Loan approval is a process that a lender goes through to determine whether you qualify for a loan or credit product. It includes checking your credit and verifying your income.
If you’re shopping for a mortgage, it is highly recommended that you get preapproved before starting to shop. This will help you avoid surprises down the road.
Pre-approval
Getting preapproved for a mortgage or car loan is an important step that can help you determine how much financing you might be able to get. A lender can give you a preliminary estimate of how much you’re eligible to borrow and at what interest rate, but it’s important to remember that a preapproval does not bind you to the particular lender or loan program. If you decide to take out the loan, you’ll need to formally apply, which requires supplying documentation and undergoing a full credit check.
A pre-approval process is different from a full application, but both can involve a credit check. Typically, the prequalification credit check is a soft inquiry that won’t hurt your credit score, while a full application will require additional documentation such as pay stubs and bank statements. If a lender gives you preapproval for a certain amount, it’s likely that the final loan will be at or close to this limit.
It’s not uncommon for lenders to advertise attractive loan rates, but those rates might only be available to the most pristine credit profiles. If you’re shopping for a mortgage, it’s a good idea to work with multiple lenders and compare offers before selecting one. That way, you can ensure that the terms of your loan will be as favorable as possible.
Getting preapproved for a loan is especially important when buying a home or a car. Many sellers won’t consider offers from buyers without a preapproval letter, and getting preapproved can reveal any issues that may prevent you from qualifying for the loan. It also shows that you’re serious about buying and can move quickly once a contract is signed. Lastly, it can set you apart from other potential buyers.
Underwriting
As the homebuying process moves closer to closing, lenders will conduct a thorough review of your financial situation. Known as loan underwriting, this is a critical behind-the-scenes step that determines whether or not you will be approved for a mortgage. It requires patience, knowledge and complete access to all relevant documentation. The underwriter will evaluate your credit report, debt-to-income ratio (DTI), employment history and a variety of other factors.
One of the most significant considerations is to ensure that you will have enough income to afford the monthly payments on your new home and cover any unexpected expenses that may arise in the future. This is why it’s important to keep a close eye on your savings and check accounts. Any changes in your finances could jeopardize your approval and ultimately delay or even derail your closing.
The underwriter will also examine your current assets and debts to ensure that you can afford the mortgage. This includes checking and savings accounts, investments and other liquid assets, as well as the value of your property. In addition, the underwriter will want to see proof that you have adequate cash reserves in case of a financial emergency.
Once the underwriter has fully vetted your financial information, they will issue a final decision. This will either be a denial or, more commonly, a conditional approval. The latter is typically issued once the underwriter has reviewed all requested borrower documentation, completed a home appraisal and verified that your loan amount will be commensurate with the property’s value.
The underwriter will often use a computer program to assess your eligibility for a loan. However, many lenders also have their own in-house underwriters to make more hands-on evaluations. The underwriters’ final decisions will be based on the most accurate and complete information available, including that which has been provided by your lender.
Closing
Once the mortgage underwriter has verified that all loan conditions have been met and that you are a good candidate for a home loan, he or she will issue you with a clear to close status. At this point, you can start preparing for closing by gathering all the necessary documents. If your lender requests any additional documentation, be sure to provide them as soon as possible. This will help prevent delays and keep the process on track.
During the closing process, it is important to avoid any major changes to your financial status. This means no new loans or credit card accounts, no big purchases and no changes to your employment or income. These changes can delay your closing and possibly re-open the door to denial of your loan.
Closing involves signing the loan documents and receiving a copy of your mortgage loan, which details where to make future payments and other information. You also pay closing costs, which can vary depending on your purchase or refinance transaction. These include:
It is a good idea to prepare for the closing process by making a list of all the documents required and keeping them organized. In addition, you should make sure to respond quickly to any questions from your loan officer. This will help keep your application on track and ensure that you can reach a successful closing.