After the initial application phase, most loans receive an approval with conditions from the lender. This form essentially says “yes, we will fund this loan if…” The ifs, or conditions, vary depending on how complete the file was when it was submitted to the lender. Lenders may simply require an appraisal and some minor verifications, or they may need further documentation and detailed paper trails on the origin of certain funds.
Income conditions can range from verbal verifications of employment, where the lender contacts the borrower's employer prior to close to confirm employment, to two years of personal and business tax returns. Sometimes borrowers who are not self-employed must provide tax returns; lenders may ask for this information to document rental property income, or to see if the borrower claims any unreimbursed business expenses that need to be deducted from his income.
There are three basic types of assets conditions: verification of required funds to close, verification of funds to close and required reserves (particularly for investment property loans) and documentation of non-payroll deposits. Occasionally a condition calls for complete asset statements, so keep that last page with nothing on it when you receive your bank statements; the lender will want to see it. Large deposits (more than an average payroll check) require documentation and explanation. Lenders need this information to ensure the funds come from eligible sources (you cannot take out a payday loan to pay the closing costs of the mortgage).
Credit conditions clear up questions or inconsistencies on the credit report. When a lender pulls a credit report, the inquiry and date it occurred appear on the report. Often when mortgage lenders see such inquiries, they want to know if any new loans exist that haven't yet appeared on the credit report. Sometimes accounts erroneously appear twice on a credit report, making it appear as though there are two loans, when only one truly exists. When this happens, lenders will require proof that there is only one loan with that company. If a borrower’s employer makes his car payment, lenders may require canceled checks or proof of reimbursement so the debt-to-income calculation excludes the car payment.
Property conditions include the appraisal and title work for the subject property. Usually these conditions are satisfied by the appraiser or title company, although some title conditions may require the borrower's involvement. Appraisal conditions may require clarification or additional comparable sales. Often lenders use a third-party property verification system to provide a comparison value. These third-party verifications can create additional questions from the lender. If your loan is not a conventional loan, neither you nor your loan officer may contact the appraiser; only the lender may contact the appraiser. If you call the appraiser and the lender finds out, the lender may require another full appraisal from a new appraiser.
A conditional approval is the lender's way of saying "we want to proceed with the loan, but we need proof of what you have told us." Conditional approvals are not guarantees of approval. Loan approval is a long process, and sometimes the information you provide can lead the underwriter to ask more questions--leading to more conditions. Thorough letters of explanation for out-of-the-ordinary items can go a long way in clearing up issues. Encourage your loan officer to provide such a letter addressing any issues up front. It will make the process smoother and faster.