What Is a Conditional Mortgage Approval?

What Is Conditional Mortgage Approval?

A conditional mortgage approval means that your lender's underwriting department has processed your home loan application and you're likely to be approved once you've met certain conditions, such as providing additional documentation. A conditional mortgage approval is not a guarantee that you'll get a mortgage.

Understanding the Mortgage Approval Process

The mortgage approval process consists of a number of steps, one of which may be conditional approval. Typically it goes in this order:

1. Prequalification or Pre-approval

Many lenders use the terms prequalification and pre-approval interchangeably, though there are some differences between the two. Both are based on the information you provide to a mortgage lender, such as your income and existing debts.

In a prequalification, the lender may make a preliminary decision without verifying the financial information you supplied, while a pre-approval generally means that the lender verified your information. In both cases, the lender will provide you with a letter that you can use to reassure prospective home sellers that you're in a position to obtain a loan for a certain amount.

At this stage, you haven't committed to a particular lender yet, since you haven't submitted a full mortgage application. You can decide which lender you want to work with once you've compared their loan estimates and put an offer on a home. 

2. Mortgage Application and Underwriting

Once you've made an offer on a home and the seller has accepted it, it's time to work with the lender of your choosing to get funding. This is when you submit a full mortgage application. 

Information you'll most likely need to provide includes:

• Your name and contact information
• Social Security number
• Tax returns (in many cases for the past two years)
• Pay stubs or other evidence of income if you're self-employed
• Information about the home you're planning to purchase
• Bank statements
• Information about any assets you have, such brokerage account statements
• Documentation of existing debt, like personal loan statements
• Proof you have enough money for the down payment

Your lender will ask for your permission to check your full credit history, as reflected on your credit reports at one or more of the three major credit bureaus.

Once you submit your application and the necessary documentation, you will need to wait for the lender to go through the mortgage underwriting process. The lender's underwriters will examine all of your financial information to determine whether you have the means to afford a mortgage and decide whether to approve you. During this process, lenders will also assess the home's fair market value to determine whether it meets their requirements. 

3. Conditional Approval

Your lender may come back to you with a conditional approval if there is any documentation underwriters still need to make their final assessment. Some of the common reasons lenders give conditional approvals are: 

• There are missing or incomplete documents, like bank statements or other information on other debts
• You need to provide a gift letter to prove that any money you received for a down payment from, for example, family members doesn't need to be repaid
• The lender hasn't received proof that you've purchased a homeowners insurance policy to take effect on the closing date
• The lender has questions about what appears to be an unusual transaction, such as funding from a new loan or a large withdrawal amount

When you receive notification of a conditional approval, the lender will outline what it needs from you to move on to the next stage of the approval process. The sooner you can provide the required information, the sooner underwriters can finish processing your home loan application. Once you've done so, underwriters may grant you a "clear to close" status, indicating that they have signed off on your application.

4. Final Approval

At this stage, the underwriters have reviewed everything they needed to assess your eligibility for a loan and approved your application. You should now receive an approval letter stating the loan amount, interest rate, fees, and other important details about your mortgage.

By law, lenders need to send you a closing disclosure three business days before your home closing. This is so you have a chance to review the terms of your loan and resolve any errors or problems that may arise.

Information you'll find in this document includes:

• Your full name and contact information
• Loan amount
• Interest rate
• Repayment terms
• A breakdown of the monthly principal and interest amount
• Prepayment penalty amount (if any)

Requirements for Conditional Mortgage Approval

The requirements for obtaining conditional mortgage approval can vary from one lender to another. In general, lenders will want to see the following, some of which you will need to supply as part of the application process described above and some of which they will obtain on their own.

• Proof of income
• Bank statements and other evidence of assets
• Proof you're not borrowing money to make your down payment (like a gift letter or bank statement showing down payment amount)
• Credit reports and/or a credit score indicating you meet the lender's minimum requirements
• Home appraisal showing the purchase price is in line with the current assessed value

Benefits and Limitations of Conditional Mortgage Approval

Keep in mind that a conditional loan approval doesn't mean you're guaranteed a mortgage just yet. While you are most likely to get one, you still have to wait until the lender has reviewed all of the information it has collected and made a final decision.

In the meantime, there are some upsides to having a conditional mortgage approval. For one, you have proven so far that you have the financial means to afford a home loan, which could help ease a seller's fears that you won't move through to the closing process. Plus, a conditional approval can mean that the final approval process will go faster.

When Loans Are Denied After Conditional Approval

A conditional approval doesn't always lead to a final approval. The reason might involve your finances or the home itself.

For example, if the lender's home appraisal comes in much lower than the purchase price, the lender may reject your application. Issues that arise from a title search, such as discovering a claim against the property, can also lead to a loan denial. 

You may be able to work with the lender and seller to renegotiate the terms of the home sale or ask for extra time to provide more documentation. It could be that the seller lowers the asking price to align more with the current appraised value, or you find a way to come up with a larger down payment. 

The Bottom Line

Obtaining a conditional mortgage approval means you're one step closer to finalizing the funding for your home purchase. But you're not quite there yet. You'll still need to get the go-ahead from your lender that the loan is fully approved.

So it's crucial to stay in close contact with the lender and provide whatever additional information it may request in a timely manner. It's also a good idea to avoid taking out new loans or making usually large withdrawals or deposits (with exceptions like ones for your down payment) for the time being. That can help make the underwriting process go as smoothly and quickly as possible.