Both buyers and sellers alike should fully understand the mortgage loan application and approval process before entering a contract. 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 mortgage approval process.
These are the three key steps involved in the mortgage loan approval process:
- prequalification
- preapproval
- full underwriter approval
The full underwriter approval is the final mortgage approval step, and there are four final approval outcomes to that step. Let’s start off by defining prequalification and preapproval.
Optional Step: Mortgage Loan Prequalification
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.
As a buyer, this is nice to know, but your prequalification approval amount is in no way a guarantee for how much you’ll actually qualify for.
The prequalification step in the loan approval process isn’t necessary. Buyers can skip it and go right into the pre-approval stage. Typically, buyers get prequalified just to get a ballpark number so they know what they might be able to afford.
First Step: Mortgage Loan Preapproval
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. The preapproval process is more intensive than the prequalification process, but it’s not as thorough as the underwriting process.
When you’re preapproved, it means a lender is willing to lend you the specified amount of money if you pass underwriting and the home qualifies.
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.
As a buyer, you can be relatively confident that a mortgage loan is on its way. Unfortunately, it’s still not guaranteed.
» MORE: Prequalified vs Preapproved: What’s the Difference?
Final Approval Step: Underwriting
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.
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 final loan application outcomes:
- conditional approval (this is the most common )
- full approval
- suspended for more documentation
- denied
Generally, real estate contracts set a deadline of 30 days for the underwriting process to be completed.
Full Approval
In this approval situation, 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.
Full approval is most likely to occur with well-vetted investors and wealthy buyers. This outcome is fairly rare, but it can happen.
What Full Approval Means for Buyers and Sellers
Congratulations! This is the best case scenario. Neither the seller nor buyer have to worry about the deal falling through due to financing issues. The sale will likely wrap up quickly without any lending hiccups.
Conditional Approval
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 | Certain conditions must be met before the loan documents can be ordered. These conditions usually include things like providing additional proof of income or employment verification. |
| 💵 Prior to funding | Documents can be ordered but conditions must be met before funding is available. These items are usually procedural items that should be easy to produce, like proof of mortgage insurance, a clear title, or a copy of a termite inspection. |
What Conditional Approval Means for Buyers and Sellerss
Be ready for this outcome because it’s most likely going to be the one you experience. Luckily, it’s probably not a death sentence for your home sale or purchase. It may take a couple of extra days to get the required paperwork submitted, but it should all fall within the escrow timeline.
Only if a document can’t be found, or there are issues with proving employment or income, will this conditional approval become a serious problem.
Suspended for More Documentation
If a loan is suspended for more documentation, it means the loan has been suspended until the underwriter receives more information.
In this case, the underwriter will request additional paperwork to clear up any issues. If the requested information isn’t submitted, or if the information isn’t satisfactory, the loan will be denied. A common reason for loan suspension is the requirement of additional proof of income.
What Suspended Mortgages Mean for Buyers and Sellers
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.
Loan Denied
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. Other problems like discovery of a default student loan, may also be grounds for loan denial, depending on the type of loan.
This outcome occurs if the buyer doesn’t have a good handle on their finances, or tries to sneak something past the underwriter.
What It Means for Buyers and Sellers When a Loan Is Denied
A denial means the deal has fallen through. Most 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. Sellers will have to find another buyer and start the process over again (which is why some sellers like to list their home as pending but accepting backup offers). Buyers will have to figure out how to fix their finances or use another, more forgiving type of loan.
Before buying a home, have a good real estate agent by your side. If you’re open and honest with them about your financial situation, it will be easier to get a home loan without last-minute surprises.