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Conditions to Clear in Mortgage Underwriting

Underwriting conditions are specific documentation and verification requirements that a mortgage underwriter imposes on a loan file before the loan can be approved, documented, and funded. Conditions are categorized as prior to document (PTD) and prior to funding (PTF), and they represent the underwriter's mechanism for ensuring compliance with investor guidelines, regulatory requirements, and lender risk standards.

Key Takeaways

  • Every mortgage transaction includes underwriting conditions, even for borrowers with strong financial profiles. Conditions are a standard part of the process, not an indication of a problem.
  • Prior to document (PTD) conditions must be cleared before the lender prepares final loan documents and issues the Closing Disclosure. These typically involve income, asset, and employment verification.
  • Prior to funding (PTF) conditions must be satisfied before the lender releases funds. These are generally administrative and handled by the settlement agent.
  • AUS-generated conditions provide the baseline, but the underwriter adds conditions based on their professional review of the file. Manual underwriting involves more conditions than AUS-approved files.
  • Prompt, complete responses to conditions reduce delays. Partial or incorrect documentation generates additional conditions and extends the underwriting review cycle.
  • Letters of explanation (LOE) must be specific and supported by documentation. Vague or unsupported explanations do not satisfy underwriting requirements.
  • Condition suspensions indicate the underwriter has identified a potentially disqualifying issue that must be resolved before the loan can proceed.
  • Borrowers should work through their loan officer to understand and respond to conditions. Underwriters do not communicate directly with borrowers in most lending operations.

How It Works

The Underwriting Review Cycle

After the loan application is submitted, the loan processor compiles the initial documentation package and submits the file to underwriting. The underwriter reviews the credit report, income documentation, asset statements, property appraisal, and title commitment against the applicable guidelines (Fannie Mae Selling Guide, FHA Handbook 4000.1, VA Lender’s Handbook, or USDA guidelines). The underwriter issues an initial set of conditions, which the loan processor communicates to the borrower through the loan officer.

The borrower provides the requested documentation, the processor updates the file, and the file is resubmitted to the underwriter for review. If all conditions are satisfied, the underwriter issues a clear to close. If additional questions arise from the submitted documentation, the underwriter issues additional conditions, and the cycle repeats. A typical loan file goes through one to three review cycles before reaching clear to close. Files with complex income structures, self-employment, or credit issues may require more cycles.

Categories of Conditions

Income conditions are among the most common and include requirements for recent pay stubs (covering the most recent 30-day period), W-2 forms for the prior two years, federal tax returns for self-employed borrowers (typically two years of complete returns with all schedules), and verbal or written verification of employment. For borrowers with variable income (overtime, bonus, commission), the underwriter may require additional documentation to establish a stable history and reasonable expectation of continuance.

Asset conditions require the borrower to document the source, ownership, and seasoning of funds being used for the down payment and closing costs. Large deposits (typically defined as any single deposit exceeding 50% of the borrower’s total monthly qualifying income ) must be sourced and documented. The underwriter traces the movement of funds to ensure they come from acceptable sources and are not borrowed funds that would need to be included in the DTI calculation.

Property conditions arise from the appraisal and title review. Appraisal conditions may require repairs for health and safety issues (especially for FHA and VA loans), a re-inspection after repairs are completed, or a second appraisal if the value is questioned. Title conditions may require resolution of liens, judgments, boundary disputes, or easement issues identified in the title commitment.

Credit conditions address issues on the borrower’s credit report, including letters of explanation for derogatory items, evidence that disputed accounts have been resolved, proof that collections or judgments have been paid (if required by the loan program), and documentation of any credit events that occurred during the loan process (such as new inquiries from auto dealers or credit card applications).

The Clear to Close Decision

Once all PTD conditions are satisfied, the underwriter issues a clear to close (CTC). The CTC authorizes the lender’s closing department to prepare the final loan documents and the Closing Disclosure. The CTC does not mean the loan is fully funded; PTF conditions must still be satisfied after closing. However, the CTC represents the underwriter’s determination that the file meets all guidelines and is ready for document preparation and consummation.

The CTC may be conditional, meaning it includes final PTF conditions that must be satisfied at or after closing. A conditional CTC is standard. An unconditional CTC (all conditions fully satisfied before document preparation) is less common because some conditions by their nature can only be fulfilled at or after closing (such as the executed closing package and the recorded deed of trust).

Handling Condition Disputes

If the borrower or loan officer disagrees with a condition, the loan officer can request a condition exception or escalate the issue to an underwriting manager. Condition exceptions are granted when the underwriter’s requirement exceeds the applicable guideline or when alternative documentation adequately addresses the underwriter’s concern. For example, if the underwriter conditions the file for two years of tax returns but the AUS approval only requires one year based on the borrower’s income type and loan program, the loan officer can request that the condition be revised to align with the AUS findings.

Escalations should be handled professionally and supported by guideline references. Disagreements with underwriting conditions are not uncommon, and most lenders have a process for resolving them through management review. Borrowers should rely on their loan officer to navigate these situations rather than attempting to contact the underwriter directly.

Related topics include documents needed for a mortgage application, mortgage underwriting explained, mortgage denial reasons and how to appeal, and to choose the right mortgage lender.

