What is a Conditional Loan Approval?
05/24/2022 Zak Bretherton
When you submit a mortgage application, the loan underwriter will give the application a status of its approval. There are many statuses your application can receive. One common term you’ll hear is “conditional approval.” What is conditional approval? We’ll break down what this status means, how it differs from other types of approval and what conditional approval means for your mortgage loan application.
What Is Conditional Approval?
When you apply for a mortgage loan, your application is reviewed by a team of underwriters who look through your documentation and information. Then, they decide if they’ll approve your loan and lend you the money. One application response you might see is a “conditional approval.” If your mortgage loan application receives conditional approval, it means the lender may be willing to approve your loan if you meet the certain conditions they set forth. In other words, the lender is mostly satisfied with your application and willing to loan you the money if you are able to meet a few conditions. The conditions could include more documentation or particular types of information that the lender needs before approving your loan.
Conditions for a Conditional Loan Approval
If you receive a conditional approval for your loan, there are several common conditions you may need to meet to receive full approval:
- Providing income and bank statements to verify your monthly income
- Filling out additional paperwork to meet requirements for a particular loan (such as a VA-backed loan)
- Providing verification of homeowners insurance
- Providing gift letters if you’re using gift funds
- Providing a letter of explanation for a large withdrawal
- Showing more documentation for debt obligations
- Showing assets statements
Your lender will provide the specific conditions you need to meet for your conditional approval.
Advantages of a Conditional Approval
Some people get worried that a conditional approval is a negative status that will hurt them while trying to buy a home. However, a conditional approval isn’t a full rejection of your mortgage application, and this status can help you stand out from other potential homebuyers. If a seller is looking at candidates to buy their home, they are more likely to consider a conditional approval over someone who hasn’t begun the loan process. So, if you receive a conditional approval on your loan application, it can be an advantage as you search for a new home.
Conditional Approval vs. Other Approvals
To fully understand a conditional approval, it’s important to know how it differs from other statuses your loan application could receive. Here are some of the most common types of approval and how they differ from conditional approvals:
Some people confuse a pre-approval with a conditional approval, but these statuses actually happen during different stages of the loan application process. Your application may receive a pre-approval status after you submit documentation to give an indication of whether or not your loan could be approved down the line. However, this status happens before the underwriting process. After this process is complete , you may receive a conditional approval, which gives you a much better indication of your application status and if you will be approved for your loan.
An initial approval and conditional approval are also different from each other because of where in the loan application process they happen. After you submit documentation and your application, there is a very brief review process (after a pre-approval) where the lender may give you an initial approval that indicates most things are in order to continue the rest of the application process. This initial approval will come before the underwriters fully examine your application and finances. After you receive an initial approval, the underwriting process begins, and you’ll receive a conditional approval.
An unconditional approval is the next step after receiving a conditional approval. After you receive your conditional approval, you will then send in the required documents to meet the conditions set out by your lender. When the lender receives your documentation for the conditions, you get an unconditional approval that lets you know the lender is ready to move forward on potentially approving your application.
A verified approval is the last step in buying your home. If you get a conditional approval, you will then meet the conditions and receive an unconditional approval. The review process will then happen. After all of the application process steps, the lender will officially approve your loan, and that’s when you get a verified approval. This approval means you are ready to buy your new home, and your lender will loan you the money to do so.
Possibility of Denial after Conditional Approval
After you meet all the conditions and send in the right documents, your lender will do another review process for your mortgage loan application. At this point, your application can be approved fully or denied. A conditional approval doesn’t necessarily mean your application will get a verified approval, and there is a possibility of denial. But most often, a denial will happen if you fail to fully meet one of the conditions.
Essentially, your conditional approval means that you can be fully approved if you meet all the conditions, so if you don’t fully meet a condition, you could be denied. However, if you are thorough and make sure you are meeting every condition set out by the lender, your application could potentially be approved. After all, your lender was mostly satisfied with your application already, and meeting the conditions set forth can only make your application stronger.
The Bottom Line
After the application goes through a review, you will be approved, denied or given a conditional approval. A conditional loan approval means that your loan application is mostly satisfactory, but the lender just needs more information that you will need to provide to potentially be approved. To move to the next part of the loan application process, you will need to meet all of the conditions set forth by the lender to be able to get a verified approval.
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