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Wednesday, March 29, 2023

Conditional loan approval: How it plays into homebuying process

Conditional loan approval: How it plays into the homebuying process

conditional loan approval

Sean McComber, CFP®

Purchasing a new home can be an exciting process, but it can also be quite complex. One of the first steps you need to take is to prequalify for a home loan. However, given the highly competitive housing market, it’s not a bad idea to go one step further and secure conditional loan approval. This step can give you leverage when it comes to competing against other homebuyers.

What is the difference between preapproval and conditional loan approval? This blog explains these differences and provides insights as to why obtaining conditional loan approval is beneficial.

What is a conditional loan approval?

Lenders give prospective homebuyers conditional loan approval only after an underwriter reviews their information and determines that they are satisfied with most of the homebuyer’s information. However, a conditional loan doesn’t guarantee final loan approval. Typically, with a conditional loan, a number of requirements set by the underwriter must be met before you close on the loan. For instance, you may need to provide proof of all income and debts prior to final approval. Your lender may also deny final loan approval if you have a significant change to your financial status, such as the purchase of a new car, from the time you complete your initial loan application to closing.

Conditional approval vs preapproval 

As a prospective homebuyer, it’s important to understand the difference between preapproval and conditional approval. Having this knowledge can help you better understand what stage of the homebuying process you’re in and what steps you may still need to take.

Mortgage preapproval

If you’re searching for a new home, the first thing you want to do is to secure a prequalification for a home loan. Typically, lenders only use the information you provide, such as income information, as well as your credit score to determine preapproval.

This process is fairly quick and oftentimes doesn’t require you to provide any documentation proving your income and other information. If you secure preapproval, the lender will also estimate how much you can borrow to purchase a new home. Many realtors require you to have at least a preapproval from the lender before you start searching for a new home.

Conditional approval

On the other hand, a mortgage underwriter or other agent for the lender completes the conditional home loan approval process. The underwriter takes a closer look at your income, debt, credit score and your entire credit report. If you’re able to secure conditional approval, it means that the mortgage underwriter is satisfied with most aspects of your mortgage application but may still require you to meet certain requirements before you receive final approval for your loan.

Real estate agents and home sellers view a conditional loan as a stronger position than only preapproval because it shows that the lender will most likely conditionally approve your loan as long as you meet certain requirements. This benefit can give you extra leverage when competing against other interested homebuyers.

Examples of mortgage approval conditions

When securing conditional approval for a home loan, the underwriter or other lending agent reviews your financial records and credit score. At this point, the lender relies heavily upon the specific information you provide. However, during this process, the underwriter may notice several issues that they want to gather more information about, or they may require you to prove some of the information you provided on your initial loan application.

Your lender may have several conditions that you must meet before you obtain final approval for your loan. Below are some examples.

Income and bank statements

During the initial application process, you provide the lender with basic financial information, such as your income, debts and assets. Your lender may offer a conditional loan approval based on this information. However, before the lender grants final approval, you may need to provide proof of your financial status, such as your paystubs, tax returns and bank statements.

When applying for a home mortgage, it’s important to gather this information together. First, this step ensures that you’re providing the lender with the most accurate information possible. Second, these documents will be readily available when your lender requests them.

Home appraisal

Nearly all conditional loans come with a provision for the completion of a professional home appraisal. The lender requests this appraisal because it wants to be sure the actual value of the home aligns with the amount of your home mortgage. You may struggle to secure final loan approval if your mortgage amount exceeds the value of the property you are purchasing.

Many lenders also require the completion of a home inspection prior to closing. This step ensures that there are no noticeable issues with the property that may lead to a significant financial hardship for the borrower.

Gift letters

Sometimes, prospective homebuyers receive financial gifts from friends and family members to cover the cost of a down payment. While this can be a great option for securing cash for a down payment, an unusual lump deposit into your bank account can cause some lenders to wonder if this money is a loan or a gift.

To calm these concerns, your lender may require you to obtain a gift letter from anyone providing a substantial amount of money toward your down payment. This letter simply states that the money provided is a gift and not a loan.

Home insurance coverage

Another common condition many lenders attach to a conditional loan is the requirement for the homebuyer to purchase home insurance. Many lenders create an escrow account that lets a homebuyer make monthly payments towards their annual home insurance premiums. This escrow amount becomes part of your monthly mortgage payments, and your home insurance premiums are automatically paid out from this account.

Alternatively, you may pay these premiums on your own and separate from your monthly mortgage amount. Either way, it’s likely that your lender will require you to prove that you have adequate home insurance coverage prior to closing on your loan.

Good faith money

Some lenders or sellers may require you to make a good faith effort by depositing a certain percentage of the loan value into an escrow account. This deposit, known as good faith money, helps strengthen the buyer’s position by letting the lender or seller know they are serious about making the purchase.

At closing, this good faith money can go toward the down payment for the home. However, if you back out of the sale, you risk losing your money because this deposit is non-refundable in many cases. If your lender requires a good faith money deposit, it’s crucial to get the details of this agreement in writing. Be sure to read the fine print so you fully understand your obligations under this type of agreement.

How long after conditional approval is final approval?

In many cases, you can secure preapproval for a home mortgage in just a matter of days. On the other hand, conditional loan approval can take up to 2 weeks or longer to complete. Once you find a home you want to purchase, you can move forward with securing final loan approval.

The time it takes to obtain this final approval depends on how long it takes you to meet all the provisions of the conditional loan. To speed up this process, it’s important to understand the things you need to complete to purchase a home, such as a home inspection and property appraisal. Stay in close contact with your loan officer and work to provide any paperwork and documentation as quickly as possible.

Our take

While many realtors only require you to obtain preapproval for a home loan, taking the extra step to secure a conditional loan can provide leverage when negotiating with the seller. A conditional loan approval can also give you peace of mind knowing that the lender is likely to grant final approval and lets you know right from the start what various conditions you may have to meet prior to closing.

The most important thing when buying a new home is to make sure your credit report is in good condition. The better your credit score, the more likely you are to secure a home mortgage.


Sean McComber

Sean McComber, CFP®


Sean McComber is a CERTIFIED FINANCIAL PLANNER™ professional and Senior Financial Advisor at Empower. He has been an advisor since 2009. Prior to that, he spent 10 years in the mortgage industry.

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“EMPOWER” and all associated logos, and product names are trademarks of Empower Annuity Insurance Company of America. This material is for informational purposes only and is not intended to provide investment, legal or tax recommendations or advice. ©2023 Empower Annuity Insurance Company of America. All rights reserved.