The journey to obtaining a mortgage can be lengthy and filled with paperwork, delays, and unclear updates. For example, receiving a notice that your loan is “conditionally approved” can leave you wondering what that means. Essentially, it’s a qualified yes, but you must take specific steps to finalize your loan. Here’s how to navigate the conditional approval process and ensure a smooth path to homeownership.

What does conditionally approved mean?

Applying for a loan to buy a house involves meeting the standards set by a mortgage lender, which requires submitting various financial documents like pay stubs and tax returns. The lender’s underwriting team thoroughly reviews your financial profile to ensure you can repay the substantial amount you’re borrowing, and they won’t approve you until they’re confident in your ability to do so.

So, what does conditional approval mean? It can be a standard part of the process, indicating that the lender needs more time during underwriting and is notifying you of your conditional approval. In other cases, it may signal some issues with the application that require additional documentation.

Generally, conditional approval means the lender will issue the loan if you meet specific conditions. Some borrowers may transition directly from pre-approval to full approval, while others might receive conditional approval as the lender works with them to gather any missing information, facilitating the home purchase process.

In either situation, you will receive a letter or statement confirming your conditional approval status.

Common causes of conditional approval

You might receive conditional approval if you haven’t addressed the following criteria:

  • Obtaining a signed gift letter if someone is providing funds for your home purchase.
  • Submitting sufficient detailed financial information (e.g., bank statements, pay stubs, and details about other debts like car loans).
  • Securing homeowners insurance.
  • Addressing a home appraisal that is significantly lower than the purchase price or the amount you’re borrowing.
  • Getting confirmation from your employer that you are on their payroll or receiving wages from them.
  • Providing a letter explaining any concerns the lender may have (e.g., a recent large withdrawal or new debt).

Why is conditional approval important?

When you receive conditional approval, it means an underwriter has reviewed your submitted documents and determined you’re a strong candidate for a mortgage, provided you meet certain conditions. While conditional approval indicates a high likelihood of loan approval, it’s not guaranteed until all conditions are fulfilled.

Conditional approval is also common with home construction loans. If you’re building a home or purchasing land for construction, the developer or general contractor may require conditional approval before committing to the project.

Different types of mortgage approval

Conditional approvals are just one type of mortgage approval. Here’s an overview of the others and how they differ:

Prequalified: This status doesn’t carry much weight in terms of actual approval. Prequalification simply means the lender has gathered basic information from you and provided an estimate of how much you can potentially borrow for a home loan.

Preapproved: Similar to prequalification, preapproval means you’ve submitted some information to the lender, and they’ve likely pulled your credit score. It indicates the maximum amount you can borrow, giving you a good idea of your home-shopping budget—an important consideration before you start house-hunting. However, with preapproval, an underwriter hasn’t yet fully reviewed your credit history details.

Unconditional Approval: Once you’ve satisfied all the lender’s criteria or conditions for obtaining a home loan, you receive unconditional approval. This indicates the underwriter has signed off on your file, bringing you one step closer to closing on the home loan.

Verified Approval: Verified approval means your assets, credit profile, and income have been substantiated and confirmed. It’s one of the final steps in the application process and provides assurance to the seller that you’re ready to move forward with the purchase.

What is the difference between conditional approval and preapproval?

Initial mortgage approval, often called preapproval, is an early stage where the lender provides an estimate of what you may qualify for based on a preliminary review of your income and credit data. This preapproval gives you the confidence to make an offer on a property, showing sellers that you’re serious about purchasing. However, a final loan decision requires a more thorough verification of your details.

Conditional approval comes after initial approval and typically after you’ve signed a contract to buy a home and formally applied for a mortgage. This stage involves a comprehensive review of your financial situation by an underwriter, who sets specific criteria that must be met for final approval.

Both stages are significant steps on your journey to homeownership, with conditional approval representing a more advanced and promising phase.

Closing on a home after conditional approval

To close on your house, you need to finalize your loan, which means moving from conditional approval to unconditional or full approval. To achieve this, you must meet all the conditions laid out by the lender.

Often, this involves providing the lender with additional information. This might include reaching out to your employer or tax professional for further documentation, drafting a gift or explanation letter, or talking to an insurer to get the house covered.

Regardless of the specific requirements, you won’t be able to secure the mortgage or close on the house until all the lender’s conditions are met. In a competitive market or if the seller wants a quick closing, it’s crucial to act swiftly.

Meeting these conditions is just one part of finalizing your home loan. You also need to be prepared to pay closing costs. Your lender should provide a clear explanation of everything required to complete your loan.

What happens after a conditional approval is received?

Once you’ve received conditional approval for your mortgage, the journey toward final approval begins. The following steps are generally involved:

  • Address Any Issues: Promptly resolve any issues that arise during the underwriting process to move on to closing. This may involve completing or submitting supplementary paperwork, such as bank statements, tax forms, employment records, a home appraisal report, pay slips, and detailing any remaining loan or credit balances.
  • Final Underwriter Check: Once all requirements are fulfilled, your loan file is returned to the underwriter for a final review and approval. If everything is in order, the lender will grant you a ‘Clear to Close’ status, indicating that all documents have been approved and the lender is ready to proceed to the closing stage.
  • Closing Disclosure and Date Setup: The lender will compile and send you a closing disclosure, and set up your closing date.
  • Closing: The final step is the closing itself, where the loan funds are distributed and you receive your first payment statement.

The journey from conditional approval to closing typically takes 1-2 weeks, provided you act promptly. Moving quickly is key to ensuring a smooth closing process.