When you apply for a home loan, you will reach a stage where you are conditionally approved. Discover what this means and how many steps you need to take to get approval.
With conditional approval, your lender has begun evaluating your ability to pay a loan back. You are on track for approval and have already passed hurdles, such as a credit check. But you still have to provide more information before getting full approval. Conditional approval means you are likely to be approved, but it is not guaranteed.
Take a closer look at what conditional approval means and where it fits in the process of applying for a home loan.
What To Expect From Conditional Approval
When you apply for a home loan, you come to a stage where you are "conditionally approved." This is one of the possible stages in a mortgage application process, but you may be wondering what it means exactly. You should fully understand what conditional approval is to help you figure out what you have left to do before being approved for your mortgage. Your mortgage application will not move past "conditional approval" without input from you.
Learning what conditional approval means, when it happens, and how to move past it will help you streamline the process of getting approved for your home loan. You will be one step closer to owning your new house.
What Does Conditional Loan Approval Mean?
Conditional approval is a step in your mortgage application where underwriting has all the information needed. The underwriters will have gone through these details and verified them. But they also require some criteria to be met before you purchase the home. Conditional approval tells you where you are in the loan application process.
Conditional approvals can be denied depending on the information that comes forth during underwriting. This information may consist of debts that weren't covered or other reasons a buyer may not be able to pay. Bank deposits or withdrawals without explanations or even an abrupt change of jobs may affect your loan.
As such, you may need to provide proof of income or another financial explanation. The following are some of the most common types of documentation you will need to supply to move past conditional approval:
- Bank statements or income statements to verify your income
- Proof of homeowners' insurance
- Gift letters if you used gift funds in your down payment
- A letter explaining any large recent withdrawals
- Other additional paperwork
Once these requirements are met, you will be approved.
When it comes to prequalification, conditional approval is a slightly higher tier of approval but not as good as final approval.
Advantages Of Being Conditionally Approved
You likely have been told to get preapproved before house hunting, but when you have conditional approval, you will have a slight edge in terms of bargaining. When you have conditional approval and enter into a bidding war, you will be considered more seriously than a candidate who lacks this type of approval.
For those who are looking to build a home, a conditional approval may help them move through the process faster. Builders don't want to commit to the expenses of construction without the guarantee that you are going to be approved.
Conditional approval can also help with getting you to close quicker. Because underwriting can take some time, having much of it done before you start house hunting or building makes the process go faster. The documents have already been approved, so you will be ready to close when the time comes.
Steps To Mortgage Loan Approval
Once your application is accepted by your mortgage lender, your underwriters will inspect the different aspects affecting your ability to pay your mortgage back. Factors like income, credit history, assets, and credit score are all weighed. As your application is examined, it will move through the following stages of approval.
This is the very first stage of applying for a home loan. Prequalification happens before your application is vetted, processed, or goes through any part of the underwriting process. As a refresher, underwriters assess the lending risk with a mortgage. Prequalification just means you pass the minimum requirements and fit the profile of individuals looking to get a loan.
During the prequalification process, expect to provide documents such as:
- Pay stubs
- Proof of assets
- Tax records
When you reach this stage, your credit history and score are verified. You are one step closer to a mortgage loan, but the underwriters still have several pieces of information to evaluate.
The biggest difference between preapproval and conditional approval is that the underwriting team has verified the information you provided. They carefully looked at the various documents before you could reach this stage. When you were in the preapproval stage, they briefly skimmed through the documents and checked their list of requirements.
By the time you reach this stage, underwriters have already verified the information on the application and have an idea of whether you can pay back the loan or not. At this point in the application, your lender will generally set some conditions to be met before you can move forward on the application. This may mean check stubs, bank statements, or a list of assets. When this documentation is provided, and everything is satisfactory, you are closer to buying a new home.
Mortgage Approval Letter
Once everything has been met in the conditional approval stage, you will receive a mortgage letter. When you have this letter, your lender has already reviewed the application and the documentation that backs it up. This includes credit scores and credit history, making you a preferred shopper.
Approval To Close
This is the final stage of your application and means you can close on the mortgage. You will need to have a proper title, and your lender will need to verify it. You generally close within a week or two of conditional approval.
What Is Needed for Approval
Understanding conditional approval is one thing, but what do you need to reach that stage and go past it? You will need:
- Several years of financial statements and proof of income (when self-employed)
- Income verification with check stubs and bank statements
- Income tax returns from the last few years
- Proper insurance verification
- Letters about down payment if it's a gift
- Appraisals of assets, such as property, jewelry, and art
When you apply for your mortgage, have all your documentation ready so the application process will go more smoothly. Remember that different lenders may have different requirements. The faster you can supply what is needed, the quicker you will be approved for your loan. Once you get conditional approval, you can somehow be relieved because it indicates you will likely get the loan.
Other Home Purchase Tips
Often considered one of your largest assets, your home is a purchase you need to carefully consider. Seeking the advice of a financial adviser is recommended to gain more insight on the best purchase to make.
Don't rush into buying the first home you fall in love with. Take your time to look at several options and make sure your most important needs are met before giving an offer. Research your real estate agent thoroughly as well.
Overall, it is smart to get advice from others when buying a home. This will protect you from making potential errors while getting a home. For example, you may miscalculate your budget. Or you may decide to forego the home inspection and miss a problem in the property. You may accidentally buy a home in an area that seems safe during the day but is questionable at night. All of those things can be avoided by asking for advice.
Tips For Getting Your Mortgage
Getting a home loan can seem daunting to some, especially for first-time buyers or those without a financial advisor. Here are a few tips to help you get yourself in the running for a mortgage.
Save For Your Down Payment
Start saving for your down payment as soon as possible. There are some loans, such as a VA or FHA, that require very little to no down payment. Still, the larger the down payment you have available, you're more likely to get a better loan. Here are some steps to start saving up for your down payment:
- Pack daily lunches in order to save on this regular expense.
- Start a side gig so that you make extra cash.
- Ask family or friends for a loan or gift to raise more money.
- Cut back on shopping or cancel subscriptions you don't use very often.
Work on Your Credit Score
If you haven't already pulled your credit report, do so as soon as possible. You can dispute any questionable debts and pay down any forgotten debts. If you don't have companies such as your cell phone carrier or utilities to report on-time payments, you can request it. Make sure your details on this report are accurate. Doing these will help get your credit score as high as possible.
Get All Documents Ready
Have all your tax documents, income statements, and credit statements ready. The more organized you are, the easier it will be to see what documents are still lacking.
Don't Move Funds Around
When your down payment has been verified, you may be tempted to move it to a higher interest account. But leave it where it is. If your lender looks into your account and finds that the cash has moved, your closing can be delayed.
When you are conditionally approved, you are making progress on your mortgage application process. The lender has already checked the initial requirements but still has more documents to verify. Conditional approval essentially means that you meet at least some criteria and will be approved as long as you meet the remaining criteria. When bidding for a home, conditional approval can help you close the deal, especially if other bidders are only prequalified. Just note that a mortgage approval letter will still be the end goal as you work on purchasing your home.
Shawn Manaher is a former financial advisor, has founded 5 online businesses, and is a coach, speaker, podcast host, and author. He's been featured on Forbes, The Consults Corner on TAE Radio, The Writing Biz, What's Your Story, and more.