What is a mortgage conditional approval? Does it mean I’m going to be approved for a home loan? Or is there a chance I’ll be turned down at the last minute?
These are some of the most frequently asked questions we receive from our readers, on the subject of mortgage underwriting. So we decided to answer them all in a single article. Let’s start by discussing what a “conditional” approval means to you, as a borrower.
What Does a Mortgage Conditional Approval Mean?
In a lending context, a conditional approval is when the mortgage underwriter is mostly satisfied with the loan application file, but there are still one or more issues that need to resolved before the deal can close. In mortgage lingo, these remaining issues or items are commonly referred to as “conditions.” Hence the term conditional approval.
Did you know: The underwriter is the person who reviews the loan file, and all documents contained within it, to ensure that it meets the lender’s guidelines as well as any secondary guidelines (from FHA, Freddie Mac, etc.). Learn more about underwriting.
You can think of the mortgage underwriter as a kind of paperwork detective whose job it is to make sure everything is in order. And it’s a fairly detailed job, because there are a lot of documents and paperwork associated with the average home loan.
If the underwriter determines that the loan looks good in most respects — but there are a couple of things that need to be resolved — it’s referred to as a conditional mortgage approval.
To put this into a broader context, let’s look at the basic steps that take place during a typical mortgage approval process. Though it’s not actually shown in the graphic below, a conditional approval would occur in between steps 5 and 6. It would happen as a result of the underwriting process and before the final approval.
Here’s a Real-World Example
John and Jane have applied for a home loan, and they’ve provided all of the documents their lender has requested thus far. Their loan file then moves on to the underwriter, who reviews it for completeness and accuracy. He also checks the file 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, he issues what amounts to a conditional approval for the mortgage loan. He refers it back to the loan officer or processor and says he needs to know the source of the recent 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 borrowers’ court. They’ve essentially been given a task to complete. They must now provide a letter of explanation that will go into the loan file.
If John and Jane can fully document the source of the down payment, and it turns out that the money came from an approved source, then the loan will likely be approved. The final conditions have been cleared, and the couple can now move on to close on the home.
Common ‘Conditions’ Identified by Underwriters
The scenario above is just one example of a mortgage conditional approval. In that realistic example, the borrowers had to explain and document a large deposit into their bank account.
Here are some other things an underwriter might ask for:
- A copy of the homeowners insurance policy
- Verification of borrower’s current employment and/or income
- Proof of mortgage insurance
- Letter of explanation from borrower for a recent withdrawal
- Other missing or incomplete documents needed for loan funding
This is just a partial list of common mortgage conditions that would need to be resolved before the final approval. You might encounter other requests during your underwriting process. Or you might sail through the process with no additional requests whatsoever. The process varies from one borrower to the next.
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 (at or before closing). It’s important to realize that things can go wrong at any stage of this process, right up to the final closing.
This is not meant to alarm you, but to help you prepare for the process — and to understand how it all works.
Home buyers and mortgage borrowers often think they are “home free” when they receive a pre-approval from a lender. But that’s not 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 pre-approval and funding. The conditional mortgage approval is one example of an intermediate step that might arise.
As a borrower, the best thing you can do in the event of a conditional approval is to resolve all conditions as quickly as possible.
Keep in touch with your loan officer during this stage (this is usually the primary point of contact). If the underwriter identifies a condition that must be resolved, the loan is essentially “on hold” until that issue is resolved. Being proactive at this stage can help prevent unwanted delays and keep the closing on schedule.
How Long to Close After a Conditional Approval?
So, how long does it take to close on a mortgage loan, after receiving a conditional approval from the underwriter? Will you still be able to close on time? Or will the “conditions” delay your closing?
This will largely depend on two things:
- The extent and complexity of the identified ‘condition’
- The amount of time it takes for you to resolve the issue
In some cases, these types of issues can be resolved within a day or two. Take the “letter of explanation” scenario mentioned earlier, for example. You could write a letter to explain a bank withdrawal or deposit the same day you receive the request. The underwriter could then clear that 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. The rest is out of your hands.
Brandon Cornett is a veteran real estate market analyst, reporter, and creator of the Home Buying Institute. He has been covering the U.S. real estate market for more than 15 years. About the author