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 youâre âconditionally approved,â you might be wondering how it differs from initial mortgage approval to buy or refinance a home.
Letâs take a look at the different types of mortgage approval and how they are applied during your homeownership journey.
Conditional loan approval is a term that often comes up during the home buying process, but what exactly does it mean? As a first-time homebuyer researching mortgages, I was confused by the differences between pre-approval, pre-qualification, and conditional approval. After speaking with loan officers and doing my own research, I want to provide a comprehensive guide to conditional loan approval to help other buyers understand this important concept.
What is Conditional Loan Approval?
Conditional loan approval is a statement from a mortgage lender indicating that they are willing to approve your loan application, contingent on certain conditions being met. This is an advanced stage in the mortgage process that comes after you’ve submitted your full application with all required documentation.
At this point, the lender has reviewed your credit, income, assets, and other details and has made a preliminary decision to approve your loan. However, the approval comes with certain stipulations that must be fulfilled before the lender will give full and final approval.
Common Conditions for Loan Approval
There are a few common conditions that lenders may require you to meet before they will remove the contingencies and give full approval:
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Appraisal – The property must appraise for at least the purchase price If it appraises for less, you may have to provide additional funds or renegotiate with the seller.
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Employment verification – The lender will verify your employment status and income directly with your employer right before closing.
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Credit check – A final credit check will be done right before closing to ensure there have been no new negatives
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Down payment funds – You must be able to document the source of funds for your down payment, if required.
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Homeowners insurance – You must have a homeowners insurance policy in place for the new property.
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Clear title – The title report must not show any issues with liens, judgments, easements, etc.
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Loan program requirements – If applying for a special program like FHA, USDA, or VA loans, you must meet all specific guidelines.
As you can see, the lender wants to verify all aspects of your financial situation before removing contingencies and approving the loan unconditionally. The conditional approval provides some security that your loan should go through, as long as you continue meeting the requirements.
The Benefits of Conditional Approval
There are a few key benefits to getting conditional approval on a mortgage:
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Stronger buying position – Conditional approval shows sellers that you are a serious buyer who has already gone through underwriting. This can give you an edge in competitive markets.
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Speeds up closing – Since the bulk of underwriting is complete, the loan can close more quickly once all conditions are met.
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Locks in current rates – The lender may let you lock in current interest rates with conditional approval, protecting you from future rate hikes.
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Eases anxieties – It provides reassurance that the loan should be approved, giving you confidence as you move forward.
How Conditional Approval Differs from Pre-Approval
Conditional approval is sometimes confused with pre-approval, but they are distinct stages:
Pre-Approval
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Initial estimate from lender based on limited documentation
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Not a guarantee of final loan approval
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No underwriting has been completed yet
Conditional Approval
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Underwriter has reviewed full application and documentation
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Notice states loan is approved assuming conditions are met
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Strong indication loan will be approved after final verification
As you can see, conditional approval is a more advanced stage coming after underwriting review. While pre-approval provides an initial ballpark, conditional approval means the lender is ready to approve your actual loan, pending those last few requirements being met.
Steps to Getting Conditional Approval
If you want to get a conditional approval letter for your mortgage, follow these steps:
1. Submit loan application with all documentation
Provide your lender will all required financial documents upfront – paystubs, tax returns, bank statements, etc. Disclose all details accurately.
2. Ask lender to evaluate for conditional approval
Specifically request that your loan be assessed for conditional approval once the underwriting review begins.
3. Wait for underwriter to complete review
This typically takes anywhere from a few days to a couple weeks, depending on lender volume. Be patient.
4. Fulfill any conditions from the lender
If approved conditionally, take any steps needed to satisfy the lender’s requirements for final approval.
5. Get final loan approval
After satisfying all conditions, the lender will remove contingencies and give full, clear-to-close loan approval.
Can a Loan be Denied After Conditional Approval?
Yes, there is still a possibility your loan could be denied even after getting conditional approval. Here are some reasons why:
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You fail to meet the lender’s stated conditions. For example, the property appraises for less than expected.
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Your financial situation changes. For instance, you lose your job or take on new debt.
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The lender finds inaccurate or contradictory information in your application.
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The property has defects uncovered during inspection.
To avoid denial, be sure to comply with all of the lender’s stipulations in a timely manner. Notify them of any changes to your finances as well. Conditional approval gets you close to the finish line, but you need to follow through on requirements to get across it.
Alternatives to Conditional Approval
Some borrowers opt not to go the conditional approval route. Here are two alternatives:
Pre-Approval Only
You can get pre-approved first and then go straight to final loan approval after submitting your full application. This speeds things up initially but can mean a longer period between offer and closing.
Direct to Final Approval
If you have an airtight financial profile, some lenders may be willing to approve your loan application outright without conditions. This eliminates contingencies but is less common.
For most borrowers, conditional approval strikes the right balance, giving confidence in the loan yet still allowing the lender to complete their due diligence.
Final Thoughts
Conditional loan approval brings you to the precipice of the home buying journey by signaling the lender is ready to approve your mortgage application. As long as you continue satisfying the requirements outlined, you can feel reassured that the loan should close.
Just be sure to communicate with your lender throughout the process and surface any financial changes promptly to avoid denial at the eleventh hour. Get support from your real estate agent or attorney whenever needed as well.
While conditional approval doesn’t remove all risk, it does provide a greater degree of certainty. Once all boxes are checked, you can move on to the next chapter of homeownership with peace of mind!
See What You Qualify For
If youâre shopping for a new home, itâs 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.
Letâs take a look at common approvals you might encounter when you first start shopping for a mortgage.
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 arenât verified with hard documentation, a prequalified approval only serves as a broad estimate of what you might be able to afford.
Lenders traditionally give you whatâs 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 youâre 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.
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 canât 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 wasnât 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 doesnât 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 Does A Conditional Approval Mean? Homebuying 101
What does conditional approval mean?
When a mortgage application is conditionally approved, it means the lender has gone through underwriting and is expected to approve you for a home loan, as long as you meet certain conditions first. Conditional approval is not the same as preapproval and usually comes after preapproval but before receiving a mortgage approval letter.
What is a conditional loan approval?
A conditional loan approval is a letter or notice from a mortgage lender stating that your assets and documentation have been reviewed and you’re eligible to close on a home loan provided certain specified conditions are met. Conditional loan approval is different from a pre-approval.
What is a conditionally approved mortgage?
A mortgage application has gone through underwriting, and the lender is expected to approve you for a home loan—as long as you meet certain conditions first. This is referred to as a conditionally approved mortgage. Conditional approval is not the same as a preapproval.
What happens if a loan is conditionally approved?
When you’re conditionally approved, there will be a dollar amount you’re approved for. However, this is conditional and is not a guarantee of final approval. The next steps will be to satisfy the lender’s remaining conditions to transition to a firm approval. What types of conditions exist?