There are many terms used in the home-buying process, particularly when it comes to obtaining a mortgage approval. In fact, even the word ‘approval’ can seem to mean different things. For example, when you are first informed that your loan application has been approved it often means that it has been ‘conditionally approved.’ So, let’s talk about what this means.
As it implies, a conditional approval means your loan has been approved with one or more conditions. In truth, just about every mortgage approval is a conditional approval because some of the more standard conditions are those that cannot be met until you actually sit down and sign the paperwork, at which point your loan is no longer approved but also closed and funded. Even aside from conditions that are not fulfilled until settlement, there are often other processing conditions that you would have no part in meeting.
Sometimes, however, the conditions of the approval do require more action on your part to verify or document situations revealed in the application process. A conditional approval is often granted when the information requested is not critical to the loan decision or it can be reasonably assumed that it will support the information already obtained. Otherwise, the loan would go into a pending status rather than being conditionally approved.
Common examples of items that may be requested on conditional approval include:
- Tax schedules – sometimes the tax returns provided, particularly by self-employed individuals, are missing a schedule or two. Many times, the end result of the calculations on one schedule can be seen on another so the underwriter may already have a good idea of what is on the missing schedules, but they must still be provided to meet program requirements.
- Final pages of bank statements – many institutions will leave the final page of their bank statements blank and many people do not think to include the blank page with the copies they submit as part of their loan application. An underwriter is typically not going to hold up an approval over a blank page; but, again, it is still required to be in the application file before you can close on the loan.
- An appraisal – this is a big one, of course. If the appraisal has not been completed and underwritten, it may appear on the conditional approval even though it doesn’t necessarily fit with the idea of “not critical to the loan or it can be reasonably assumed…” provided above. The appraisal is absolutely critical and who knows what it will say until we actually see it? If the underwriter provides a conditional approval prior to receipt of the appraisal they are basically saying you, as the borrower, are okay but we still need to see about the home.
Not all things happen as expected, though. A conditional approval can become a denial if the conditions cannot be met or if the additional information provided does not align with what was expected. Using one of the examples above, if the appraisal comes in significantly lower than the sales price and the buyer and seller are unable to come to an agreement on how to proceed, the low appraisal would be grounds to deny the loan.
If you have any questions about the mortgage process, buying a home, or any other relevant topic, please do not hesitate to contact me. My goal is to provide my clients with the information they need to make informed decisions and it would be my pleasure to help you, too.