Mortgage 101: What is Conditional Loan Approval?

The PropertyClub Team
Jul 20th 2020
If you're applying for a mortgage, you may find yourself getting a call from your banker stating you've received conditional approval for the loan. So what exactly does that mean, and what should you do?

Applying for a mortgage is often a stressful process. After the whole ordeal of house shopping, now you get to wait around for the underwriter to approve your home loan. Finally, your loan officer calls you and tells you that you got conditional approval for your loan.

So, how can a loan be conditionally approved? You’d think it would either be approved or not. But conditional underwriting approval is a normal part of the business. It’s a complicated way of saying that you need more paperwork. Here’s how it works.

Conditional Approval vs. Pre-Approval

The first thing that often confuses homebuyers is the difference between mortgage pre-approval and conditional approval. Pre-approval is the approval you’re given before you even put in an offer on the home. It’s based on a quick look at your income and credit score, so the loan officer is just getting a snapshot of your financial situation.

The good news about a pre-approval is that it gives you leverage when you’re making offers on homes. The seller knows you’re approved for the mortgage so that they can accept your offer with more confidence. A pre-approval also makes real estate agents more likely to work for you, since they know you’re a serious buyer.

The bad news about pre-approval is that it doesn’t necessarily mean you’re going to get the loan. You still need to file a complete application for a specific loan amount for a particular property. At this point, the loan will need to be underwritten. This means an underwriter goes through your finances and determines whether or not the lender is going to approve that specific loan.

Conditional loan approval comes after you’ve put in an offer and filed an official loan application. At this time, an underwriter examines your finances and may ask for additional information. This can include pay stubs, tax returns, and information on credit report information such as late payments and defaults. If you’re not able to provide this information, the lender may not be willing to move forward with a mortgage.

How to Close After Conditional Approval

The good news about conditional underwriting approval is that it’s generally not that big a deal. Think about it this way: you didn’t get rejected! The lender is interested in doing business with you. They just want to cross their “T” s and dot their “I” s.

Here are a few examples of how this may work in practice:

Jack and Jill are applying for a $250,000 loan. Jill is a part-time nurse, and Jack is self-employed. Because Jack is self-employed, the bank asks for more information. As long as he can supply his tax returns for the past two years, and as long as that matches the income on their application, they will qualify for their loan.

Jack and Jill meet the income and credit requirements to afford the monthly mortgage payment. However, they’re depending on a $10,000 check from Jill’s mother to pay part of the down payment. The underwriter will want this check to be deposited before the mortgage can be closed.

Jack and Jill meet all the requirements for the loan. However, Jack stated that he has $240,000 in a 401K account. The underwriter may need to see proof of this information before approving the loan.

Another major consideration is a process called title verification. During this process, the underwriter must ensure that no third party holds a lien on the property. There’s nothing Jack and Jill can do but wait this part out.

In addition, most underwriters are going to want the house to be appraised. This will ensure that the selling price is not wildly inflated. In other words, the bank wants to make sure that they’re not lending more for the house than the house is worth.

Can A Loan be Denied After Conditional Approval?

In short, yes, a loan can be denied after receiving conditional approval. This usually happens when the borrower doesn’t provide the documents that are required. In addition, the loan may be denied if the borrower doesn’t meet the underwriting requirements. For example, if their small business does not bring in consistent income on a year over year basis, their loan may be denied despite a recent successful year.

Steps to Take After Conditional Approval

In essence, getting a mortgage conditional approval means you’ve got to go through a few more steps to get your home loan. Listen to what the lender is asking for, and supply them with whatever they need. For one thing, your loan is not going to go through unless you provide this information. The faster you work with your underwriter, the quicker you can get approved and move into your new home.

For another thing, most banks will close your application if you don’t supply the required information within 90 days. At this point, you’ll need to apply for a new loan, which can lead to even more delays.

The type of documentation required by the underwriter can be just about anything. For instance, you may need to supply tax returns, proof of income, and proof of savings. Documentation is also required for loans that include collateral. For example, if you’re using a first home as collateral on a second home, you’ll need to provide proof that there are no liens on your first home.

Another common type of documentation is homeowner’s insurance. Homeowner’s insurance is going to be required before you close on your home. Since insurance is an ongoing cost, most lenders want to know how much you’re paying so they can factor that into your expenses.

Keep in mind that you’re free to back out of the application process at any point, even after receiving conditional approval. You’re not under contract for anything, and you can back out with no penalty. Another thing to keep in mind is that your underwriter will not be your point of contact. Typically, you’ll be dealing with your loan officer, so make sure to take in touch with them.

Usually, any information you submit should be processed within 48 hours. At that point, feel free to call your loan officer to check on the status. Provided the information answered all the underwriter’s questions, your loan should be approved. That said, there are some specific scenarios in which the underwriter may need even more information. This often happens when family members help with various expenses like a down payment. For instance, if the underwriter asks for savings account information and sees a recent deposit of $5,000, they’re going to want to know where that money came from.