Before you receive final approval for a mortgage, you’ll have to clear some other approval hurdles. Your pre-approval will probably be followed by a conditional pre-approval, which means you’ll have to meet certain conditions before your lender can give the green light to your final mortgage approval. Even before you begin navigating the twists and turns that form the approval maze, it all starts with the application process.
TL;DR (Too Long; Didn't Read)
A mortgage pre-approval, which is a preliminary loan approval, is the step before a conditional pre-approval, which outlines the conditions a borrower must meet before the lender or underwriter can grant final approval.
Mortgage Application Step
As a precursor to mortgage approval, your loan application offers a lender enough information to get started toward that goal. Some of the information you provide on your application helps the lender move you in the direction of certain types of loans for which you may qualify, and away from other loans, which may not be available to you. As the lender assesses your financial health by reviewing the income, employment and debt information you submit, the lender may grant a pre-approval based on this preliminary assessment.
Mortgage Pre-Approval Step
After a lender crunches the numbers on your application – such as your income and debts – and if things look favorable, your application status shifts into pre-approval status. During this step, the lender will pull your credit report, and you’ll have to provide the documents that support the financial data you listed on your application. Among other documents that start populating your mortgage loan file, your most recent pay stubs and tax returns will verify your income, and your employer will verify your employment on a form required by the lender.
Conditional Pre-Approval Step
Once you’ve passed the pre-approval step – after the lender has, among other things, verified your employment, checked your credit score and confirmed your income and employment – you’ll be shifted into the conditional pre-approval step. At this juncture, you’re only one step away from final approval. You’re essentially approved for the mortgage, pending the satisfaction of requirements called “conditions.” Examples of conditions include the stipulation that you must sell your current home before buying your new home, you must pay off (or pay down) a debt or provide additional documentation.
Meeting the Conditions
After you’ve received a pre-approval, your lender may give you a conditional qualification letter, which notes your eligibility for certain loan products and lists the conditions you’ll need to satisfy for final approval. In addition to verifying your income during pre-qualification, the lender may need to document the source of your down payment during the conditional pre-approval.
If, for example, you’re receiving the funds for your down payment from a family member, the lender’s underwriter may ask for a gift letter from your family member to document this transfer. And since your final approval is also based on an appraisal and/or home inspection that return certain results, these all-important documents must also meet the lender’s final conditions.
Denial of a Conditional Pre-Approval
If you fail to meet the conditions outlined in your conditional pre-approval, you may fall short of a final approval. Common reasons for denying a conditional pre-approval include the discovery of an unexpected lien on the property, the inability of the lender’s underwriter to verify the data or supporting documents to the mortgage application or issues with the appraisal or home inspection report. But even if the underwriter sends your conditional pre-approval back to the lender as a denial, you may still be able to satisfy the condition(s) in question by supplying the necessary paperwork or fulfilling any deficiency.
Victoria Lee Blackstone was formerly with Freddie Mac’s mortgage acquisition department, where she funded multi-million-dollar loan pools for primary lending institutions, worked on a mortgage fraud task force and wrote the convertible ARM section of the company’s policies and procedures manual. Currently, Blackstone is a professional writer with expertise in the fields of mortgage, finance, budgeting and tax. She is the author of more than 2,000 published works for newspapers, magazines, online publications and individual clients.