If you’re preparing to buy a home, understanding the financing process of loan approvals is key to being able to make an offer with confidence. We know that getting a mortgage can be daunting, as it is a unique financing process that may feel confusing or complicated.
Understanding What Happens with Loan Approval During Escrow
Loan Application Submission
Once your offer on a home is accepted, the first step in the loan approval process is submitting a formal mortgage application. Even though you went through a similar process when you were pre-approved, we will need to verify and update all the information previously provided during pre-approval. During the loan application, you will be asked to provide detailed documentation related to your finances, which will vary some depending on the type of loan you’re getting but might include:
- Proof of income (W-2s, pay stubs, tax returns)
- Employment verification
- Bank statements
- Information on current debts and assets
- Personal identification (driver’s license, Social Security number)
Loan Estimate
After submitting your application, we will provide you with a Loan Estimate within three business days. This document outlines all the key information about your loan: the loan amount, interest rate, estimated monthly payments, and closing costs. This helps you make sure there are no surprises later in the process of your loan approval after purchasing and closing on your home.
The Loan Estimate is not a final document, but rather an approximation of the total cost associated with the mortgage, giving you an opportunity to review and ask any questions before moving forward with your loan approval.
Loan Processing
Next, your mortgage application enters the loan processing phase. At this stage, our loan processor reviews your application to ensure all required documentation is complete and accurate. If any additional information or documents are needed, such as clarification on financial statements or more recent bank activity, the loan processor will reach out to get it from you.
During this time, it’s important to respond quickly to any requests to keep the process moving. The faster you can provide any additional documentation, the smoother the process will go.
Home Appraisal
While your financial details are being reviewed, we will order a home appraisal to assess the property’s fair market value. It’s essential to ensure that the home is worth the amount you’re borrowing, and an appraisal is the best way to do this. The appraisal will be conducted by an independent third-party appraiser who will evaluate the property based on factors such as:
- Location
- Condition and size of the home
- Comparable properties in the area
The appraised value of the home is crucial because it impacts how much can loan you. If the appraisal comes in lower than the offer price, you may need to negotiate a lower price with the seller, pay the difference out of pocket, or explore other financing options. Best case, the appraisal comes in at or above the offer price and you can proceed without any issues.
Title Search and Title Insurance
During this period, a title search will be conducted to verify that the property’s title is clear of any liens, unpaid taxes, or legal issues that could affect your ownership. This ensures that when you buy the home, there are no disputes or legal claims on the property from previous owners.
After the title search, you will need to purchase title insurance to protect against any potential future claims. Title insurance ensures that if any issues with the title arise after the sale, you and your lender are financially protected.
Loan Underwriting
The most critical part of the loan approval process is underwriting. This is where the lender’s underwriting team reviews your application in depth to assess the level of risk in lending you money. The underwriter will examine:
- Your credit score and history
- Debt-to-income (DTI) ratio
- Employment stability
- The home appraisal results
- Your financial reserves
During underwriting, the lender is ensuring that you meet the requirements for the loan program you’re applying for, whether it’s a conventional loan, FHA loan, or another type of mortgage. The underwriter may also request additional documents or clarifications during this stage.
There are three potential outcomes of underwriting:
- Conditional approval: The loan is approved, but additional information or conditions must be met (e.g., providing more documentation or resolving credit issues) to get the final loan approval.
- Approval: The loan is approved without conditions, and you can proceed to closing.
- Denial: The loan is denied, usually due to factors like insufficient income, high debt, or problems with the property’s appraisal.
Clear to Close
Once the underwriter has signed off on the loan and all conditions are met, the loan will be marked as clear to close, getting you closer to your loan approval. This means that the loan process is complete, and you’re ready to move toward closing the sale of the home. We love helping our clients reach this exciting milestone.
If you have any questions about getting approved for a mortgage, the process of getting a loan approval, or finding the right funding for your home purchase, we can help. Contact us any time to apply for a loan or learn more about the different types of mortgages we have available.
