When you apply for a mortgage and go through the loan process, you’ll hear many terms thrown at you. One of those terms is ‘conditional loan approval.’ While the name sounds promising, since it has the word ‘approval’ in it, there are things you should know about it.
A conditional loan approval doesn’t mean you can close on the loan tomorrow. It means the lender approves your loan, but needs you to satisfy a few conditions first. Typically, these conditions have to do with the property itself, but in some cases, they have to do with the borrower too.
Typically, in order to get a conditional loan approval, you must apply for the loan and provide the lender with your basic qualifying information. This includes:
- Your income documents (paystubs, W-2s, and tax returns)
- Your asset statements
- Your credit report
- Your debt information
Your lender will use this information to determine your ability to secure a loan. If they decide that you are a good candidate, in other words, that you can afford the loan, then they will approve you for the loan based on a few conditions.
Each loan will have its own conditions; it depends on your qualifying factors. A few of the most common conditions include:
- Appraisal – The lender needs to know how much the home is worth before they can give you a loan. They need to know that there is enough collateral in the home should you default on the loan. The lender will need to sell it to make their money back.
- Title – A clear title search lets a lender know that there aren’t any existing liens on the property. Liens travel with the property, which means they would become your responsibility if you bought the home with liens. It could also push the lender’s position back, leaving them at risk of default.
- Income – Sometimes your income isn’t as clear-cut as you think or the lender wants to verify your income again right before the closing. They will explain the condition and how you can satisfy it on your conditional approval letter.
- Assets – If you didn’t verify your assets that you will use to put down on the home or pay the closing costs, you’ll need to do so. The lender needs to see the last 2 months of bank statements for each account that you will withdraw money from in order to get the loan.
- Proof of housing history – Lenders need to see that you are used to paying a housing payment each month. Even if it’s rent to a landlord or your parent, you’ll need to provide a 12-month history of your payments. This lets the lender know that you can afford a housing payment as well as the size of the payment shock you’ll experience with the new mortgage
Can you Lose a Conditional Loan Approval?
Under no circumstances is a conditional loan approval a ‘sure thing.’ Any loan approval can fall through the cracks. If you can’t provide the documentation necessary to satisfy any conditions on the approval, you may lose your loan approval.
For example, if the appraisal came back $20,000 less than you agreed to pay for the home, the lender can’t follow through on the conditional approval. One of the conditions wasn’t met, which means the loan approval is null and void. The lender would be taking a large risk if they still gave you the loan.
The same is true if you can’t satisfy any income, asset, or employment verificationconditions on the loan. You have to be able to satisfy every condition beyond a reasonable doubt in order for the lender to write you the loan.
A conditional loan approval is a good sign that youare well on your way to securing a loan, but it’s not set in stone yet. Make sure you take the time necessary to satisfy the conditions on your loan so that you can close on it as you planned.