What is a Conditional Loan Approval?

A conditional loan approval is a common step in the mortgage loan process where the lender approves your loan application tentatively, subject to certain conditions being met This type of approval provides borrowers with some assurance that their loan application is on the right track, while also giving lenders an opportunity to gather any additional information needed before issuing a final loan approval

How a Conditional Loan Approval Works

When you apply for a mortgage loan the lender will review your credit history income, assets, and other financial information to determine if you qualify. However, the lender may need additional documentation or want to verify certain details before they can give full approval.

Rather than make you wait indefinitely for a final decision, the lender will issue a conditional approval outlining the specific conditions you must satisfy for your loan to be formally approved. These conditions can include:

• Providing additional paystubs, tax returns, or bank statements
• Receiving the home appraisal or title search report
• Having the property surveyed or inspected
• Paying down existing debts to improve your debt-to-income ratio
• Having gift funds properly documented
• Verifying employment status

The lender’s underwriters will carefully review any new information you provide to ensure it is consistent with your original application. As long as you meet the stipulated conditions in a timely manner, your conditional approval will become a final loan approval.

The Benefits of Conditional Approval

There are a few key advantages to receiving a conditional loan approval:

• Forward Progress A conditional approval signifies that your application meets basic eligibility criteria and is likely to be approved unless issues arise. While not guaranteed, it allows you to move forward as if final approval is imminent.

• Motivation to Act: The conditions give you a clear to-do list of steps to take to get your final approval. This keeps the lending process moving.

• Lender Flexibility: If you have difficulty meeting a condition, the lender may be willing to modify it to enable your loan approval. Their conditional approval shows they want to approve you.

• Reassurance When House Hunting: A conditional approval gives you confidence to make an offer on a home, knowing your financing is nearing completion. You can provide the seller with proof of your conditional approval.

As long as you satisfy the lender’s conditions in a timely manner, a conditional approval puts you well on your way to getting your mortgage loan funded.

When Conditional Approval Happens

There are a few common scenarios where a lender may issue a conditional, rather than final, loan approval:

1. More Documentation Needed

The lender may require additional financial statements, tax returns, or other documents to supplement your original application. A conditional approval gives them time to review the new information.

2. Appraisal or Title Issues

Problems can arise during the home appraisal or title search processes that may need resolution before final approval. A conditional approval allows these issues to be addressed.

3. Underwriting Taking Longer Than Expected

Extensive applications may require some extra underwriting time. Rather than delay approval indefinitely, the lender grants conditional approval in the interim.

4. Credit Problems or Changes

If your credit score drops, you take on new debts, or issues come up in your credit review, the lender may want to re-evaluate your application but provide conditional approval in the meantime.

5. Employment Verification Delay

Lenders routinely verify borrowers’ employment status but it can take a couple weeks. A conditional approval enables the rest of the mortgage process to proceed.

How Conditional Approval Differs from Preapproval

Preapproval and conditional approval may sound similar but are very different milestones in the lending process:

• Preapproval is an initial, informal approval based only on a cursory review of your stated income and credit scores. It is not a guarantee of final loan approval.

• Conditional approval comes after your loan application has been formally submitted and involves comprehensive underwriting. It provides a high degree of assurance your loan will ultimately be approved.

Preapproval estimates your borrowing capacity; conditional approval affirms you meet the lender’s qualification standards, subject to satisfying defined conditions.

Steps after Receiving Conditional Approval

If you’ve received a conditional loan approval, here are next steps to take:

• Review all the conditions carefully to ensure you understand what information the lender needs and can comply by the deadlines given.

• Act swiftly to fulfill conditions like providing documents, paying down balances, or resolving title issues. This shows the lender you are committed to getting approved.

• Keep your lender updated on progress satisfying conditions and let them know immediately if any are proving difficult to meet.

• Avoid major financial changes like new debts, switches in employment or large purchases that could derail your approval.

• Stay in close contact with your loan officer so you know when final approval occurs and can keep the rest of the home buying process moving.

• Read your closing paperwork carefully to ensure final loan terms match those you agreed upon. This includes interest rate, loan amount, fees and other closing costs.

Can a Conditional Approval Be Denied?

Yes, it is possible for a conditional approval to ultimately result in a loan denial. Reasons this can happen include:

• You fail to satisfy the lender’s set conditions in the required timeframe.

• The additional documentation you provide raises concerns or contradicts your initial application.

• Your financial circumstances deteriorate before closing. For instance, you lose your job or take on additional debts.

• New information surfaces in the appraisal or title search that killed the deal, like a lien on the property.

• You are unable or unwilling to address issues that arise during the underwriting process.

To avoid denial, it is critical you meet all conditions promptly, avoid further financial complications, and maintain open communication with your lender if any hiccups occur.

While disappointing, a denial after conditional approval does not necessarily mean you cannot get approved in the future. In some cases, you may just need to reapply once issues get resolved or your financial situation stabilizes.

Alternatives if Denied After Conditional Approval

If your conditional mortgage approval gets revoked, here are some options:

• Talk to your loan officer to understand specifically why you were denied and determine if the issues can be resolved. The lender may reconsider if conditions change.

• Request a re-evaluation in 6-12 months after you’ve had time to improve your financial standing by paying down debt, increasing your income or savings.

• Ask about alternative loan programs you may qualify for, like FHA loans or adjustable rate mortgages with lower initial qualification standards.

• Work to improve your credit so you can qualify for better mortgage rates when you reapply. Getting denied provides useful insight into where your vulnerabilities lie.

• Consider using a mortgage broker for your next application. They have access to a broad range of lending programs and can help match you with the right options.

• Save a larger down payment so you can qualify for more favorable loan terms by borrowing a lower percentage of the purchase price.

While a conditional approval that gets withdrawn is certainly discouraging, it is not the end of the road. Use it as a learning experience so you can eventually get the green light.

Final Thoughts

Receiving a conditional loan approval means you’ve made significant progress towards getting your mortgage loan funded. Fulfilling the lender’s stipulated conditions in a timely manner should clear the path to full approval. However, take nothing for granted until you have an unconditional approval in writing. Be proactive communicating with your lender and vigilant avoiding financial missteps. With focus and discipline, you’ll work through the conditional approval process successfully.