What a ‘Conditional Approval’ Means During Mortgage Underwriting

The 2024 FHA Loan Handbook

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.

But 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.

As a borrower, your job is to resolve those conditions in a timely fashion to prevent unwanted delays.

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, including the conditional approval. While this process can vary slightly from one transaction to the next, it usually looks something like this.

Infographic showing the typical mortgage process including a conditional approval

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.

Realistic Example of a Conditional Approval

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. To satisfy this request, they must provide a letter of explanation (LOX) that will go into the loan file.

Graphical overview of a mortgage letter of explanation

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 — 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:

  • 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 and salary.
  • 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. You can resolve this by addressing any errors on your credit report and providing explanations for any negative items.
  • 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 of these 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 in order 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. Or you might sail through the process with no issues whatsoever. 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.”

Related: Being Denied After the Pre-Approval

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, 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

The 2024 FHA Loan Handbook