Conditionally Approved Loan Meaning: A Complete Guide

Getting a mortgage can be an arduous process with lots of paperwork, waiting, and confusion over vague status updates from lenders. One such puzzling term you may encounter is “conditional approval” on your loan application. But what exactly does it mean and what should you do when you get this notice? This comprehensive guide breaks down everything you need to know about conditionally approved loans.

What is Conditional Approval?

Conditional approval is a common stage in the mortgage loan underwriting process where the lender states they will provide financing subject to the applicant fulfilling certain stipulated conditions

It indicates that while you have met the lender’s initial requirements to qualify for a home loan there are still some loose ends that need to be tied up before they can give full and final approval.

These conditions usually relate to providing additional documentation, such as bank statements, tax returns, employment details, or gift letters for funds being gifted to you. Or it may be contingent on other external factors like the appraisal value or inspection of the property.

Essentially, you are a promising candidate for a mortgage in the lender’s eyes, but they need you to check some extra boxes before they can officially approve the loan. Fulfilling the conditions transforms a conditional approval into an unconditional one.

Why Do Lenders Issue Conditional Approvals?

There are several reasons why lenders provide conditional rather than outright full approval:

• Need More Information: The lender requires supplementary documents to verify your financial situation before feeling comfortable to approve the large loan amount. This provides them with a fuller picture.

• Underwriting Still in Progress: The underwriting department needs more time to comb through your application and confirm all details. Conditional approval buys them that time.

• Hiccups in Application: Minor issues have surfaced that require simple actions like a letter of explanation from you or confirming employment. Conditional approval allows the process to keep moving forward.

• Contingent on External Factors: The property itself may have triggered the need for conditions, for example, if the appraisal comes under the purchase price or title issues arise.

• At Your Request: Some borrowers request conditional approval to lock in an interest rate while they gather remaining documents. This provides flexibility.

What are the Common Conditions Set by Lenders?

Some typical conditions that lenders may impose before changing your mortgage approval from conditional to unconditional include:

• Submitting missing bank statements, tax returns, or other financial records

• Providing proof of homeowners insurance

• Getting a signed gift letter for any gifted funds

• Explaining large deposits or withdrawals in bank accounts

• Verifying employment details

• Addressing issues discovered during the appraisal like a low valuation

• Resolving problems with the title documents

• Submitting a written explanation for any credit concerns

• Showing additional assets if the lender requires a larger down payment

What Happens After Conditional Approval?

1. Review Conditions: Thoroughly review the conditional approval letter/email from the lender detailing the list of conditions. Note submission deadlines for any documents required.

2. Gather Info: Compile all the necessary supplementary paperwork and track down any external approvals needed. For example, reach out to your employer for an employment verification letter.

3. Submit Conditions: Submit all required documents and information back to the lender well before the provided deadline. Send prompt explanations for any credit/deposit issues.

4. Final Review: The underwriting team will undertake a final comprehensive review of your full application once conditions are met.

5. Clear to Close: If everything checks out, they will issue a clear to close, meaning you are unconditionally approved!

6. Closing: Final loan documents are prepared, funds disbursed, and congratulations – you close on your new home!

Can a Conditional Approval Be Denied?

Yes, it is possible for your mortgage to be denied even if you initially received conditional approval from the lender. Some scenarios where this could occur:

• You are unable to satisfy all the conditions within the mandated time frames. The approval essentially expires.

• Your final documentation uncovers new issues like undisclosed debts or income inconsistencies that cause the underwriter concern.

• New negative information surfaces in your credit report or employment profile.

• The appraised value comes in far lower than the purchase price, putting the loan amount at risk.

• Title problems or inspection issues can’t be resolved amicably with the seller.

However, denial is not necessarily the end. You may be able to reapply and go through underwriting again with updated documents that overcome the problems. As you’ve gotten conditional approval before, the lender is likely willing to work with you further.

Tips for Avoiding Denial After Conditional Approval

• Carefully manage your finances and avoid taking on new debts before closing.

• Submit all paperwork well before deadlines and be responsive to any additional requests.

• Consistently keep your lender updated on any changes in income, debts, assets, address etc.

• Thoroughly research the property and work reasonably with sellers to resolve any issues that arise.

• Ask your lender to review your final documentation package before submission to ensure it fulfills all conditions.

Conditional Approval vs Other Types of Approval

There are a few other types of mortgage approval to be aware of:

• Pre-Approval: A preliminary thumbs up from the lender based on limited data. Not a guarantee of final approval.

• Pre-Qualified: Very initial ballpark estimate of loan amount you may qualify for.

• Unconditional Approval: All conditions met, loan approved, clear to close!

• Verified Approval: Assets, income, and details confirmed. Final step before closing.

Conditional approval fits between pre-approval and unconditional approval in terms of certainty, with your loan contingent on meeting additional requirements set out by the lender.

Is Conditional Approval Binding?

Conditional approval is not binding on its own, as it states the lender will provide the mortgage only if certain conditions are satisfied. Those conditions need to be met for conditional approval to transition to full approval.

However, once all conditions are fulfilled, the lender is obligated to fund the loan, so conditional approval provides a certain degree of assurance. But borrowers should still understand lenders can deny the loan if new significant problems emerge later in underwriting.

The Takeaway

Conditional approval is a frequent and important part of the mortgage process, signaling you are near the final approval finish line. Satisfying the lender’s conditions allows you to seal the home loan. Stay diligently focused on your conditions, be transparent with your lender, and you’ll get the keys to your new home in no time.