A conditionally approved loan is closer to closing than a preapproved one but comes with a few conditions, usually concerning documentation and income, that must be met before a client can be approved to close.
A conditional approval occurs once the client has provided the necessary documentation to get their loan set up, such as supplying the following documentation:
- Employment and income verification
- Pay stubs
- Tax returns
- Bank statements
- Debt obligations (credit cards or loans)
- Utility bills
- Asset statements
This information is required before the loan is completely approved.
Conditional Approval vs. Preapproval
People often confuse conditional approval and preapproval when talking about mortgages.
Loans are preapproved by a Home Loan Expert who has reviewed your income and credit information. Your information must be verified and approved before a decision can be made.
“The preapproval is based on what the client tells the banker and their credit report information,” said Jennifer Davenport, product manager on the Quicken Loans Capital Markets team. “Conditional approval differs from preapproval in that the loan may not have been reviewed by an underwriter when preapproved.”
After your information is reviewed, you’ll receive a preapproval letter stating your eligibility for a loan up to a specified amount.
Conditional approval comes after preapproval and involves going a little deeper. An underwriter conducts a strict documentation review before your loan is conditionally approved.
“This documentation is reviewed by an underwriter, and provided the client’s information matches up with what was initially stated to the mortgage banker, they are conditionally approved,” explained Davenport. “This means that the loan is moving forward but there are or may be additional conditions that will need to be met in order to finalize and close the loan.”
If the conditions aren’t met, the client might not be able to close on the loan.
Conditions on a Conditional Approval
There are a few common conditions attached to a conditional home loan approval.
Additional documentation, such as pay stubs, paperwork for business income, and tax documentation, is often required for final approval.
This might also include written verification of employment from your employer or additional asset statements, depending on what’s needed for your loan.
Conditional approval can also require purchase agreement addendums. Title verification, an appraisal, an inspection and homeowners insurance are usually needed to verify the market price of the home, the loan-to-value ratio and other details.
This can also include confirmation that there are no unexpected liens or judgments on the home.
Denial of a Conditionally Approved Loan
Clients with a conditional approval for a home loan are at risk for denial if they fail to meet any of the conditions laid out by the lender.
Here are a few reasons why a client might be denied:
- The underwriter is unable to verify the data provided by the client
- The home the client is trying to purchase has an unexpected lien
- The client has a judgment on their record
- The home inspection or property appraisal came in with unexpected issues
- The client experienced a decrease in income
- The client had negative entries on their credit report
According to Davenport, conditionally approved loans “may also get denied based on the additional information that comes in. For example, maybe the client does not actually earn as much income as they initially thought or loses their job, or there are not enough assets, or clients open up new debt during the process and now their DTI (debt-to-income ratio) exceeds the product guidelines.”
If you’re looking to get a mortgage, the first step you want to take is to talk with a Home Loan Expert.
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