Lenders use conditional approvals to provide customers with a quick, but limited, answer to their loan application. Conditional approvals can apply to personal loans, car loans and mortgages. People selling their homes and car dealerships often prefer to work with buyers who have received conditional approval from their lender because there is less chance of financing issues slowing or stopping the sale. Although similar, conditional approval is not the same the same thing as pre-approval.
TL;DR (Too Long; Didn't Read)
When a bank conditionally approves your loan, this means they have verified your information and will offer the loan given that you meet any conditions set out. This may require presenting some documentation or having a home inspector and appraisal.
Pre-Approval Versus Conditional Approval
People often use the terms interchangeably, but a loan pre-approval and a conditional approval are different concepts. Lenders issue pre-approvals after they have reviewed the income and credit information you provided on the application and have conducted a credit check. The information must still be verified and approved by an underwriter before a decision can be made.
Underwriters provide conditional approvals once they have verified all financial and credit information and have determined that you are a good risk for the lender. The conditional approval will stand unless you fail to meet the stipulations the lender lays out.
Additional Documentation Conditions
The most common conditions require you to provide additional documentation, such as pay stubs, paperwork detailing your business income or tax documents. Renters who are applying for a mortgage often have to provide a statement or other rental history documentation from their landlord. For cars and houses, you may also have to provide bank statements to confirm that you have the funds for any down payment, escrow or closing costs.
Mortgage Loan Conditions
Conditional mortgage approvals require an inspection and appraisal of the property to verify the market price of the home and determine the loan-to-value ratio. The lender will also require title verification to confirm ownership of the property and determine if any liens or judgments exist on the house. If you already own a home, the lender may require that you sell it before it will approve the new loan.
Denial After Conditional Approval
Lenders will not approve your loan if you fail to meet any of the conditions set forth. You may also face denial if the lender is unable to verify any of the data you provided, such as employment or rental information. If you take too long to provide the documentation or other information the lender requests, any changes in your income or credit history that have occurred in the meantime will be taken into account.
Decreases in income or negative entries in your credit report can cause the lender to withdraw the conditional approval. To avoid denial, consult with your loan officer to determine exactly what documentation the lender needs, the date by which you must turn it in and how you should submit it.
Lauren Treadwell studied finance at Western Governors University and is an associate of the National Association of Personal Financial Advisors. Treadwell provides content to a number of prominent organizations, including Wise Bread, FindLaw and Discover Financial. As a high school student, she offered financial literacy lessons to fellow students.