Conditional approval is the underwriter's yes with a to-do list attached. The loan is approved on the home you're buying, as long as a set of specific items, called conditions, are delivered and check out before closing.
Almost every mortgage passes through this stage. Conditions are routine: the underwriter has read the whole loan and wants the last pieces in writing.
Conditions buyers see most often
Underwriters sort conditions by when they have to be met. Prior-to-document conditions must be cleared before closing papers are drawn. Prior-to-funding conditions can be cleared at or just after the signing.
Common ones include:
- A pay stub dated within the last 30 days, or a written verification of employment
- A letter explaining a recent credit inquiry or a late payment
- The source of a large deposit in your bank account
- The appraisal, and any repairs it calls for
- A homeowners insurance policy on the home, including wind coverage in Florida
- A signed gift letter and proof the gift money moved
- The title commitment showing the seller can deliver clear title
How a large deposit becomes a condition
Fannie Mae defines a large deposit as a single deposit above 50% of your total monthly qualifying income. FHA and the other programs also ask where any large or unusual deposit came from.
A buyer earning $4,800 a month deposits $3,000 from selling a motorcycle. Half of $4,800 is $2,400, and $3,000 is more than that, so the underwriter adds a condition: show the bill of sale and the buyer's check or transfer record. With those two documents, the $3,000 counts toward the down payment. Without them, the lender takes the $3,000 out of the verified funds and checks whether what's left still covers the cash to close.
A new debt in the middle of underwriting
The same buyer was conditionally approved with total monthly debts, including the new house payment, of $1,968. That's $1,968 divided by $4,800, or 41% of income.
Three weeks before closing, the buyer finances a car with a $380 payment. The lender's final credit check catches it, and underwriting re-runs the numbers:
- New total debts: $1,968 plus $380 = $2,348
- New debt-to-income ratio: $2,348 divided by $4,800 = 48.9%
On FHA, that still sits under the 56.9% limit with an automated approval, so the loan survives with a new condition to document the car loan. For a buyer whose ratio started at 52%, the same car would push total debts to 59.9%, and the buyer would need to pay off another debt to get back under the limit. The cheapest move is to wait until after closing to buy the car.
Clearing your conditions quickly
Send every document the day it's requested, as a full PDF with every page. Answer explanation letters in plain sentences with dates. Ask the loan officer which conditions are waiting on you and which are waiting on someone else, like the appraiser or the title company.
The DTI calculator shows how one new payment moves your ratio before you sign for it. Call AAA Capital Funding at 888-601-8344 with a condition you don't understand, and we'll tell you exactly what satisfies it.