Conditional & Final Loan Approval

Conditional and Final loan approval are two milestones used to mark specific periods within the process of obtaining a mortgage loan. These two milestones are also referenced in the standard Hawaii sales contract written by the Hawaii Association of Realtors. There’s a lot of confusion over these terms and what they these approvals really mean to the various parties in the transaction. So today we’ll try and keep it simple, and shed some light.

When a loan application is presented to an underwriter for consideration, and if that underwriter approves the loan request, an approval sheet is generated that outlines the terms of the loan and the conditions that will need to be satisfied in order for that lending institution to give you the money you applied for. That initial approval is referred to in the mortgage world as the Conditional Loan Approval. The number of conditions required to be met by the applicant, and those associated with the transaction, contained in that approval varies greatly for a number of reasons. It’s important to note that a long list of conditions doesn’t equate to a poorly qualified applicant. In any approval, over half of the conditions listed are items the escrow/title company need to fulfil.

Conditions are broken down into four different categories. They are credit related, income related, asset related, and property related. Items dealing with title and the seller are part of the property group. Another important aspect of conditions is when they must be satisfied in order to not delay the transaction. Some conditions are required to be cleared prior to the issuance of the loan documents the borrower will sign at closing, while others are required prior to the lender actually funding the loan. This last designation of which conditions are required to be satisfied in order to issue closing documents, versus those that can wait until funding, is where the confusion exists with the clear definition of the Final Loan Approval.

Most people think that when Final Loan Approval is issued, there are no outstanding conditions by the lender. In fact, there are many conditions still open. Most people just don’t see or hear of them because they mostly involve the procedures the escrow/title people have to deal with along with your mortgage originator and processor.

I promised to simplify things, so here is my best shot.

A Conditional Loan Approval is the initial review of an application by an underwriter which states that the lender will lend the applicant a certain amount of money at specific terms, provided that a set of conditions set forth, are met.

It is the responsibility of the Originator (Loan Officer) or their associates to collect and gather the additional items requested by the underwriter to satisfy those conditions. An underwriter will not review any of the items requested until all the conditions requested are available.

Once all the items have been gathered and submitted, the underwriter will start signing off and clearing the conditions on the loan application. It is very common that items submitted to clear an item will generate news conditions itself. A good example is a condition to submit the borrower’s most recent bank statement. If that statement shows large unexplained deposits, that will cause the underwriter to issue new conditions to the approval.

Many real estate agents incorrectly believe that upon review of the submitted requested items a new loan approval is generated by the underwriter. That is not correct. The Conditional Loan Approval is nothing more than a punch list of outstanding items – not unlike any other major project. Items are crossed off, and some new items are added, but never is a whole new list generated. We work off that original list until the transaction closes.

Once the underwriter has signed off on all the conditions required to be cleared in order for the loan documents be signed by the borrower, we are theoretically at where the Final Loan Approval is issued and a letter to all parties is generated. There are still open conditions even after Final Loan Approval. Those items are the ones needing to be signed off before the lender actually funds the loan. Those items include signed copies of the loan documents and proof that all required funds were received by escrow (and from the right accounts). It is escrow’s job to make sure those items are taken care off. If all goes well……

Finally recording day arrives!