When is an mortgage loan approval letter really an approval letter? Why is an approval letter not an approval letter, but it’s really a conditional approval letter? Is this a semantics discussion only? Either way, this matters more than you know.
Conditional Approval Letter
Whether a mortgage borrower knows it or not, when a lender tells them the loan is “approved”, there is usually a list of “conditions” on the “approval letter”. Further, the document the lender sends likely says “Conditional Approval Letter.” It is almost impossible to get an “Approval Letter” because there are always some conditions, such as the below standard conditions:
acceptable title search.
acceptable homeowners insurance policy.
pending return of processed 4506T from IRS (see my blog about this form, here).
wiring instructions, closing agent fee sheet, E&O insurance and closing amendment– need 72 hours prior to close.
pending internal verbal verification of employment (this is a last minute phone call to the borrower’s employer to make sure they are still employed).
all liens to be released from title; all taxes to be paid current.
title company must send HUD-1 to lender prior to closing for approval.
And then there are loan approval conditions that are hard to predict or may be due to something missing from the loan package that should have been included:
evidence of a debt being paid off if required to make debt ratios work.
evidence of source of funds for a large deposit (if you have a large deposit on a bank statement, the underwriter will want to document where it came from to make sure you are not borrowing money from a disallowed source for the down payment).
documentation on what a deduction on a pay stub is for (if it is for a loan against a 401k account, for example).
review appraisal required (on some loans a bank or underwriter may determine the appraisal needs to be reviewed for accuracy).
proof of taxes and insurance on another property owned.
I could go on and on and on. You have no idea the length to which an underwriter can dream up a paranoid based reason to ask for any number of loan approval “conditions”.
The problem is that there usually comes a point where a seller will ask a buyer to release the “financing contingency”. This is where I inevitably get a call asking, “do we have loan approval, can I release the financing contingency”. When I send a copy of a “Conditional loan approval”, this is where the fun begins.
Some buyers get incredibly nervous, considering that there are still “open issues” and remaining loan approval conditions. But there is a point where you can feel comfortable, knowing that the conditions are either standard or easily met. If you know you have a rational explanation and can document every condition, then release the financing contingency. If there are a few leftover conditions like acceptable title work, don’t worry that you’ll lose your deposit if there is a cloud on the title and a problem with the title work, that is the seller’s fault, not yours.
The bottom line is that as long as a buyer moves forward in good faith, and uses all due diligence in providing what the lender asks for, you will be safe in releasing the financing contingency even when you have a “conditional loan approval“, as long as you know the conditions are easily satisfied.