet any of the conditions laid out by the lender.
Here are a few reasons why a borrower might be denied:
- The underwriter can’t verify the data provided by the borrower.
- The home the borrower is trying to purchase has an unexpected lien.
- The borrower has a bankruptcy judgment on their record that wasn’t previously disclosed.
- The home inspection or home appraisal uncovered unexpected issues.
- The borrower experienced a sudden decrease in income.
- The borrower has new negative entries on their credit report.
If your information changes substantially or new documentation reveals issues, the lender may rescind the approval. For example, if you experience a loss of income or buy a new car while applying for a mortgage, this will affect 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.
FAQ
The Bottom Line About Conditional Approval
Conditional approval is often a step between preapproval and formal mortgage approval. If you can meet the conditions set by the lender during the process, you can get final approval and close on your new home.
Maya Dollarhide
Maya Dollarhide is a freelance writer with over a decade of experience covering personal finance topics. Her writing credits include AARP, Bankrate, Investopedia, CNN.com, Yahoo Finance and Lending Tree. She enjoys writing articles and producing multimedia content that helps individuals and families make informed decisions about their money, from mortgages and home loans to reducing credit card debt and saving for retirement. She has also created educational materials for use in schools to teach young people about personal finance, from opening up a bank account to saving for college and beyond.
