The Loan Approval Process

The loan approval process involves a lot of documentation, such as proof of income. Lenders also require verification of assets. For example, if a couple is getting a large down payment from a relative, the lender may want to verify the source of funds.

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Once the credit team performs the analysis, a loan approval document (also known as a credit memo) is prepared.

Preapproval

The preapproval process gives you an estimate of how much you can borrow and a range of loan programs you might qualify for. This allows you to shop with confidence and shows sellers that you’re a serious buyer.

Preapprovals are based on information you provide and typically don’t require a credit report or a lengthy application. You can usually get a preapproval from a lender online or in person. Getting preapproved early in the home-buying process can help you identify potential mortgage obstacles quickly and avoid delays later in the loan process.

While a preapproval can give you an idea of how much you can spend on your new home, it’s important to talk with the lender and understand what the full approval process will look like before you start shopping for your dream home. For instance, your preapproval may limit your search to homes within a certain price range, which could impact how fast you can find and close on your home.

It’s also a good idea to only apply for a preapproval when you’re ready to begin seriously shopping for a home. The preapproval process can cause a hard inquiry to your credit, and too many hard inquiries can negatively affect your score. Plus, your preapproval may have an expiration date that can force you to reapply for a loan later in the process.

Underwriting

Underwriting is the process by which a lender determines whether to approve your loan. This process involves evaluating your application and assessing your financial information to make the decision of whether you can afford the mortgage. While a home loan agent may be able to give you a general understanding of the company’s underwriting policies, it is the underwriter that has the final say and evaluates your specific situation.

During the underwriting process, lenders will verify your income, assets, debt and property details. They will also review your credit report and may request documentation such as pay stubs, bank statements, tax returns and investment account documents. In addition, the underwriter may request an appraisal on the property you wish to buy to ensure that it is within your affordable range.

The underwriting process can take a few days to a couple of weeks and is the most comprehensive step in the loan approval process. It is important to be proactive during this time and avoid making any major financial changes. Irregular deposit activity, a new debt or job changes can be red flags that could delay your approval or even result in a denial.

It is also helpful to work with a trusted mortgage professional throughout the entire process so you can be prepared for any questions that might arise during underwriting. This will help expedite the process and get you closer to homeownership.

Final Approval

It’s a huge moment to reach this point – you’ve been given the green light by underwriting to complete your home loan. The final approval stage is called “Clear to Close” and this signifies that all of the conditions of your conditional loan approval have been cleared and you’re ready to complete the home purchase process and get started with your mortgage.

The conditions at this stage may be very similar to the ones your underwriter set for your approval in principle, but you will need to submit more information and documentation. This includes things like the property valuation report, the contract of sale and insurance documents. It’s also common for your underwriter to request more recent financial statements and bank accounts in order to verify income and asset amounts. Lenders will look at your cash in bank accounts, investment accounts and the cash value of life insurance policies to make sure that you’re not borrowing more than what’s available in your assets.

It’s a good idea to enter a quiet period and do your best to avoid any big purchases or new credit until after your loan is funded and you have the keys in hand. Changing banks, taking on new debt or making large deposits or withdrawals are all very risky and can potentially jeopardize your loan application.

Closing

The final stage, closing, is the day you actually buy the home you have chosen and begin making your new mortgage payments. Before closing, lenders do a second credit check to make sure that nothing has changed since your loan went through underwriting. They also confirm that you have the funds to cover your down payment, closing costs and any other charges associated with buying a home.

If there are any remaining conditions, your lender will share them with you and give you a timeframe for when they must be met. These can be procedural things, like proof of homeowners insurance or a clear title, or they may involve supplemental documentation or additional information on income or employment status. If you’re stuck with conditional approval, it’s important to keep working hard and to stay on top of any requests your lender makes, as delays can throw off the entire timeline for closing.

It’s also a good idea to avoid significant changes to your financial situation during this time period, such as a sudden increase in spending or a change to the amount you earn at work. Stable, reliable income is a key element that lenders look at when evaluating borrowers’ ability to repay their loans, so leaving a job or changing from salaried to commission-based compensation could raise concerns.