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 with a definition.
What Is a Mortgage Conditional Approval?
In a lending context, a conditional approval is when the mortgage underwriter is mostly satisfied with the loan application file, but there are one or more “conditions” remaining that must be resolved.
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.).
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 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.
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 to the underwriter, who reviews it for completeness.
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 cannot tell where the 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.
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 for Underwriting Approval
The scenario above is just one example of a mortgage conditional approval. 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. 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 discourage you, but only to prepare you. 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.
There are many issues and mortgage conditions that can arise between pre-approval and funding. The conditional mortgage approval is one example.
As a borrower, the best thing you 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.