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.
Getting a mortgage to buy a home is an exciting yet complicated process. You submit your application, provide documents, and await approval from the lender. Oftentimes, you may receive a “conditional approval” before getting a final loan approval. But what exactly does conditional approval mean?
What is Conditional Loan Approval?
A conditional loan approval means the lender has reviewed your application and is prepared to approve your mortgage provided certain conditions are met first.
These conditions may include providing additional paperwork, getting the home appraised, securing homeowners insurance, or meeting other stipulations outlined in the conditional approval letter.
Conditional approval comes after you’ve been preapproved but before receiving full loan approval. It’s an important milestone, but not a guarantee you’ll get the mortgage. Failing to meet the lender’s requirements could still result in denial.
Why Do Lenders Issue Conditional Approvals?
There are a few key reasons a lender may provide conditional rather than full approval
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Missing paperwork: The lender may require additional pay stubs, tax returns, bank statements or other documentation to verify your finances before approving the loan.
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Home appraisal: The lender may want to get the property appraised and ensure it’s worth the purchase price before issuing final approval.
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Homeowners insurance: You may need to secure a homeowners insurance policy for the new property before the lender will approve the mortgage.
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Credit inquiries: If you’ve applied for other loans recently, the lender may want to verify there are no new debts before approving the mortgage.
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Letter of explanation: For large account transfers or deposits, the lender may request a letter explaining the source of funds.
Basically, conditional approval allows the lender to fill any information gaps and complete due diligence before committing to the mortgage.
The Conditional Approval Process
Here are the typical steps in the conditional loan approval process:
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Preapproval: You provide financial information for preapproval to determine the loan amount you qualify for.
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Application: You formally apply for a mortgage, allowing the lender to review your credit, income, assets and debts.
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Underwriting: The lender underwrites your application to analyze if you meet lending guidelines. Additional verification may be needed.
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Conditional approval: The lender issues a conditional approval outlining requirements to be met for final approval.
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Fulfilling conditions: You provide any additional documents and complete tasks outlined in the conditional approval.
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Final approval: Once all conditions are met, the lender issues a clear to close or full approval.
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Closing: You review final loan documents and close on the home purchase.
Common Conditions in a Conditional Approval Letter
Conditional approval letters will outline the specific requirements you must meet for the lender to finalize the mortgage. Some common conditions include:
- Providing bank statements to explain large deposits or transfers
- Supplying additional paystubs or tax return documentation
- Getting the property appraised to confirm value
- Securing homeowners insurance for the new home
- Paying down existing debts to improve the debt-to-income ratio
- Avoiding new credit inquiries before closing
The lender may also ask you to sign updated disclosures and provide a letter confirming any gifts used for the down payment.
What Happens If You Don’t Meet the Conditions?
If you fail to satisfy the terms outlined in the conditional approval letter, the lender will most likely deny the mortgage application.
For instance, if you never submit the requested bank statements or don’t get the required home appraisal done in time, the lender may decide it doesn’t have the information needed to approve the loan.
If your application gets denied, you have a few options:
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Reapply with the same lender: You may be able to reapply and go through underwriting again if you can now meet the approval conditions.
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Try another lender: You could shop around and apply with a different lender, providing all required documentation up front to potentially get fully approved faster.
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Appeal the denial: In some cases, you may be able to appeal the lender’s denial decision by providing additional context. But appeals don’t always work.
The best approach is to make sure you satisfy all requirements in the conditional approval letter within the lender’s specified timeframe. This will provide the smoothest path to getting your mortgage approved.
How Long Does It Take to Get Final Approval?
There is no set timeframe for how long it takes to go from conditional approval to full mortgage approval.
It depends on the specific conditions and how quickly you’re able to fulfill them. For instance, if you just need to submit some additional bank statements, you may be able to provide those within a few days.
But if you need to get the home appraised or secure homeowners insurance, it could take several weeks to complete those conditions before the lender will issue a final approval.
The best practice is to proactively work on satisfying conditional approval requirements as soon as possible so as not to delay closing. Maintain open communication with your loan officer on the status as well.
Alternatives to Conditional Approval
Some borrowers try to avoid getting a conditional approval that may create uncertainty or extra steps. A couple options include:
Getting fully approved upfront – Being well prepared by submitting all required financial documents and paperwork when first applying can improve the chances of getting fully approved faster without conditions.
Pre-underwriting – Some lenders offer pre-underwriting before you make an offer on a home. This very thorough review of your finances early on can catch any issues that might lead to a conditional approval down the line. There is a credit check required though.
That said, conditional approval is common and you may receive one even with lots of upfront preparation. The key is working diligently to satisfy the lender’s requirements so you can get finalized and closed on time.
The Takeaway
A conditional loan approval represents a preliminary thumbs up from the lender, but full approval is still pending. Certain requirements outlined in the conditional approval letter will need to be met for the mortgage to be finalized.
This gives the lender a chance to complete due diligence and collect any missing information before committing to the loan. While not guaranteed, responsively satisfying the lender’s conditions provides the best chance at securing your home financing.
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 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 doesnât guarantee final mortgage approval, only that the lender will finance your home once you meet their pending conditions.
Conditional approval occurs near the end of the mortgage application process. Specifically, after youâve 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, for example, once the client provides 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 â the person who determines whether you meet the guidelines for a particular loan â thinks most of your information looks good but needs further documentation or clarification before youâre fully approved, theyâll issue a conditional approval.
When youâre working on a refinance, you skip initial mortgage approval and move directly to conditional approval because you donât have to find a house and execute a purchase agreement.
What Does A Conditional Approval Mean? Homebuying 101
FAQ
What does it mean if my loan is conditionally approved?
Can a loan be denied after conditional approval?
Is it good to be conditionally approved?
How long after conditional approval is final approval?
What’s the difference between pre-approval and conditional loan approval?
With mortgage pre-approval, an underwriter doesn’t review your financial documentation. In contrast, with conditional loan approval, an underwriter does take that step. You’ll be issued a letter of conditional approval once that review is complete.
What is a conditional approval mortgage?
A **conditional approval mortgage** is a level of approval from the underwriter that tells you where you are in the mortgage application process.It means that your mortgage underwriter will likely approve
What happens if you get conditional approval for a home loan?
If you get conditional approval for a home loan, you show sellers you’re a strong candidate. That could come in handy in a bidding war. Conditional loan approval could also speed up the closing process. For a mortgage to close, there’s lots of financial information for lenders and underwriters to review and process.
How do I apply for conditional loan approval?
Here are the steps to applying for conditional loan approval: Shop around with the best mortgage lenders to find the best home loan offer. Provide the lender you choose with all of the financial information it requests. Tell your lender you want a notice of conditional loan approval once your loan reaches that stage.