When you apply for a mortgage, you may get one of several types of approval. After the initial pre-approval, you may hear that your loan is ‘conditionally approved.’ As the name suggests, there are conditions that remain on the loan file, but given proper satisfaction of those conditions, you will be able to close on your loan.
The Underwriter’s Role
With a conditional approval, the underwriter reviewed your loan and all of your supporting documentation. The underwriter likely approved the documentation you provided, but still has one or more conditions they need satisfied.
Basically, the underwriter tells you that the loan looks good for the most part. The underwriter would just like a few issues cleared up to provide that ‘clear to close’ status you desire. A few examples may include:
- A large deposit in your bank account – Underwriters take a very detailed look through your finances. If they come across a deposit they cannot source with your income, they will question it. You will then have to provide proof that the deposit isn’t a loan. You can do this by providing proof of the funds’ origination, such as the sale of an asset.
- A drop in your income – Underwriters look closely at your income now and in the past. They look at the patterns. If you made less last year than the year before, they will need to know why. Even if your current income supports a mortgage payment, they may want to know the circumstances of the decreasing income to make sure it’s not a repeating pattern.
- Verification of your employment – Some mortgage companies leave the verification of employment as the last satisfied condition. This leaves you with a conditional approval until they verify your employment. It doesn’t mean your loan could still fall through. If you are at the job you said you were and the employer provides the same information you provided, you are in good shape.
Other Conditions Lenders Require
Aside from the ‘red flags’ that could pop up, there are a few common conditions that most borrowers experience:
- An appraisal proving the home’s value – Once you sign a purchase contract, the lender will order an appraisal on the property. Until the lender gets this report back from the appraiser, they can’t close on your loan even if they already verified your income, assets, and credit. The home must be worth at least the amount of the purchase price in order for you to qualify for the loan.
- Clear title – The lender will also order a title search on the property. This allows the title examiner to determine if there are any unpaid liens on the property. It also checks on the chain of ownership to make sure that no one can come back and claim ownership on your property.
- Proof of homeowner’s insurance – This is usually one of the last purchases you make. You want to make sure the loan is conditionally approved before you buy it. Since you probably pay 100% of the policy up front, it’s a large expense. It makes sense to wait to buy it, but know that it holds up your final approval.
- Proof of funds to close – Lenders may require another verification of your funds used for closing to make sure that you have them and that the funds are yours. In other words, they want to make sure you didn’t take out any new loans.
- Final credit check – Your lender will likely pull your credit one last time right before you close. They do this to make sure that you didn’t change your credit drastically by racking up credit card debt, paying bills late, or taking out new loans.
Can You Lose Approval After a Conditional Approval?
Unfortunately, even if you have a conditionally approved loan, you can lose your approval. It all comes down to the qualifying requirements. For example, if a lender verifies your employment and what the employer says doesn’t match what you told the lender, it could send your loan into a denied status.
Other issues that can occur include:
- The value comes back too low from the appraiser
- The title search turns up liens on the property or issues with ownership
- You can’t prove that the funds you have to close belong to you
- You damaged your credit after getting pre-approved
The best thing you can do once you have a conditional approval is to keep everything status quo. Don’t quit your job, rack up your credit cards, or make large deposits in your bank account. It’s like you freeze your financial life. Once you get the final approval and close on the loan, you are free to do things with your finances as you see fit. Until that point, keep everything as close to the same as it was when you applied for the loan as possible.