When a lender reviews a mortgage application, it might find that some pieces of information are missing. A conditional mortgage approval lets the borrower know that the application is on track but that there’s still some work to be done for a full approval.
Types of Mortgage Approval
Just as there are several steps borrowers complete to get to closing, there are different types of approval that can be issued by a mortgage lender. Which type of approval applies depends on where you are in the application process and what information you’ve provided.
Preapproval
Preapproval goes a step beyond mortgage prequalification. Typically, you prequalify by providing the lender with an estimate of your credit score, down payment, income and debt payments. The lender issues a letter stating that it will probably lend up to a specified amount, assuming that the information you’ve provided is correct. For mortgage preapproval, you complete a loan application with details of your employment, assets and liabilities. The lender generally uses an automated underwriting system to get a preliminary underwriting decision that includes a hard credit pull.
Some lenders have extensive preapproval processes in which a complete loan application is checked by an underwriter, but oftentimes lenders do not verify all of your documents at this stage.
Conditional Approval
Conditional approval is an approval that depends on the submission of further information or on additional steps being taken. To reach conditional approval, you submit a complete mortgage application, and the lender has an underwriter review your documents and confirm that you meet the criteria for the loan.
“If the finding says that we need 30 days of pay stub, the underwriter needs to see 30 days of pay stub and verify that the numbers on there are in fact what was inputted into the system,” says Mona SooHoo Wong, senior loan officer at Monument Mortgage.
If the underwriter finds that the overall application you submitted is accurate but that you’re missing some necessary information, the lender can issue a conditional approval. This might mean that you need to answer questions or provide more recent documents. Sometimes, you get conditional approval because the lender is still waiting to receive findings from a third-party service provider, like an appraiser or a title company.
“Conditional approval is a very good sense to the borrower that the bank has already reviewed everything and is moving forward with the file,” says Brian Shahwan, vice president, mortgage banker and broker at William Raveis Mortgage.
Credit Approval
Credit approval is a form of conditional approval that applies when you’ve submitted complete information about your finances, and underwriters have signed off on your credit application, but the lender has not yet reviewed the property. This could happen because you haven’t yet decided on the home you’re going to buy or haven’t had an offer accepted. Credit approval is conditional on the home’s meeting the guidelines set by the lender and the loan program.
A lender will typically revisit a credit approval once you find a property to make sure that your financial situation hasn’t changed in the time since the approval was issued.
Full Approval
Full or final approval, also known as “clear to close,” is when the lender has approved your application with no remaining conditions. At this point, you receive the closing disclosure and schedule your closing date.
Typical Conditions for Mortgage Approval
A lender might condition a mortgage approval on information that the borrower provides, such as updated bank statements or proof that gift funds to cover the down payment have been deposited into their account.
Approval might also depend on the title search finding that there are no prior claims on the property.
Other possible conditions relate to the state of the property. If there are safety issues in the home, resolving them might be a condition for approval.
In particular, lenders can approve Federal Housing Administration loans only if the property meets the FHA’s minimum requirements. Peeling paint, missing railings and water damage are some of the FHA appraisal findings that could delay full approval.
“If they see water stains on the ceiling, the question that’s going to come up: Where is that coming from? Is it old? So depending on what the answer is to that, it might need to be fixed,” SooHoo Wong says.
And approval could be conditioned on the appraised value of the property. If the value is found to be significantly lower than the purchase price, the loan might not be approved or the down payment might need to increase.
How to Meet Conditions for Mortgage Approval
Once you’re conditionally approved, your lender will give you a commitment letter outlining the remaining conditions and the actions you need to take to meet them. In some cases, you’ll need to provide additional information or documents to your loan officer. Otherwise, you may just have to wait until someone else, like an appraiser, gets back to the lender.
Only after all conditions have been met will your application return to the underwriter.
“Generally, an underwriter doesn’t want to see conditions or review conditions piecemeal. They’ll only want to look at the file again once all conditions have been received by the loan processor so that the file can just be run through again and officially cleared,” Shahwan says.
Can a Conditionally Approved Mortgage Be Denied?
In the best-case scenario, you satisfy all of your lender’s conditions and proceed to full approval. If you aren’t able to meet a condition, though, your mortgage application can be denied.
You could receive a denial because your financial circumstances change, like if you lose your job or if your plans for funding the down payment fall through.
“Let’s say the borrower all of a sudden isn’t able to get the gift they were expecting or as much of the gift as they were expecting. That could certainly put them in a situation where they don’t have enough assets to close the loan, and it could be denied,” Shahwan says.
Taking on enough new debt to alter your debt-to-income ratios could also result in a denial.
Sometimes, satisfying one condition triggers requests for more information. Or it can cause your loan to be declined.
A mortgage approval that’s conditioned on an appraisal, for example, could end up being denied if the home is found to need extensive repairs or if the value is much lower than expected. If the home needs repair work, you might have options such as negotiating with the seller to make repairs or switching to a loan program with less strict property standards. If the home’s value is the issue, workarounds could include negotiating with the seller to lower the price, making a larger down payment or taking out a loan with private mortgage insurance rather than one without it. But if you aren’t able to reach one of those solutions, the outcome could be a denial.
How to Avoid Denial After Conditional Mortgage Approval
To avoid a denial, stay in close contact with your loan officer and respond promptly to any questions.
Be careful to maintain the status quo. Try not to take any steps that would affect your mortgage application, such as applying for new credit. And if it looks like your financial situation may change, talk to your loan officer right away.
“It’s not the right time to make any large purchases. It’s not the right time to open credit cards and not the right time to change your job,” SooHoo Wong says.
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What Is Conditional Mortgage Approval? originally appeared on usnews.com