Key Factors

Factors relevant to Conditions to Clear in Mortgage Underwriting
Factor Description Typical Range
Condition Category (PTD vs. PTF)
Response Time and Completeness
Complexity of Borrower's Financial Profile
Loan Program Requirements

Examples

Scenario: Underwriter conditions the file for sourcing a large deposit in the borrower's bank statement.
Outcome: The underwriter reviews the bill of sale and check, confirms the deposit source is acceptable (sale of a personal asset), and clears the condition. The documentation fully addresses the underwriter's concern on the first submission, avoiding additional review cycles.

Scenario: Self-employed borrower receives extensive income conditions requiring multiple review cycles.
Outcome: The missing K-1 triggers an additional review cycle, adding four business days to the underwriting timeline. Once the K-1 is submitted, the underwriter completes the income analysis, calculates qualifying income based on two-year averaging of the net business income, and clears all income-related conditions. The total underwriting review for this file required three cycles spanning 12 business days.

Scenario: FHA appraisal generates property repair conditions that delay closing.
Outcome: The seller agrees to complete the repairs but scheduling the work takes seven days, and the appraiser's re-inspection is scheduled three days after completion. The total delay is 10 business days from the original anticipated closing date. The re-inspection confirms all repairs are satisfactory, the condition is cleared, and the file proceeds to clear to close.

Common Mistakes to Avoid

  • Providing incomplete documentation in response to conditions
  • Submitting vague letters of explanation without supporting documentation
  • Making financial changes (job change, large purchase, new credit) during the underwriting process
  • Ignoring conditions or delaying responses
  • Attempting to contact the underwriter directly rather than working through the loan officer

Documents You May Need

  • Most recent 30 days of pay stubs (all borrowers)
  • W-2 forms for the prior two years
  • Federal tax returns for the prior two years (required for self-employed borrowers; may be required for all borrowers depending on AUS findings)
  • Bank statements for the most recent two months (all accounts being used for the transaction)
  • Letters of explanation for any credit, deposit, employment, or address discrepancies
  • Verification of employment (completed by the employer or verified verbally by the lender)
  • Gift letter and donor bank statements (if gift funds are being used)
  • Proof of insurance (homeowners insurance declaration page with lender named as mortgagee)

Frequently Asked Questions

What are underwriting conditions?
Underwriting conditions are specific documentation and verification requirements that the underwriter imposes on a loan file. They ensure the loan meets all investor guidelines, regulatory standards, and lender requirements. Conditions are standard in every mortgage transaction and do not indicate a problem with the application. They are the mechanism by which the underwriter verifies the borrower's income, assets, employment, credit, and property eligibility.
How long does it take to clear conditions?
The timeline depends on the borrower's responsiveness and the complexity of the conditions. Simple conditions (updated pay stub, LOE) can be cleared in one to two business days. Complex conditions (self-employment income analysis, property repair re-inspections) may take one to two weeks. Each review cycle after the borrower submits documentation takes two to five business days for the underwriter to review and clear or re-condition.
What is the difference between PTD and PTF conditions?
Prior to document (PTD) conditions must be satisfied before the lender prepares the final loan documents and issues the Closing Disclosure. These are the substantive conditions involving borrower verification. Prior to funding (PTF) conditions must be satisfied before the lender releases funds after closing. These are typically administrative conditions handled by the settlement agent, such as the executed closing package and the recorded deed of trust.
Can conditions cause my loan to be denied?
In rare cases, yes. If a condition reveals information that disqualifies the borrower under the applicable guidelines (such as an inability to verify income, discovery of undisclosed debts, or a property appraisal significantly below the purchase price), the underwriter may suspend or deny the loan. Most conditions, however, are routine verification requirements that are satisfied with standard documentation.
What is a conditional approval versus a clear to close?
A conditional approval means the underwriter has reviewed the file and determined it is approvable subject to the listed conditions being satisfied. A clear to close (CTC) means all PTD conditions have been satisfied and the lender is authorized to prepare loan documents. A conditional approval precedes the CTC. The CTC may still include PTF conditions that must be satisfied after closing but before funding.
What happens if I disagree with an underwriting condition?
The loan officer can request a condition exception or escalate the matter to an underwriting manager. Condition disputes are resolved by referencing the applicable guidelines (Fannie Mae Selling Guide, FHA Handbook, etc.) and determining whether the condition exceeds the guideline requirements. If the condition is required by the guidelines, it must be satisfied. If it is a lender overlay, the loan officer may be able to negotiate its removal.
Why did the underwriter add conditions that were not on the AUS approval?
The AUS generates standardized conditions based on the data submitted. The underwriter reviews the actual documentation (bank statements, pay stubs, credit report details) and may identify issues that the AUS did not flag. For example, the AUS does not read bank statements and cannot identify large deposits requiring sourcing. The underwriter's conditions supplement the AUS conditions to ensure the file is fully verified.
What is a condition suspension?
A condition suspension means the underwriter has identified a significant issue that prevents the loan from being approved in its current state. The file is placed on hold until the issue is resolved. Suspension items are more serious than standard conditions and may include unverifiable income, unresolvable title defects, property issues that require major repairs, or DTI ratios that exceed program limits. A suspension requires the borrower and loan officer to address the specific issue before the file can return to active underwriting.
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