What is conditional approval?

Conditional approval is a statement from a lender indicating that you are likely to be approved for a loan if you meet specific conditions. 

While conditional approval brings you closer to final approval, it does not guarantee that your mortgage will be approved. 

Conditional approval can feel tricky, in that you are close to a final mortgage approval, but failure to meet the outlined conditions may jeopardize completing the entire process. 

This article will help you learn about conditional approval inside and out and share some tips on meeting conditions.

Realtors can also benefit from this article, as they work with home buyers and might want to streamline their transactions with contract management software.

What does conditional approval mean?

Arriving at the conditional approval stage of the loan means that you’re now going through the underwriting process.

An underwriter reviews your financial documentation and assesses risks a lender will take if they give you a loan.

They make one of three possible decisions: denied, suspended, or conditionally approved.

Once you’ve received conditional approval, an underwriter is primarily satisfied with your loan application but needs to dive deeper into some of your documentation.

They request additional information from you: bank statements and monthly income, insurance verification, a gift letter, or other data.

After they validate that your information meets the required criteria, the mortgage lender can issue a verified approval for the home loan.

That said, conditional approval is not a guarantee that your mortgage will be approved — it moves you closer to final approval when a bank or financial institution decides whether to lend you money. 

Your application can still be denied during the review process.

It usually happens if an underwriter can’t verify your information or if you have negative marks on your credit score or with your financial documentation.

However, the refusal can be a temporary thing.

You may need to restart the application process and change the loan request.

Here is a simple chart to illustrate where conditional approval sits in the stages of applying for a home loan:

What are the advantages of conditional approval?

• A conditional approval sets you apart from other candidates in the home buying process. You will be considered a more serious buyer than candidates at the pre-approval stage.
• While pre-approval gives you an understanding of how much money you can borrow, conditional approval gives you a more accurate loan assessment because underwriting is now involved.
• The fact that you have conditional approval also streamlines the closing process. An underwriter has already reviewed your initial documents, and the following review will generally take 1-2 weeks before the full approval is issued.
• Though it’s not a final approval, conditional approval gives you the feeling that you’re on the right track with your loan application. The initial review suggests you’re financially stable, and to reinforce this idea, you need to provide additional documents.

What conditions are included in conditional approval? 

The specific requirements vary by borrower. The following are the most common at the conditional approval stage of the loan:

Gift letter

If someone gives you money toward the purchase of a house, you must ask that person to write a gift letter.

It ensures a lender that money came to your banking account as a gift, not a loan.

Homeowner’s insurance

You must verify to a lender that you have insurance for the property.

It can take the form of a copy of your policy or a certificate from the insurer.

Financial documents

These include bank statements, tax returns, investment information, and docs verifying your income.

Letter of explanation

If you made a large withdrawal recently, you should write a letter of explanation and specify what it was for.

Home conditions

A lender often requests an appraisal to see if a property’s value aligns with the loan amount the borrower is requesting. 

Tips on meeting conditions

1. Read conditions carefully

Review and understand requirements issued by an underwriter, then make a checklist of all documents you must prepare.

2. Organize your documents

Gather the necessary documents in one place, like in a document repository.

Quickly locate docs by applying filters and using smart search.

3. Focus on time-sensitive docs first

The time needed to prepare documents can vary greatly.

Focus on documents that require additional effort first; doing so will give you flexibility to deal with other requirements later.

4. Show financial stability

Avoid making significant financial changes, such as opening new credit or switching jobs during the conditional approval stage.

Lenders want to see financial stability.

5. Stay in touch with your real estate agent

Your real estate agent can help you understand the conditions and guide you through deadlines and doc preparation.

How PandaDoc can streamline the real estate purchase process

Conditional approval means you are one step closer to final mortgage approval.

To streamline this process, use contract management software like PandaDoc.

We provide a centralized repository where you can keep all home-related docs in one place.

If you need to fill in a document quickly, access a library of contract templates as a base for your upcoming docs.

Realtors will benefit from contract management software too.

Edit docs simultaneously, manage access settings and locate documents quickly with a smart search.

Use tools like eSignature or document tracking to streamline your workflow and be aware of real-time data updates.

No matter which methods you choose to keep the mortgage approval process flowing smoothly, we’re here to help you stay organized when preparing documents, reviewing the information, and submitting docs promptly.