What is conditional approval?
Updated April 8, 2022
When applying for a mortgage, buyers must undergo a process called underwriting, in which the mortgage provider assesses their credit history, income documentation and assets to determine whether they meet the criteria to be granted a loan. Conditional loan approval is a status assigned to buyers during the underwriting process when the lender requires more information or additional documents before the mortgage can be officially approved. It states that the lender is willing to loan a specific amount of money to the buyer once they meet certain conditions.
A conditional approval letter will list conditions that must be satisfied for the mortgage to be officially approved, such as the submission of bank statements to verify income, tax returns, a list of assets, verification of homeowners insurance or an appraisal that will confirm the property’s value and suitability. Although it does not guarantee that final approval for the loan will be granted, it is a stronger indication than preapproval. The mortgage can be denied if new information becomes known or the buyer’s circumstances change during the underwriting process—for example, if the buyer takes on additional separate debt, withdraws a large unexplained sum or money or changes jobs.
A conditional loan approval is one step beyond a prequalification, but it's a sign that more information is needed. Credit: Pixabay
Conditional loan approval is not the same as preapproval. A preapproval letter can be issued without a thorough investigation of the buyer’s finances, based only on credit history and credit score. A condition approval letter is only granted after a loan officer has reviewed the buyer’s credit score, credit history, income and assets, meaning that it carries more weight with sellers who may be considering whether or not to accept an offer.
When should you obtain conditional loan approval?
- Buyers in a competitive market should consider getting conditional loan approval before making an offer on a home to give them an edge over buyers who only have preapproval status
- Conditional loan approval can mean that closing on a property takes 10 to 15 days, as opposed to between 20 and 30 days, allowing for higher negotiating power and a swifter purchase
- Buyers considering building a new home may be required to have conditional loan approval before the developers will break ground
When to wait
- Most lenders require all documents to be dated within 90 days of funding, so applying for conditional loan approval is not advisable if the buyer is not planning to purchase a home within the next three months
What happens after conditional approval is granted?
The first two stages of applying for a mortgage are prequalification, which simply means that the buyer has applied for a loan, and preapproval, which is contingent on a credit check. Conditional approval requires a deeper scrutiny of buyers’ financial status, meaning that they have already fulfilled many of the necessary steps to secure final loan approval. The next step, after the buyer has supplied any additional requested documentation, is a mortgage approval letter. This means that a loan officer has assessed all the buyer’s details and deemed them suitable for a loan. The final stage is approval to close, which means that the buyer is ready to provide the down payment and take possession of the title to the property. Closing usually takes one to two weeks after conditional approval is granted.