When buying a home, there are several stages to obtaining the bank financing necessary to close the transaction. Perhaps the most important step for a buyer to take, even before looking at houses, is to speak with a lender to get a pre-qualification or better, a pre-approval letter. That letter will tell the buyer how much house they will be able to afford and determine the price range to be looking in. Here are the loan steps from start to finish:
Loan Commitment Stages
Pre-Qualification: A pre-qualification letter is a quick estimate by the lender for what the buyer will be able to afford. It is based on a verbal review of the buyers income and debts. No income verification or credit check have been made, and therefore, a pre-qualification has very little weight when judging the strength of a borrower.
Pre-Approval: A pre-approval is a more detailed look at the borrowers financial situation. It involve a credit check, review of income statements and bank accounts for proof of funds. The pre-approval letter tells the seller and real estate agents that the buyer is a serious contender to purchase a house. Sellers will not consider an offer unless it includes a pre-approval letter.
Some lenders go a step further and issue a Verified Pre-Approval Letter, which is an even stronger guarantee that the buyer will have their loan approved. The lender more rigorously checks the borrowers income, tax return, credit and does many of the steps that happen during the underwriting stage.
Commitment Letter: The commitment letter is a pledge by the lender that they will loan money to the borrower once all final conditions are met. When a buyer has an accepted offer from the seller, they start the formal loan application process. The lender orders an appraisal on the property and starts to thoroughly review the borrowers loan application and supporting documents, such as W-2’s, pay stubs, bank statements, credit reports, tax returns and current assets. Once all the required information is collected, the loan goes to the underwriting stage for review. Often the underwriter will require additional documents. Once all of their requirements are satisfied and the borrower qualifies for the loan, they will issue the commitment letter. This is a very important stage in the loan approval process and necessary for the buyer to satisfy the mortgage commitment contingency in the real estate contract. This contingency, usually about a week before the closing date, lets the buyer get out of the deal if they fail to qualify for the loan. Without the commitment letter, the buyer will not be able to get the loan and can thus terminate the deal.
Clear To Close: Once the borrower completes any outstanding conditions from the lender, the clear to close is issued and the loan is ready to close. This often takes place a few days before the scheduled closing date.
