Yes, if you do not need a visa to come to Iceland. Applicants who do not need a visa to come to Iceland may stay in the country at the time of submission of the application and for as long as it is processed, as long as their stay in the Schengen area does not exceed 90 days in the previous 180-day period.

If you require a visa to come to Iceland, you cannot not be in the Iceland when the application is submitted and while it is being processed.