What is a conditional loan approval?

Getting a mortgage involves several steps, including pre-qualification and preapproval, but applying for conditional approval can help move along the process significantly. This type of approval comes later in the process and requires more documentation. It can also give you more leverage in the negotiation phase.

What does conditional approval mean?

A conditional approval means the bank is likely to approve your mortgage — but only on specific terms — as long as pending conditions are met.

For example, you might receive conditional approval for a specified loan amount with the condition that your income doesn’t change drastically before closing. If you change jobs or your employer reduces your pay during this time, this could compromise your approval.

There are also debt conditions. If you suddenly incur a substantial amount of debt during this period (e.g., a lien from the IRS for unpaid taxes), this will probably endanger your approval.

Essentially, a mortgage lender may give you conditional approval when you’ve met most of the borrowing criteria, like if the underwriter has already verified some of the more critical information, like your income and credit history.

However, you’ll likely need to submit additional documentation before your mortgage is officially approved. The underwriter could ask for an updated bank account statement or a written explanation of a substantial cash withdrawal, for example.

Conditional approval vs. pre-qualification vs. preapproval

It’s easy to confuse conditional approval with other types of approvals. Basically, conditional approval is a step beyond pre-qualification and preapproval and comes just before verified approval.

Pre-qualification vs. conditional approval

Pre-qualification is the first step to obtaining a mortgage and doesn’t guarantee that you'll get approved for the loan. To pre-qualify for a home loan, you give the lender financial information and let its representatives run a quick credit check. The underwriter doesn’t verify information like your income or your bank account balances at this point. Often, you can receive a pre-qualification decision the same day you apply.

Conditional approval is later in the process and requires more verification on the bank’s part. It takes some time for the bank to investigate the information you provide, but most decisions arrive within one to two weeks.

Preapproval vs. conditional approval

Preapproval is a step beyond pre-qualification and requires a bit more research on the lender’s part (the underwriter may still need to verify your income and other financial info). Once you’re preapproved, you’ll receive a document, called a preapproval letter, that outlines the maximum loan amount and down payment expectations. Your real estate agent will then attach this letter to the purchase offers you submit.

Conditional approval follows preapproval. Even after the bank has preapproved you for a loan, there may still be more documentation required in order to get conditional approval. When it comes to placing an offer, conditional approvals tend to look even better to sellers than preapprovals.

Verified approval vs. conditional approval

Verified approval, also called formal approval, is a step beyond conditional approval. At this stage, the underwriter has verified all of the information on your application, and the lender officially approves you for the loan.

This loan offer is good for a set time frame — usually no more than 90 days. You might not receive verified approval until after your purchase offer has been accepted and you begin the closing process.

Benefits of a conditional approval

Conditional approval can speed up the homebuying process, but it also offers other benefits. Once you have this approval, you’ve completed the mortgage application and provided all the required documents. The lender has also verified your information and is comfortable with offering approval as long as you meet their criteria.

Conditional approval looks especially good to sellers because it shows you’re a serious buyer who has done their homework. It also increases the chance the sale will close without any last-minute hiccups.

How to apply for conditional approval

The mortgage process starts with finding suitable lenders for your individual situation. For example, if you’re unable to offer a down payment, you might consider lenders that offer USDA loans.

Most potential borrowers apply for a mortgage with their preferred financial institution (the company that manages their checking and savings accounts). Your bank may also offer perks for existing customers, like a discount on closing costs.

However, it’s important to gather information from various lenders about interest rates, down payment requirements, expected closing costs and customer service. You won’t be able to obtain an exact quote for your specific loan unless you continue with the application process. A pre-qualification can give you some preliminary loan details to use for comparison purposes.

Once you’ve decided on a lender that meets your loan criteria, you can begin the official application process. Most applications today can be easily submitted online. You’ll be asked to provide personal data like your Social Security number (for a credit check) and your income.

From this point, you could receive a preapproval in a matter of days and a conditional approval about one to two weeks later (once all your documents are submitted).

Bottom line

Conditional approval is a normal part of the mortgage application process, and it’s a good sign if your lender extends this type of approval. It’s a step beyond preapproval and can take a week or two before you have a decision from the bank.

You can use conditional approval to get an idea of a price limit as you search for homes and as leverage in the negotiation process. Just make sure to keep up with further requests from your lender to speed up the official approval.