After much searching, you have finally found your dream home, and the seller has accepted your offer. But when you receive the approval from your mortgage lender, you find that your loan is approved with conditions. What does it mean when your loan is approved with conditions, and what should you do about it? In this article, we will answer that question for you.
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What Approved With Conditions Means
When the loan underwriter for your mortgage lender approves your application for a loan, they are mostly satisfied with your application. Before a mortgage can be approved, the underwriter has to verify all of the information in your loan application to ensure that everything is completely accurate. They just have some things they need more information on from you. Make sure that you give them all of the paperwork they request as quickly as possible to keep your loan approval moving.
Common Mortgage Conditions
When a mortgage is approved with conditions, there are some conditions that are more common than others. Let’s take a look at these common examples and what they mean for you.
Income Verification
The request for income verification is pretty straightforward. The lender wants to see paycheck stubs, bank statements, and possibly previous tax returns to verify your income. The income verification goes a little beyond just income from your employer. If you receive child support from an ex, they will want to see the paperwork that requires your ex to pay child support. If you are receiving alimony payments from an ex-spouse, they will want your divorce decree. Income from a trust fund, money from a side gig selling crafts on Etsy, pensions, and other types of income will need to be shared, along with evidence of them.
Letters of Explanation
A letter of explanation is how you document anything that causes questions with the underwriter. This can be a gap in employment, a large withdrawal, deposit, or transfer into or out of your bank account, or a lot of credit inquiries. The letter needs to be specific and include the date and dollar amounts of the questions, as well as any names that need to be included in the explanation.
Gift Letters
If someone is gifting you the money for your down payment on the home, the lender will want a gift letter. Whoever is gifting you the money will need to write down the exact amount they are giving you and that they do not expect you to repay it. Be as specific as possible with the gift letter to give them all of the requested information in one go, so they might not need further information about the gift. In fact, most banks will give you a specific gift letter template to fill out that meets their guidelines.
Large Bank Deposits
If you have any large non-payroll bank deposits that do not have an obvious transaction description — like a paycheck or tax return — a lender will usually require you to supply the reason for the deposit. Typically, if the description is just “ATM Deposit,” the lender will want to know where the money came from. The lender wants to make sure you have not taken out a line of credit or a cash advance loan, which is why they require these explanations.
Proof of Employment
When the lender asks for proof of employment — also known as verification of employment — they want to contact your employer for information about how long you have been employed there and what your income is. The lender may also ask about the potential of continuing to be employed by the company. They want to make sure you will have the money to continue making your mortgage payments, so this is an important one.
Proof of Earnest Money
If you are providing earnest money for the home purchase, the underwriter will want a copy of the check or wire transfer, and evidence the deposit cleared your account.
The Sales Contract
The lender will also want a copy of the full sales contract between you and the seller that is signed by all parties.
Home Appraisal and Inspection
The lender wants to make sure that the home is worth what you are paying for it. Therefore, they will want you to get an appraisal of the home before giving you the final approval. If you offered the seller more than the appraisal value, you would need to either come up with the difference between the value and the offer yourself or return to the negotiating table with the seller to lower the sale price to the appraisal value.
Proof of Homeowners or Title Insurance
Since the property technically belongs to the bank until you pay off your mortgage, lenders will want you to have homeowners’ insurance and title insurance; they may also want flood insurance, depending on where you live. You will just need to provide them with proof of your insurance policy.
Closing Thoughts
There can be many reasons that a mortgage lender will approve your loan with conditions. The reasons here are the most common loan conditions out there. The underwriter will tell you exactly what they need from you in order to fulfill the conditions. While it may be inconvenient, this is a milestone to show you are almost there with your mortgage loan and home purchase. Find whatever documents you need quickly to keep everything moving for your loan and home purchase. Some of these conditions can be avoided if you include this information in your loan application paperwork, so the underwriter has everything on hand when they process your application. This home purchase checklist includes some of the documents you will need when submitting your mortgage application.
About the Author
Auz Burger is a freelance writer who specializes in real estate and home DIY projects. She has a BA from Washington State University and has been writing and editing professionally for over a decade.