It is critical that buyers and sellers alike fully understand the mortgage loan application and approval process. This post will give you an overview of the three major steps involved. It will also provide you with an in-depth look at the four potential outcomes of underwriting, the final step in the approval process. You’ll learn what each outcome means to your buyer and how each one can impact your sale. Let’s get started!
The three key steps involved in the mortgage loan approval process are pre-qualification, pre-approval and full underwriter approval. Let’s start of by definihomeng steps one and two.
Step 1: Mortgage Loan Pre-Qualification
At this stage buyers are simply asking for an estimate of how much mortgage financing they could potentially be approved for. They haven’t yet completed a formal loan application and they are not yet qualified by a mortgage lender as a good loan candidate. As a seller, it’s usually best to steer clear of offers submitted by buyers who have only been pre-qualified and have not yet been pre-approved for a loan.
Step 2: Mortgage Loan Pre-Approval
At this stage, buyers have submitted financial information to a lender, and the lender has vetted their financial history and credit worthiness to determine how much money is safe to lend. As a seller, you can feel more confident about accepting offers from pre-approved buyers because the likelihood that they’ll be able to obtain financing is high.
Check this post out for a more detailed look at pre-qualification vs. pre-approval.
Step 3: Underwriter Approval
Once a buyer and seller have mutually agreed on the price and terms of a real estate sale, both have signed a contract and an offer has been accepted, the loan application goes to the lender’s underwriter for final approval.
How It Works:
An underwriter is a person working for a lender who makes the final decision on whether a loan will be approved. There are four possible loan application outcomes: full approval, conditional approval (the most common), suspended for more documentation and denied. Generally, real estate contracts set a deadline of 30 days for the underwriting process to be completed.
In this case, the underwriter deems the buyer is wholly qualified for the loan amount and is trusted to pay it back, no questions asked and no further conditions required. This outcome is fairly rare, but it can happen.
Congratulations! This is the best case scenario. It means your buyer is all set and your sale will likely wrap up quickly without any lending hiccups. This circumstance is most likely to occur with well-vetted investors and wealthy buyers.
This is the most common outcome. If a loan is conditionally approved, the underwriter says we’ve got a deal if certain detailed conditions are met prior to closing. These conditions fall into two categories: prior to documents and prior to funding.
‘Prior to documents’ conditions must be met before the loan documents can be ordered because they are necessary to deem the borrower fully qualified. These conditions usually include things like providing additional proof of income or employment verification. As an example, it’s not uncommon to have to verify your employment or income if you are employed as an independent contractor.
‘Prior to funding’ conditions must be met before funds are issued to the borrower, which means the buyer is approved as a borrower, so documents can be ordered, but funding will not be available until these conditions are met. These are generally procedural items that don’t impact one’s ability to qualify and they are easy to produce, meaning the risk of not being able to come up with the needed documents is low. Examples include providing proof of your mortgage insurance, a clear title report or a copy of a termite inspection.
Be ready for this outcome because it’s most likely going to be the one you experience. The only very small downside here is it can take a couple extra days to get the needed paperwork submitted to the lender – especially when third party companies are involved, like escrow and title groups. However, as previously stated, your contract will ultimately keep things on track because the buyer will have already agreed to a certain time frame in which they must obtain funding.
Suspended for More Documentation:
If a loan is suspended for more documentation, it means loan approval is pending, and before it can move forward, fundamental qualification questions deemed unanswered by the underwriter must be clarified. In this case, the underwriter will request additional paperwork to clear up any issues. If the issues are resolved satisfactorily, the loan will be approved, usually with conditions.
In this case, you’re probably going to have to wait a while longer before you make it to the closing table, and the length of time you have to wait depends on how substantial the issues are and how difficult they will be to resolve. In many cases, the underwriter’s questions can be answered within just a few days with additional verification paperwork. In other cases, it may take a week or more to get things worked out.
Either way, all hope is not lost and patience is a virtue if you find yourself in a suspended approval holding pattern. Once again, you still have a deadline driving the process, which means you are protected from the process stalling for longer than the agreed upon number of days outlined in your real estate contract if you have other interested buyers.
If a loan is denied, the underwriter does not feel that the borrow applying for the mortgage loan is a good credit risk and has deemed them unfit to receive funding. Most of the time, the reason for the denial will be because of insufficient buyer funds or poor credit. This outcome is quite rare and typically only occurs if the lender made a poor judgment call earlier in the process.
In most cases a denial means the deal has fallen through. All real estate contracts contain contingencies with deadlines that describes what to do in this circumstance. For example, a contract may say that if the buyer can’t get loan approval within 30 days, they may cancel the contract without penalty.
As you might imagine, it’s disappointing for both the buyer and the seller when denial happens. If you get along well with the buyer and you want to give them a chance to apply for a loan with another lender and are willing to wait, it’s usually within your power to do so. However, there’s no guarantee another lender will approve the loan.
Hopefully this post gave you a comprehensive understanding of the loan underwriting process and how it can impact your home sale. If you have questions, feel free to ask us in the comments!
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