What is Conditional Loan Approval and How Does it Work?

Conditional loan approval is an important part of the home buying process. It means the lender has reviewed your loan application and is likely to approve it, but there are still a few steps you need to take before you can close on the home.

I want to explain what conditional approval is, how it differs from preapproval, the conditions lenders commonly require, and why it puts you in a stronger position as a buyer. This guide will provide homebuyers with a clear understanding of conditional loan approvals so you know what to expect during the financing process.

What Exactly is Conditional Loan Approval?

Conditional approval means the underwriter reviewing your mortgage application is satisfied with most of the information you’ve provided, but needs a few more items before giving full approval.

Here’s a simple overview of what conditional approval means:

• The underwriter has reviewed your credit report, income, debts, and other financial information

• They are likely to approve your mortgage application if you meet certain requirements laid out in the conditional approval letter

• You’ll need to submit additional documentation or take other steps to fulfill the underwriter’s conditions

• Final loan approval is not guaranteed until you meet all requirements.

So in short, conditional approval means you’ve passed the initial underwriting review, but there are still a few hurdles before you cross the finish line.

How Conditional Approval Differs from Preapproval

Preapproval and conditional approval sound similar, but there are important differences:

Preapproval

• Based on limited information you provide like income, debts, and credit scores.

• No underwriter review.

• Gives an estimate of how much you may be able to borrow.

• Not a firm approval.

Conditional Approval

• Underwriter reviews your full credit report, income docs, assets, debts, etc.

• Underwriter states you’re likely to be approved if you meet all requirements.

• Provides a strong indication your mortgage will be approved.

• Puts you in a much stronger position compared to preapproval only.

As you can see, conditional approval requires underwriter review and comes with an almost certain chance of final approval, making it much stronger than preapproval.

Common Conditions Required by Lenders

The underwriter may need you to take care of a few items before issuing final loan approval. Some common conditions include:

• Submitting bank statements – To verify your assets, debts, and cash reserves.

• Providing income documentation – W-2s, paystubs, or tax returns to validate your income.

• Getting homeowners insurance – Lenders want to ensure the property is covered.

• Obtaining an appraisal – Ensures the home value supports the loan amount.

• Completing a home inspection – Identifies any major defects with the property.

• Securing title insurance – Covers issues that could impact legal ownership of the home.

• Explaining large deposits – Any recent large deposits must be sourced.

• Signed gift letters – For any gift money given for the down payment.

Fulfilling these requirements in a timely manner helps ensure your conditional approval leads to a final loan approval.

Why Conditional Approval Strengthens Your Offer

There are a few key reasons why conditional approval gives you an edge over buyers with just preapproval:

1. Sellers know you can get financing

Once the underwriter reviews your application and provides conditional approval, the seller can be confident you are very likely to get approved. This gives you a competitive advantage.

2. Locks in mortgage rates

Once conditionally approved, you can usually lock in an interest rate. This protects you from rate hikes while house hunting.

3. Speeds up the closing process

Since the underwriter has already reviewed your documentation, the final underwriting steps move faster. This helps shorten the time between offer acceptance and closing day.

4. Buyer flexibility on closing date

If you need flexibility on when you can close, conditional approval enhances your negotiating position to pick a closing date that works for you.

5. Leverage in bidding wars

In competitive purchase situations, conditional approval signals to the seller you have the financing nearly locked up. This tips the scales in your favor versus offers with just preapproval letters.

Clearly, conditional approval provides advantages that can help you win when bidding against other buyers.

How Long After Conditional Approval Until Final Approval?

The timeline between conditional approval and final loan approval varies, but here are some general guidelines:

• 1-2 weeks for the underwriting conditions to be cleared

• 1-2 weeks between final approval and closing date

So in total, expect around 3-6 weeks between conditional approval and closing on the home. The exact timeline depends on how quickly you satisfy the underwriter’s requirements. Stay in close contact with your loan officer to speed up the process.

Can a Mortgage be Denied After Conditional Approval?

While rare, it is possible for a mortgage to be denied even after getting conditional approval. Some reasons this can happen include:

• Taking on significant new debt

• Loss of income

• Unable to verify critical documentation

• Home appraisal comes back too low

• Major issues found during inspection

• Change in borrower’s financial profile

The best way to prevent this is being conservative with your finances leading up to closing day. Avoid large purchases, maintain your income sources, and stay on top of any requests from your loan officer.

Wrap Up

To summarize the key points:

• Conditional approval means you’ve passed initial underwriting but have a few more steps before final approval.

• It provides a major advantage over preapproval when making an offer.

• Common conditions include verifying income, assets, home value, insurance, etc.

• The entire process from conditional approval to closing usually takes 3-6 weeks.

• While rare, there is still a chance of denial even after conditional approval.

Now that you understand exactly what conditional loan approval entails, you can feel confident taking this intermediary step in the lending process. Conditional approval puts you in a great position to have your offer accepted, lock in low rates, and cruise smoothly to the finish line!