What Does Conditionally Approved Mean?

What Does Conditionally Approved Mean?

Conditional approval means your lender is likely to approve your loan, provided you meet their remaining conditions. A conditional approval generally happens during the mortgage underwriting process, when your lender is working to verify information about your finances and the home you're intending to buy. Conditional approval is a good sign that your loan application is on track, but it is not a guarantee that your loan will be approved.

Common Causes of Conditional Approval

Missing information is one common reason your loan may be conditionally approved. Your application may be missing key documents loan underwriters need to verify your asset, debt and income information. Examples include:

• Bank or asset statements
• Loan or other debt information
• Gift letters stating that money you received for a down payment does not need to be repaid
• Proof of homeowners insurance
• Income verification documents, including pay stubs or tax returns
• Letter of explanation for a large withdrawal

During the loan approval process, underwriters review your information in detail. They may contact your employer to verify employment and may ask for pay stubs to confirm your income. If your bank statement shows a large unexplained deposit, they may want to know the source of the money. If the deposit is a gift, they may want a letter stating the money is not a loan and doesn't need to be repaid.

Meanwhile, your home may undergo a home inspection, home appraisal and title search. Your loan may be conditionally approved while waiting for these reports to be completed, or if any issues turn up in the reporting process. An underwriter may also issue a conditional approval if they simply need more time to complete the verification process.

Learn more >> Things That Can Keep You From Getting a Mortgage

Conditional Approval vs. Other Mortgage Approvals

Conditional approval is just one type of approval you may encounter when you're trying to get a mortgage. From quick, informal estimates to fully vetted final approvals, these approval steps serve different purposes. Here's a rundown of basic terms and what they might mean to you.

Prequalification

A prequalification is a general estimate of how much you can borrow for a home loan. To prequalify, you typically provide the lender with income and asset information. The lender may do a soft inquiry on your credit to get a sense of your credit score and existing monthly debt (this will not affect your credit scores).

Because none of this information is verified (yet), a prequalification is only an estimate of what you may be able to borrow; it's not a loan approval.

Preapproval

The preapproval process can vary from one lender to another, but generally preapproval is a step up from prequalification and a step behind conditional approval. Before providing a preapproval, your lender will typically ask for more detailed information about your income and assets. They may ask to see bank statements, pay stubs or tax returns. They'll also do a hard check on your credit.

As part of a preapproval, your lender may provide possible rates and terms on a loan as well as an estimate of how much you can borrow. Although a preapproval may be more thorough than a prequalification, your application has not been fully vetted and a preapproval does not mean your application is actually approved.

Verified Approval

If your lender fully verifies your credit and financial information before you purchase a home, they may provide you with a verified approval letter. This letter shows a home seller that your financial information is in order and your application is (nearly) approved, showing your strength as a potential buyer.

Conditional Approval

Conditional approval typically happens after you've signed a contract to purchase a home. While prequalifications and many preapprovals are informal estimates, your loan application now reflects an actual sale price, down payment and loan amount. You are officially applying for a loan.

In the underwriting phase, your application will be formally reviewed and vetted. Although a conditional approval places conditions on your loan's approval, it also signals that your loan is likely to be approved; so far, underwriters have not uncovered information that might cause the lender to deny your application.

Final Approval

A final (or unconditional) approval means your loan application has moved through the underwriting process and is cleared to close. By this point, your financial information, income and credit have been verified. Your home has undergone the necessary appraisal, title search and inspection processes. Any conditions raised in your conditional approval have been resolved. A new loan—and your new home—are now on track to be yours.

Learn more >> What Do Mortgage Lenders Look For?

What Happens After a Conditional Approval?

Check your notice of conditional approval to find out what needs to happen next. To move your loan forward, work on meeting your lender's requirements right away. Tasks might include:

• Tracking down missing documents
• Providing gift letters or letters explaining large transactions
• Scheduling a home inspection or home appraisal (or second opinions)
• Resolving title issues such as liens or judgments
• Lining up homeowners insurance to start as soon as your new home is yours

You can request additional time if you need it, but the sooner you can cross the outstanding items off your list, the sooner your loan application can move to the next stage. Once your lender's conditions have been met, your loan should be ready for final approval and, ultimately, funding.

Can You Be Denied After a Conditional Approval?

Your loan can be denied after a conditional approval if you fail to meet the lender's conditions. Here's a brief, but not exhaustive, list of reasons why your loan application may be denied:

• The lender can't verify your income, assets or other key information.
• Your credit report shows unexpected negative information, such as a bankruptcy.
• Your income has decreased.
• Your debt has increased.
• Your home has a lien or other title issue.
• The home appraisal is low and you can't renegotiate the sale price to reflect it.
• A home inspection turns up substantial problems that can't be resolved.

Learn more >> Why Would a Mortgage Application Get Denied?

The Bottom Line

Not every loan application passes through a conditional approval stage, but many do. If you receive a conditional approval, make sure you understand what's required from you, then work toward resolving each condition so your loan can progress.

One way to reduce the potential for surprises during the loan application process is to check your credit before you begin applying for loans. Reviewing your credit report and score from Experian lets you know what to expect, so you can be prepared and apply with confidence.