What Is Conditional Loan Approval?

Financing Your First Home, Home Approvals, Mortgages


You’ve decided you’re ready to buy your first home, and you’ve started the mortgage loan application process. Everything has gone smoothly, but now your lender mentions that they want to grant you conditional approval. 

This may leave you wondering: What is conditional loan approval? And what does it mean for you? 

Conditional approval on a mortgage is when a mortgage underwriter is generally satisfied with your application and is willing to approve your loan on the condition that you meet their pending requirements. 

Learning more about this type of loan approval can help you understand how to successfully move to the next phase of home buying – closing on a home.

Underwriting

Underwriting is when a person or institution reviews the financial risks of a loan.

What Does Conditional Loan Approval Mean? 

So, what does it mean to be conditionally approved? Conditional loan approval means the lender is interested in loaning you – the borrower – money. However, they need to dig deeper and verify things like income, debt and other important financial information before approving the loan.

Conditional loan approval isn’t an approval or a denial. During the underwriting process, the underwriter reviews the application and determines whether you’re a candidate for a loan. 

If the underwriter believes you might be a good candidate, but some crucial information is still missing, they’ll issue a conditional approval. The approval is based on the condition that you can meet outstanding pending requirements. 

Conditional approval comes with a dollar figure and states that you’ve been conditionally approved for a certain amount for your mortgage loan. However, approval isn’t guaranteed. The next steps will be to satisfy the lender’s remaining conditions to transition to a firm approval. Often, this will require providing missing documentation. 

What Different Approval Types Are There?

It’s important to note that conditional approvals are not the only type of approvals available for a mortgage loan. There are several types of approvals in the home buying process, with differences in their requirements or respective places within the journey.

Initial approval/prequalified approval or preapproval

Before you commit to a lender, you can apply to one or more lenders. Your credit report is pulled to review your credit score and outstanding debts. You also provide a verbal statement of all your income and assets.

Based on this information, you’re given an estimate of what size mortgage loan you may be approved for. Because your income and assets haven’t been verified, this estimate is not guaranteed.

From there, you may be given an initial approval/prequalified approval or a preapproval. As a rule, a preapproval usually carries more weight than a prequalified approval.

Conditional approval (and why it matters)

Conditional approval can set you apart as a buyer – especially in a hot market. 

Many buyers get a preapproval before they start shopping and bidding on homes, but a conditional approval can show that you’re a more serious, prepared candidate. It shows the seller that you’ve gone further down the approval process and are financially ready to commit. 

Conditional approval is more challenging to secure than a preapproval, making you a less risky option for the seller. 

Are you planning to build rather than buy a home? If so, the builder will want to see conditional approval before committing resources to your project. 

Conditional approval can fast-track your journey to the closing table. Because you’ve gone through the underwriting process, processing the closing documents will probably move more quickly.

Unconditional approval

An unconditional approval is the next step after conditional approval. It means you’ve provided the information to the underwriter and met the terms of your conditional approval, so the lender has lifted the conditions and given you a formal letter of approval.

Verified approval

Once you’ve submitted everything requested by the lender, you can move on to the verified approval stage. With a verified approval, the lender has verified your credit, income and assets and has approved you to purchase a home. 

Verified approval is stronger than initial approval and conditional approval because it confirms that you have the financing for the home purchase. 

What Types of Conditions Exist?

A mortgage approved with conditions is quite common. Many conditions may be required by the lender. Some of them are:

  • Verifying your income and job: You will be asked to verify your income and employment with documentation, like pay stubs and bank statements.
  • Getting mortgage insurance: Many lenders require proof of mortgage insurance before approving a loan. Private mortgage insurance (PMI) is required for conventional loans with less than a 20% down payment. Federally backed government loans require a mortgage insurance premium (MIP). 
  • Disclosing any gift letter: If you’re getting extra money from the Bank of Mom or Dad, you’ll need to provide a gift letter.
  • Providing asset statements and title verification: If you have assets, such as cars or other properties, you may need to provide title verifications for each one.
  • Submitting a home appraisal: The lender may request a home appraisal to confirm the property value and condition of the home.  
  • Getting a home inspection done: An inspection is a top-to-bottom examination of a home that determines the home’s condition and details any problems with the home. 

These are some of the most common conditions you’ll encounter. Note that some loans, like a Federal Housing Administration (FHA) loan, or Department of Veterans Affairs (VA) loan and other government-backed loans, will require more items to verify loan requirements. 

For example, an FHA conditional loan approval may require a clear title search in addition to income verification, an appraisal and proof of homeowners insurance.

Can You Be Denied After Conditional Approval?

Conditional approval doesn’t mean you’re out of the woods yet. There are scenarios when a borrower’s application is denied despite having conditional approval. Some of the common reasons why conditional approval is denied are:

  • The requested documents weren’t submitted on time.
  • Big purchases, such as a car, raise red flags for the lender.
  • The requirements of the loan haven’t been met. 
  • There’s been a recent drop in income.
  • A home inspection or appraisal reveals unknown issues in the home.
  • The home has a lien on it, so a clear title cannot be established.

When you’re denied final approval, the first step is to determine why you were denied. Try to work with the lender to clarify and explain any issues the lender considered disqualifying. Otherwise, you may need to restart the process.

Declination Letter

When you’re denied a loan, you receive a declination letter. It should specify why you’ve been denied. If it doesn’t, reach out and ask your lender why you were denied.

After Conditional Approval, How Long Will Underwriting Take?

Once the underwriting process begins, it can take a few days to several weeks. The time frame depends on the type of information that’s missing. On average, it takes 1 – 2 weeks to complete the underwriting process.

The sooner you submit the requested documents to the underwriter, the sooner the underwriter can complete your application. You can help speed the process up by communicating with your lender and being proactive with any requested information or paperwork. 

Get an Edge on Your Offer With a Conditional Approval

Remember that conditional approval and preapproval are different. You can give yourself an advantage in the home buying process by getting a head start on conditional approval. This will start the underwriting process earlier, helping you understand what you can truly afford. After all, the best offers come with a verified approval letter.



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