When you find the right home and your offer is accepted, it’s exciting! In most cases, though, there’s still a lot that must happen to get to the closing table. When your loan is “approved with conditions,” what does that mean?
The underwriter’s job is to ensure that the borrower meets the appropriate amount of risk, which can vary depending on the loan (FHA, conventional, FNMA, VA, etc.). In order to make sure that their loans are as sound as possible, lenders have to verify all information on a borrower’s application. They must ensure that the borrower’s data falls within an acceptable range.
If your loan is approved “with conditions,” don’t worry – the good news is that the loan has made it past the initial application stage and is progressing through the system. At this point, it’s critical for you to provide all requested paperwork as soon as possible to keep the loan moving.
Examples of conditions
The underwriter works with the mortgage loan team to get documentation from you that can serve as proof of each loan requirement. Here are some common examples of lender conditions:
- Letters of explanation are a way to document the reasons behind anything that might cause questions in the file. Examples might be that additional information is needed to explain a gap in employment, large withdrawals, or a high number of credit inquiries. Letters should be specific and include dates, dollar amounts, and names (if applicable).
- Large deposits may require explanations to prove that the borrower hasn’t opened another credit line or taken a cash advance (with may interfere with DTI). Credits over $500 may be flagged as needing explanation if the transaction description isn’t obvious. A transaction that shows something like an IRS refund or an employer deposit is less likely to be scrutinized than something generic like “ATM Deposit.”
- Gift letters are required when you use gift funds for a down payment. The giver must state that the money was given to the buyer as a gift and does not need to be repaid. Again, specific dates, amounts, and names are necessary.
- Proof of employment (also called Verification of Employment) asks the employer for dates and income, but may also inquire about the probability of continued employment.
- Earnest money proof asks for a copy of the earnest money check or wire transfer.
- The sales contract requires that the fully executed sales contract signed by all parties be submitted.
These are just some examples of lender requests; there could be dozens more. The mortgage loan originator will be able to tell you exactly what is needed to fulfill these requests. It’s important to remember that these conditions are actually a good thing—they mean that the underwriter is going forward with explanations of required items so that the loan can be submitted. So, make sure you turn in your documentation quickly so that you can proceed to the closing table!