Once you’ve obtained a preapproval or mortgage commitment letter, typically the lender approves your loan application based on conditions, which means you have to satisfy certain requirements before your loan is fully approved. Usually, those conditions fall into two categories: “prior to documents” conditions and “prior to funding” conditions. These conditions may be standard or specific to your loan type. Either way, in order to continue on the path to final loan approval, you’ll have to comply with all of the loan conditions.
Prior to Documents
The “prior to documents” condition refers to the standards you have to meet before the lender will issue your loan documents. Since the Underwriter reviews your application to verify its accuracy and to make sure you qualify for the loan, the underwriting department will typically require you to provide supporting documents. For instance, the Underwriter may request that you supply a certified copy of your child support agreement to prove you’re entitled to a specific monthly income, proof you paid off an auto loan or credit card to decrease your debt-to-income ratio, or explanation of a sizeable banking transaction. While these are specific to a borrower’s financial situation, there are other conditions that are more standard across the board such as employment verification, an appraisal that exceeds the value of the home, or proof of mortgage insurance. Meeting these conditions is the first of two important steps you have to complete in order to turn your conditionally approved loan into a fully funded loan because an Underwriter will not order loan documents until all of the required loan conditions are satisfied.
Prior to Funding
Typically before the lender releases funds to the escrow company, there are another set of documents the borrower has to provide the lender. Most of the “prior to funding” conditions are usually easy for the borrower to meet and at times will deal with procedural matters that the escrow or Loan Officer will handle such as the Closing Disclosure form. However, bear in mind that most lenders typically still check your credit score and other financial documents prior to closing. Therefore, it’s important to make sure you save all of your new pay stubs and banking statements as you may be required to produce those documents. Also, for borrowers who are already homeowners, the lender usually requires proof that your current home has sold before they will fund a new loan.
Once the Underwriter approves your paperwork, the Loan Officer will order your loan documents and deliver them to the escrow officer, who will compile them into their final form with pertinent information such as payoff amount, taxes, and prepaid interest. After the final loan documents are prepared, there will be a date set for closing your loan. It is important to remember that even though you sign your home loan, everything isn’t necessarily final. You should verify with your closing agent that there aren’t any outstanding conditions that still haven’t been addressed. To avoid any last-minute changes, determine exactly what documentation is needed, the date it must be submitted, and how it should be submitted. Otherwise, it’s possible for a loan approval to expire, while conditions are waiting to be fulfilled.
Funding Your Loan
The sooner all conditions are met, the sooner you can obtain funding approval. Since every borrower is different, every lending scenario and timeframe is different too. Therefore, you may encounter some or none of these conditions on your path to homeownership. However, once the lender issues a final approval, the funding department will transfer the payment to the escrow company and the loan process is finally complete.