When you go through the mortgage process, there are many steps involved. As we have discussed in previous blog articles, you’ll need to complete steps such as pre-qualification and pre-approval. But there is also a step, one less known than others, that is important when you apply for a mortgage: conditional approval.
Conditional approval is not that same as final approval, and it’s not even a guarantee that final approval will happen. It is, however, a stronger indication that final approval will be reached. It’s certainly a stronger sign compared to pre-qualification, which is an important step in the process.
After you apply for a mortgage, your application goes through a variety of different phases. Eventually, it will be approved or denied by the lender. When you reach the steps for conditional approval, you have already gone through many of the most important tasks of the overall process.
With conditional approval, you have gone through a large portion of the overall process. But, as the term suggests, there are still some conditions you need to meet before the lender can issue final approval.
What is Conditional Approval?
To be clear, there is no mortgage product called “conditional approval.” It’s not a type of mortgage like a conventional loan or FHA loan. Rather, it is more like the terms “pre-qualification” and “pre-approval,” in that it is part of the process.
Basically, it is a level of approval that is closer to final approval than pre-qualification or pre-approval. But it’s not as high as final approval.
You could go through conditional approval, and be on track for final and official mortgage approval, and have your application rejected. Conditional approval can be denied if the lender comes across information indicating a problem with your income or your overall ability to repay the loan. For example, you could be conditionally approved but if you take on more debt, debt that would make it harder for you to repay, that approval could be rescinded. The same goes if you change jobs; even if the pay is the same or higher, the lender will need to verify your income and make sure you can still repay the proposed loan. You may, in this case, have to start the process over again.
How Conditional Approval Fits into the Full Process
To better understand conditional approval, it helps to take a look at the full process and see where this part fits into the whole.
This is the part that is easiest to complete and also the most casual, requiring the fewest official documents. You can, essentially, be pre-qualified for a mortgage by merely stating your overall income and debt load to the lender. This can even be done over the phone, with no verifying documents. The lender can then state that if your information is accurate and can be verified later, you should receive approval. Essentially, this step indicates that you appear to be qualified for a loan.
At this point, you need to have your information verified. While the previous step allows you to move forward, essentially, on your word, this step requires documentation, especially verification of your credit score and history. It will also require documents on your income, including paystubs, tax returns, and other important information.
3. Conditional Approval
Once you reach conditional approval, the mortgage lender has a strong idea of your total financial picture and has a good understanding for whether or not you can repay the loan.
At this phase, the lender may give you a set of specific conditions (hence “conditional” approval) that you need to complete to satisfy the loan application. For example, upon conditional approval, you may need to provide bank statements, paystubs, tax returns, a list of assets, and many other financial documents. Once you provide these documents, you are much closer to final approval.
4. Mortgage Approval Letter
If all goes well at the conditional-approval stage, you will receive a mortgage approval letter, sometimes called a “mortgage commitment letter.” These means that the lending institution has looked over your application and all the documents you have provided. Based on these documents, they have made a decision to support your purchase. When you get this letter, you are a preferred buyer who can make a stronger purchase offer if you have not already had an offer accepted.
5. Final Approval (Aka “Approval to Close”)
The last stage is the approval to grant a mortgage. To complete this phase, you must have a specific property in mind and the property must have a clear title. It will usually require a home appraisal as well. Final approval usually takes about two weeks after you are conditionally approved.
What Does it Take to Reach Mortgage Approval?
Throughout this process, you will have to meet certain conditions and provide documentation of your financial situation. Each application is different, but you can expect to provide several years of financial statements, as well as proof of your income. Many lenders will need to see a list of your financial assets, as these can reduce the chances of mortgage default. Appraisals of high-value property, such as jewelry or technology and equipment, could be requested.
The lender may also need verification of your assets and income through bank statements. Paystubs, tax returns, and other financial information may also be requested.
There could also be requirements for gift letters, retirement assets, and other documents that will help you reach conditional approval.
Reach Conditional Approval for Your Next Mortgage
If you need a mortgage for your next home purchase, contact our staff today. We’ll walk you through all the phases of a mortgage application, from pre-qualification to final delivery of your loan. Whether you need a large loan for a luxury property or a small loan for a moderate townhouse, we are here to help!