What is conditional approval?

It’s not uncommon to receive a conditional approval after applying for a home loan. As the term implies, it means the mortgage lender agrees to finance the purchase under the condition that you meet certain requirements. The requirements can vary by lender, though, so, it’s important to understand what it means to be conditionally approved for a loan and what to expect moving forward.

What does conditionally approved mean?

When you’re figuring out how to buy a house, getting the mortgage plays a huge role. Most people can’t make a six-figure purchase in cash, so they have to finance it with a loan, i.e., a home mortgage.

You can’t just get a mortgage, though. Instead, you need to qualify for one, meeting the standards and criteria set by a mortgage lender. That requires the fairly involved process of providing them with your financial documents (be ready to dig out pay stubs and tax returns). The lender does this deep dive on your financial profile to make sure you can pay back the large sum you’re borrowing. They won’t approve you for financing until they’re confident you can.

So, what does conditional approval mean? It means the lender will issue you the loan if (and only if) if you meet the conditions they specify. Some borrowers go straight from pre-approval to full approval, but in many cases, the lender may offer you conditional approval while they work with you to dot the final i’s and cross the last t’s, making it easier to move forward with your home purchase. Or you can request it from them.

In either case, your status will be confirmed by a letter or statement indicating you have been conditionally approved.

Common approval conditions

You could receive a mortgage conditional approval if any of these criteria are not met:

• Getting a signed gift letter if someone is giving you money to help with the home purchase
• Providing more detailed financials (e.g., bank statements, pay stubs, details on other debt like a car loan)
• Getting homeowners insurance
• Having a home appraisal on the house you want coming in at or above the purchase price
• Receiving confirmation from your employer that you’re on their payroll or receive wages from them
• Getting a letter from you explaining something that concerns the lender (e.g., a recent large withdrawal or fresh debt)

Why is conditional approval important?

When you get conditional approval, it means an underwriter has evaluated everything you’ve submitted and deemed you a good candidate for a mortgage — assuming you meet the stipulated conditions. Because you’re further along in the home loan process, conditional approval carries more weight with sellers, and can help you stand out from other buyers. Getting conditionally approved could be the leg up you need, especially if your local market is ultra-competitive.

Conditional approval also often comes into play with home construction loans. If you are building a home or buying land to build a home on, the developer or general contractor might demand the financing is conditionally approved before they commit to the project.

Different types of mortgage approval

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

• Prequalified: This form of approval doesn’t hold as much weight as a conditional approval. It 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: Like a prequalification, a preapproval means you’ve submitted some information to the lender and they’ve likely pulled your credit score. It gives you a good idea of your home-shopping budget, one of the biggest questions you should get answered before you start house-hunting. But with pre-approval, a pro from the mortgage lender — namely, an underwriter — hasn’t yet dug into your details.
• Unconditional approval: Once you’ve satisfied all the lender’s criteria or conditions to get a home loan, you receive unconditional approval. It indicates the underwriter has signed off on your file and you’re one step closer to closing on the home loan.
• Verified approval: A verified approval indicates your assets, credit profile and income has also been verified. It’s one of the last steps in the application process, and provides assurance to the seller that you’re ready to move forward with the purchase.

Closing on a home after conditional approval

To close on your house, you need to finalize your loan. And that means moving from conditional approval to unconditional or full approval. To get there, you need to meet all of the conditions the lender has laid out.

In many cases, that means providing them with more information. Once you know why your loan was conditionally approved, start taking steps to meet those conditions. That might mean reaching out to your employer or tax professional for additional documentation, drafting a gift or explanation letter or talking to an insurer to get the house covered.

Whatever the case may be, you won’t be able to get the mortgage — or close on the house — until you meet the lender’s conditions. If you’re in a competitive market or the seller wants a quick closing, act fast here.

Checking off your conditions is just one piece of finalizing your home loan. You also need to be ready to pay closing costs. Your lender should explain everything required to get your loan in place.

If I’m conditionally approved, can I be denied a mortgage?

Yes. Remember, your approval is conditional. If the conditions aren’t met, your approval becomes null and void. The fact that you had partial approval carries no weight.

Some people with conditional approval don’t end up getting a mortgage because they simply didn’t do the required things. You could end up being denied because you didn’t get the requested documents in by the required date, for example.

But conditional approval also gives the lender the right to back out of the deal if they see anything they don’t like. So even if you submit everything on time, if that last bank statement you send in shows a troubling pattern of spending — or uncovers a new type of debt you hadn’t disclosed — you could get denied.

If this happens, don’t panic. It doesn’t necessarily mean the refusal is permanent. You simply may need to restart the underwriting process, which means the size of your mortgage or its interest rate could change. Since you’ve already made it to conditional approval, though, the lender may be willing to work with you to reassess the loan you can get based on the new information you’ve submitted.

Bottom line on conditional approval

What is conditional approval? It means you almost have a home loan — but you need to take certain steps (e.g., meet the stipulated conditions) to finalize it.

Sometimes it’s just a standard stage in the process:  If the lender needs more time during underwriting, they may alert the applicant that they’re conditionally approved, so the homebuying process can proceed. At other times, it may indicate a couple of hiccups in an application, requiring additional documents to address.