If you’re a first-time homebuyer, you may feel stressed as you start the process. You’re asking to borrow a lot of money in a high-rate environment, which means the lender may put your entire financial life under a microscope.
While you’ve likely noticed lender websites promising instant preapprovals to help with your house hunting, if you’re approved conditionally for a home loan, you can anticipate some hiccups as you move toward closing.
What does conditional approval mean?
If you’re conditionally approved for a home loan, it means full loan approval is contingent on meeting specific lender conditions. While conditional approval might sound daunting, it means that the lender’s mortgage underwriting team has reviewed your financial documentation and feels confident about loaning you the cash as long as certain factors check out.
What are the most common approval conditions?
A lender can include many conditions in a mortgage application decision. But here are some of the most common conditions that need to happen to push your approval through:
- The home’s appraisal must exceed or equal the agreed-upon purchase price. Lenders need to know that the property you’re buying is worth the price you’re offering. If not, the lender may not approve you for a loan larger than the home’s value. You may need to come up with a bigger down payment to compensate for the gap or get the seller to agree on a lower price.
- You need to verify your employment. Lenders need to know you have a steady income stream to cover your monthly mortgage payments. While the pay stubs you initially submitted provide some proof, the lender may require a letter from your employer confirming you work there.
- You need to explain a sizable financial transaction. Lenders will look at all the money in and out of your bank accounts. If you recently made a big withdrawal or received a large deposit that seems unusual, the underwriter may request an explanation.
- You need to show you have homeowners insurance. Even though you don’t own the property yet, you need to ensure it’s protected before moving in. Don’t be surprised if your lender asks for proof that you’ve bought a homeowners insurance policy.
- You need to submit a letter about a down payment gift. If someone is giving you money to help cover your down payment, the lender considers this a gift and needs to know about it. The generous friend or family member may need to sign a document indicating they don’t expect any repayment.
How long does it take for a conditional approval to go through?
Once you get conditional approval for a mortgage application, you must satisfy the lender’s conditions to receive full approval. If the condition is easy to meet, the process can move quickly. But, if you need to meet multiple conditions or are waiting on another party, it can take more time to move through the closing process.
For example, you may need to request an additional appraisal, which requires scheduling a professional to look at the property.
Responding promptly to lender asks is the best way to navigate swiftly through this piece of the home-buying puzzle. Make sure you submit requests to the lender, your agent and your attorney (if you have one) right away to demonstrate that you’re a responsible borrower.
Another essential tip: Don’t make any big changes to your finances, like buying a new car, taking out a new loan or even applying for a new credit card during this process. Lenders like predictability; new credit accounts, debt or big withdrawals can raise a red flag.
What happens if a lender denies your conditional approval?
If you don’t meet the lender’s conditions, the lender will likely deny your home loan. In this case, you can start the full underwriting process again with the same lender or find another lender.
You’ll also need the seller to agree to a delay, which can be challenging. In a seller’s market, the homeowner may relist their property and find another buyer.
Can you avoid conditional approval?
Conditional approval is part of most home-buying purchases. Lenders need to make sure that every loan they add to their books has a low risk of default. However, getting preapproved can help speed the process along; since you’ll need to submit a wide range of paperwork about your finances for preapproval, an underwriter may already have nearly all the information they need to move to full approval.
There’s another way to avoid conditional approval -- although it’s unrealistic for most homebuyers: Buy the home in cash. Then you won’t have to deal with any back-and-forth communication with a lender.
The bottom line
Getting conditional approval for a mortgage means you’re close to signing your name on a lot of loan documents. Focus on meeting those conditions by your lender’s deadline to speed up the process. Once you do, you can remove any of the labels in front of the word approval and put a new label next to your name: homeowner.
FAQs
Yes. Conditional approval indicates that an underwriter has reviewed your mortgage application and is almost ready to grant you full approval for the home loan. As long as you can satisfy the conditions spelled out in this phase of the approval process, you’re on the path to moving in.
No. Conditional approval typically happens after preapproval, although some lenders offer conditional approval programs before beginning the house-hunting journey. While preapproval is an indication that your application is highly likely to be approved, conditional approval means that your application has been reviewed, and there are a few additional conditions that must be satisfied before you can close on the home.
Conditional approval can delay the closing process, especially if you need more time to meet the requirements. However, some conditions are easy to meet. If you are concerned about meeting the conditions before your closing date, talk to your real estate agent and attorney to make necessary adjustments to the timeline.