What is conditional approval for a mortgage?

If you’re buying a home with the help of a loan, you may be learning about the different types of mortgage approval. While preapproval helps you assess whether you can afford a home and full approval basically gives you a green light to buy one, understanding conditional approval — where a lender has reviewed and approved your loan application, with certain conditions attached — is a bit less cut-and-dry. Let’s learn more about what a conditional approval might mean for you.

What does conditionally approved mean?

While “conditional” may sound a bit scary when you’re trying to buy your dream home, it’s not nearly that bad. Generally, it just means having to verify certain income and asset details with your lender, and the conditions typically lay out exactly what you’ll need to get your loan, so you aren’t left guessing. These potential conditions include providing additional documentation; meeting specific income, credit or appraisal requirements; or down payment verification. Here’s how the process works:

1. Application: First, you’ll have to submit an application to your lender, complete with information regarding your income, credit score, employment and, if applicable, other financial details.
2. Initial review: Next the lender will review your application, including your credit score, and based on a comprehensive underwriting review, decide whether you meet the initial requirements for the loan.
3. Conditional approval: If you’ve met the initial requirements, you may be issued a conditional approval explaining what needs to happen to obtain full approval.
4. Provide Documentation: This is when you’ll want to submit documentation  to support your eligibility requirements. This could be tax returns, proof of employment or bank statements.
5. Underwriting: Next up is the underwriting process. After reviewing the provided documents, the lender will conduct a comprehensive underwriting review of your credit, income, and assets, and is valid for a designated period of time to extend a home purchase loan up to a specified amount. This is to ascertain how much risk they’re willing to take on by giving you a loan.
6. Final approval: If underwriting goes according to plan, you may receive final, full approval of your loan.

Remember: Conditional approval is not a guarantee of a loan, and you must meet all lender requirements to receive full approval. You should also be prepared to provide any additional documentation requested by the lender through the process.

Conditions for approval

Being conditionally approved could look very different depending on each borrower’s situation, the lender they're working with and the conditions that may need to be met for the lender to approve the loan. Here are some common conditions you may be required to meet to get a mortgage:

• Credit check and proof of income: Lenders typically require a credit check and proof of income to ensure you have a solid credit history and can afford to make your mortgage payments. While income documents may vary, it's also common for the lender to verify your employment and request tax returns or pay stubs.
• Property appraisal: Lenders may request an appraisal of the property to ensure it is worth the loan's amount. This is to avoid lending you more funds than the property is worth.
• Debt-to-income ratio (DTI): Lenders might look at your debt-to-income ratio to determine if you'll be able to afford mortgage payments.
• Homeowners insurance verification: The lender may want to see you have homeowners insurance to protect their investment in the property. This means that they can still recoup their investment if the property is damaged or lost.
• Down payment: Typically, down payments are required to get a mortgage. Down payments reduce the amount you need to borrow and show your lender that you're seriously committed to the purchase.
• Letters of explanation: The lender may ask for letters of explanation for any unusual financial activity, such as sizable withdrawals or deposits to and from bank accounts. This is one way for the lender to better understand your financial situation, while also confirming there are no red flags.
• Gift letter: If you’re relying on a gift fund for your down payment, your lender may want to see what’s called a “gift letter” that clearly states the funds are a gift and not an additional loan, the latter of which could make the loan riskier for the lender.

Other types of mortgage approvals

Apart from conditional approval, there are several other types of mortgage approvals that potential homebuyers may want to be aware of.  Lenders may use different terms to describe the different mortgage approvals and it is best to ask the lender what each means.

Prequalification

Prequalification is when a lender provides an estimate of how much you might be able to borrow based on your stated income, assets and debts.

Preapproval

For preapproval, a lender checks your credit, verifies your financial and employment information, and completes an automated underwriting system (AUS) review to provide a specific loan amount they may be willing to approve. Preapproval may give you a clearer idea of what you can afford and show the seller you're serious about the purchase, though it should be noted that this doesn’t constitute a formal loan offer and all conditions are subject to a full underwriting review.

Final approval

Final approval, also known as unconditional approval, is granted when a lender has reviewed your documentation and is satisfied with your financial situation and the property you’d like to purchase. It’s at this stage that the lender commits to lending you money for your home purchase.

Can you be denied after conditional approval?

While conditional approval is a significant step toward securing a mortgage, it's important to remember there are circumstances where you could still be denied:

• Loss of income: If you lose your job or experience a major decrease in income after receiving conditional approval, the lender may deem you unable to afford the mortgage payments and could deny the loan.
• Inadequate credit or credit score: If your credit score drops significantly after conditional approval, the lender could reconsider their decision.
• Property: If the property isn't appraised for its expected value, the lender may deny the loan. This is because the lender needs assurance that the property is worth the amount they're lending.
• Title defects: If it turns out there are issues with the property's title — such as liens or ownership disputes — the lender may deny the loan until these issues are resolved.
• Issues with documents: If there are discrepancies with your documents — such as inconsistencies in your income statements or employment verification — the lender may deny the loan.

When conditional approval is denied, it can be a disappointing setback. But that doesn’t mean you’re out of options. You can work to address any issues that contributed to the denial, such as improving your credit score, finding a different property or resolving any of the discrepancies within your documents. Once these issues have been addressed, you can reapply for the loan. You may also want to consider seeking out a different lender who may have different criteria for approval.

In summary

Conditional approval plays a key role in the mortgage process. It serves as a form of protection for lenders while also giving borrowers a clearer path toward securing their home loan. The conditions set by lenders vary, but often include meeting requirements including financial information such as credit scores, DTI and assets. If you’re able to meet these conditions, you may be one step closer to full approval and home ownership. In the event you’re not? You can try again after addressing and resolving the issues outlined by your lender. Understanding conditional approval, like understanding any part of the mortgage process, can help you navigate your homebuying process more smoothly and effectively.

Conditional approval FAQs

1. How long does underwriting take after conditional approval?

The underwriting process may vary greatly from lender to lender, depending on the borrower's situation. That said, once you've received conditional approval and submitted all necessary documentation, underwriting typically takes anywhere from a few days to a couple of weeks.

2. How long does it take to close after conditional approval?

If you've received conditional approval, you will typically move forward to closing. The timeline for this varies, but you generally can expect to close within a few months after receiving conditional approval, provided you meet the conditions set forth by your lender. This time frame allows for any additional inspections, appraisals or paperwork that may be required.

3. How long does conditional approval last?

The duration of conditional approval depends on the lender. Reach out to each lender to learn more about their conditional approval periods.