What is conditional approval?
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“On one condition.” It’s a phrase you’ve heard before. You know it means that you can have or do something if you meet one said condition.
That’s essentially what you’re dealing with in the homebuying/home financing world, when it comes to conditional approval. It means a mortgage lender is agreeing in principle to give you a home loan under the condition that you meet certain requirements.
Those requirements can vary, though. Let’s talk about the details of being conditionally approved.
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.
Getting a mortgage isn’t like getting a new shirt, though. You can’t just go out and grab one. Instead, you need to qualify for one, meeting the standards and criteria set by a mortgage lender. That requires the fairly involved process of opening up all of your financials to them (be ready to dig out pay stubs and tax returns). The lender needs 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. Those might include:
- 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)
Long story short, getting approved for a mortgage means jumping through a lot of hoops. It’s possible to 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.
Conditional approval vs pre-approval
Condition approval means you’re one step further into the mortgage application process than pre-approval. With pre-approval, 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.
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 it means 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.
That said, most people don’t go through conditional approval until after they’ve put an offer on the house. This process of finalizing underwriting usually takes a couple of weeks and is part of the reason closing on a house takes a while. You’ll generally only get conditional approval before making an offer if you find yourself in an extremely competitive market.
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.
Closing on a home after conditional approval
In order to close on your house, you need to finalize your loan. And that means moving from conditional approval to unconditional/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.
You don’t have to navigate this process alone. A real estate agent can help you go through the steps to meet the lender’s conditions and get the money you need to buy your dream home. They can also advise you on how important it is to obtain conditional approval status while you’re house-hunting — if it indeed would give you a competitive advantage over others in your local market.