The mortgage loan process involves many different steps and stages. These individual steps move the loan file forward and help you reach the finish line, which is the final closing.
Along the way, you might encounter what’s known as a “conditional approval” from your mortgage lender. This means they need some additional information from you, in order to clear you for closing.
Here are five key points you need to know about this subject:
- Conditional approval means the lender is mostly satisfied with your mortgage application but needs more information before giving you a final approval.
- Common conditions include income verification, employment verification, asset verification, appraisal issues, credit concerns, and bank transaction explanations.
- Borrowers should handle these requests in a timely fashion to avoid unwanted delays to the closing.
- The length of time it takes to resolve such issues will depend on their complexity and the speed with which the borrower responds.
- You’re not fully approved for the loan until the underwriter decides you are “clear to close.”
Conditional Mortgage Approval Explained
Let’s start by defining some of the terms used throughout this guide.
Conditional approval: In a mortgage lending context, a conditional approval occurs when the mortgage underwriter is mostly satisfied with the loan application file. But there are still one or more issues that need to be resolved before the deal can close.
So you might think of it as a green light with an asterisk. The lender has reviewed your application and supporting documents, and overall they like what they see. But they need a couple of things checked off before they can issue a final approval.
Underwriting: This is when the mortgage lender evaluates your financial situation, creditworthiness, and the property you’re buying to determine if you qualify for a loan. It helps the lender decide whether to approve the loan, deny it, or issue a conditional approval requiring additional steps.
During underwriting, the lender reviews all aspects such as your income, assets, debts, credit history, employment status, and the appraisal of the property being purchased. They do this to measure risk and also to ensure the loan meets any secondary requirements from the FHA, VA, Freddie Mac, etc.
If the underwriter finds that the loan meets most requirements but has a few outstanding issues to address, it’s termed a conditional mortgage approval.
How It Fits Into the Broader Process
To put this into a broader context, let’s look at the basic steps that take place during the mortgage loan process. While the process can vary from one person to the next, it usually looks something like this.
As this graphic shows, a home buyer who receives a conditional approval from the underwriting team (step 4) must resolve those items before they can proceed to the closing (step 6).
Closing is when you sign all of the finalized real estate and loan documents and seal the deal, taking ownership of the home.
Realistic Example of a Conditional Approval
This will all make more sense if we look at a realistic example:
Amy and John have applied for a home loan, and they’ve provided all of the documents their lender has requested thus far. The file then moves on to the underwriter, who reviews it to make sure all loan requirements have been met.
The underwriter decides that the borrowers are qualified for a loan, and that the file contains everything needed to satisfy requirements. With one exception…
A large deposit was made into the borrowers’ bank account within the last couple of weeks, and the underwriter is unable to determine where that money came from.
So the couple receives what amounts to a conditional approval. The underwriter refers it back to the loan officer and says that they need to know the source of the deposit.
This is a condition to final approval. This item must be resolved before the underwriter can declare that the loan is “clear to close.”
So now the ball is back in the borrower’s court. They’ve essentially been given a task to complete. To satisfy this request, they must provide a letter of explanation that will go into the loan file.
If Amy and John can fully document the source of the down payment (and it turns out that the money came from an approved source), the loan will likely be approved and move on to closing.
Common ‘Conditions’ Identified by Underwriters
The scenario above is just one example of a conditional approval in the mortgage world. In this realistic scenario, the borrowers had to explain and document a large deposit into their bank account.
Here are some other things an underwriter might ask for:
- Income verification: The lender might need additional documentation to verify your current income. This could include pay stubs, W-2s, or tax returns.
- Employment verification: They might require a letter from your employer stating your position, salary, or employment history.
- Asset verification: The lender may need to see bank statements or investment account documentation to ensure you have enough funds for the down payment and closing costs.
- Appraisal issues: If the property appraisal comes in lower than expected or raises concerns about the property’s condition, the lender may impose conditions related to the appraisal.
- Credit Issues: If there are discrepancies or issues with your credit report, such as late payments or high debt levels, the lender may require explanations or additional documentation.
- Bank transactions: Mortgage underwriters often request additional information relating to large bank deposits or withdrawals. They do this to verify the source of funds used for your down payment and closing costs, and also to assess your financial stability.
In all cases, the path to resolution is the same. The borrower must gather the necessary documentation, deliver it to the lender, and address any other outstanding issues to move the ball forward.
Note: This is a partial list of common mortgage conditions. Depending on your situation, you could encounter additional underwriting requests not covered above. It varies.
Will My Loan Still Go Through?
There are various stages of “approval” during the mortgage lending process. But there’s only one final approval, and that’s when the loan is actually funded (during or shortly after the closing).
It’s important to realize that things can go wrong at any stage of this process, right up to the final closing.
Home buyers and mortgage borrowers often think they are home free when they receive a pre-approval from a lender. But that’s not always the case. A pre-approval simply means there is a likelihood you will be approved for the home loan, once the underwriter gives you a thumbs-up.
Being pre-approved has its own benefits. It helps you narrow your housing search and could make sellers more inclined to accept your offer. But it’s not a guarantee that the deal will go through.
There are many issues and conditions that might occur between the pre-approval and final funding. The conditional mortgage approval is just one of those “speed bumps.”
Best practice: Keep in touch with your loan officer or mortgage broker throughout the process. Being proactive at this stage can help prevent unwanted delays and keep the closing on schedule!
How Long to Close After a Conditional Approval?
Here’s another common question among home buyers:
How long does it take to close on a mortgage loan, after receiving a conditional approval from the underwriter? Will I still be able to close on time, or will it delay the process?
This will largely depend on two things:
- The extent and complexity of the identified conditions
- The amount of time it takes for you to resolve the issue(s)
In some cases, underwriting conditions can be resolved within a day or two.
Consider the “letter of explanation” mentioned earlier. You could write a letter to explain a bank withdrawal or deposit the same day that you receive the request. The underwriter could then clear the issue and move forward.
In other cases, you might have to do a bit more legwork to resolve an issue. Maybe you have to round up some documents or make a few phone calls. This can add time to the underwriting process, which might push your closing back a few days.
As a borrower, the best thing you can do is stay in touch with your loan officer and handle any requests in a timely fashion, providing accurate and truthful information. The rest is out of your hands.
Brandon Cornett
Brandon Cornett is a veteran real estate market analyst and reporter. He has been covering the U.S. real estate market for nearly 20 years. More about the author