What Does It Mean When Your Loan Is Conditionally Approved?

Getting approved for a mortgage loan can be an exciting yet stressful process You submit your application, provide all your financial documents, and then anxiously await the lender’s decision. Finally, you get the news – your loan is conditionally approved! But what does that actually mean?

I was in the same boat recently when I was going through the home buying process. After months of searching, I had finally found my dream home. I quickly applied for a mortgage so I could make an offer. A few days later, my loan officer called to say I was conditionally approved. I’ll admit, I was a bit confused at first. Was this good news or bad news? Did this mean I was definitely getting the loan or not?

To help others going through this process, I wanted to provide a detailed explanation of what conditional approval means, the steps that follow, and tips for ensuring your loan closes smoothly.

What Is Conditional Loan Approval?

Conditional approval means the underwriter has reviewed your mortgage application and credit report. They have determined you meet the basic requirements to qualify for the loan, pending some additional verifications.

This is different from preapproval or prequalification, which are more preliminary assessments to estimate how much home you can afford. With conditional approval, the underwriting process has begun but is not yet complete.

Some key things to know about conditional home loan approval:

• It is a common and normal step in the mortgage process. Do not be alarmed if you receive this rather than a firm approval right away.

• You have met the basic credit and income standards required by the lender. However, the underwriter still needs to verify your employment, income sources, assets, and other information.

• There are likely some outstanding conditions you will need to satisfy for full approval. These may include providing additional documents, higher down payment, or resolving credit issues.

• Conditional approval brings you one step closer to getting your mortgage, but does not guarantee final approval.

Overall, a conditional approval is a positive sign that you are on track to get your home loan. But there remain a few hurdles to clear before you get the green light.

Common Conditions for Final Loan Approval

When you receive conditional approval, your loan officer will outline the specific conditions you must meet to progress to a full approval. Here are some common conditions to be aware of:

Income Verification

The lender will likely request additional pay stubs, W-2s, tax returns, or bank statements to verify your income, employment, and assets. Provide requested documents promptly to keep your approval on track.

Minimum Down Payment

The underwriter may require you to put down a larger down payment to qualify for the best loan terms. Be prepared to provide proof of your down payment funds.

Gift Letter for Down Payment

If you are using gift funds for your down payment from a relative, you will need to provide a gift letter confirming the gift does not need to be repaid.

Homeowners Insurance

You will need to secure homeowners insurance on the property and provide proof of coverage. Shop policies from multiple insurers to get the best rate.

Clear Title Search

The lender will check for liens, unpaid taxes, covenants, or other issues that could impact your title ownership of the home. Any title concerns must be cleared up.

Satisfactory Home Appraisal

The property must appraise for at least the purchase price. If not, you may need to provide additional down payment funds.

Acceptable Inspections

Inspections may reveal issues you must address, such as pest infestation, roof damage, flooding risks, or faulty electrical. Major issues could jeopardize your loan approval.

Credit Explanations

You may need to provide a written explanation for collections, late payments, hard credit inquiries, or other red flags that show up. Demonstrate these were one-time issues.

No New Debts

Avoid taking on new credit cards or loans before closing. Added debts could negatively impact your debt-to-income ratio.

Satisfying lender conditions in a timely manner is crucial for your conditional approval turning into a final loan approval. Stay in close contact with your loan officer throughout the process.

The Steps After Conditional Approval

Receiving conditional approval kicks off the final, critical stages of underwriting and loan verification. Here is a look at what typically happens next on the road to closing on your mortgage:

Underwriter Review

The underwriter dives deep into your financials, valuations, title, and insurance to validate all details. Additional documents and explanations may be requested from you to clear up any concerns.

Appraisal Completed

An independent appraiser will visit the property and complete a professional valuation to confirm the purchase price is in line with the home’s market value.

Final Underwriting Approval

Once all i’s are dotted and t’s crossed, the underwriter gives a final approval (also called clear to close or unconditional approval). This means you now have the green light on your mortgage!

Closing Scheduled

The closing date and location will be set to finalize the transaction. Closing typically happens 30-45 days after going under contract.

Loan Funds Disbursed

At closing, loan funds will be wired to the seller. The home title will transfer to you once funds are received.

Move-in Day!

Once closing is complete, get ready to pick up your keys and move into your new home!

The conditional approval process usually takes 1-2 weeks if you stay on top of providing requested documents. Then you can expect to close within 30-45 days. Keep an open line of communication with your loan officer to stay on track.

Tips for Avoiding Denial After Conditional Approval

Does conditional approval guarantee you will get the mortgage? Unfortunately, no. There is still a possibility your conditional approval could turn into a denial. This usually only happens if you are unable to satisfy the underwriter’s conditions.

Here are some tips to avoid this worst-case scenario:

• Provide requested documents within 1-2 days to resolve any concerns quickly.

• Do not take on new debts or make major purchases for new furniture or appliances before closing.

• Avoid changing jobs or your income before closing.

• Make certain funds for closing costs and down payment are documented and readily accessible.

• Be upfront about any credit issues or red flags – don’t let the underwriter find them first.

• Stay in regular contact with your loan officer and real estate agent about the progress of your approval.

• Get any liens removed from the home title as soon as possible.

• Address any repairs needed based on inspections promptly and thoroughly.

• Be prepared to provide additional down payment if the appraisal comes in low.

• Do not deposit any unexplained cash into accounts or it may raise flags.

With diligence and patience, you can get from conditional approval to mortgage approval! But it is critical not to slack off or celebrate too soon. Keep your foot on the gas until you are handed the keys.

What If My Loan Is Denied After Conditional Approval?

While uncommon, it is possible for a mortgage to be denied even after initially being conditionally approved. This disappointing outcome usually occurs because new information came up that no longer meets the lender’s underwriting requirements.

Reasons you may now get denied after conditional approval include:

• Being unable to validate or document your stated income or assets

• Drastic change in your credit score or new negative item on your report

• Loss of stable income

• Taking on excessive new debt obligations

• Discovery of title issues or liens on the property

• Home appraisal coming in too low

• Failure to secure homeowners insurance

• Inability to cover your down payment or closing costs

If you end up with a denial after conditional approval, don’t panic. You have options:

• Appeal the denial and provide additional documentation to satisfy the lender’s concerns.

• Dispute any inaccurate information that led to the denial.

• Restructure the loan with the seller to lower the purchase price or increase your down payment.

• Apply with another lender or mortgage loan program.

• Take steps to improve your financial profile, then reapply in 3-6 months after conditions change.

While challenging, a denial after conditional approval can be overcome by understanding the reasons why and correcting those issues. Work with your agent and loan officer to consider alternatives and get your home purchase back on track.

The Bottom Line

Receiving notice that your mortgage is conditionally approved undoubtedly generates mixed emotions. On one hand, you passed the initial approval stages which is great news! However, more time and effort remains before you are fully in the clear.

I know the waiting and uncertainty can be stressful. But try to have faith in the process. Conditional approval means you are headed in the right direction. Stay diligent in providing all documents requested, fulfill the lender’s conditions, and maintain open communication along the way.

Before you know it, you’ll have the final approval notice in hand. Keep your eyes on the prize of move-in day, and you’ll