June 22nd, 2012 8:16 AM by Richard T. Cirelli
Loan Approvals: Know the Difference Between Each Type:
With the recent surge in home buying, I am discovering that many home buyers and Realtors are not familiar with the three types of Loan Approvals. I thought it would be a good time to explain process and how you can help to assure closing on time.
The Pre-Approval should be obtained in advance of the borrower making their offer. To be reliable it needs to include a thorough review of the borrower’s income and asset documentation and include a credit report. The Borrower’s Loan Application and Credit Report are input into a Loan Processing system and uploaded into Fannie Mae or Freddie Mac’s automated underwriting system. This provides an electronic underwrite that is accepted by all lenders for loans up to $625,500 that are to be sold to these two agencies. Borderline files should also be reviewed by an underwriter for extra assurance. Jumbo loans larger than $625,500 may be underwritten to the same Fannie/Freddie guidelines and usually are, but the acceptance of the Fannie/Freddie automated underwriting can vary by jumbo lender. Beware of any lenders that issue a Pre-Approval without first reviewing the borrowers Income, Assets and Credit.
Once we have all of the borrower’s documentation plus the purchase agreement, preliminary title report, etc., - basically a complete package except perhaps the appraisal - the loan is submitted to the Lender for underwriting approval. The underwriting is a manual process whereby the underwriter verifies all documentation and matches it to the original Fannie Mae/Freddie Mac automated report. The underwriter then issues a “Conditional Approval” listing the conditions or requirements.
The conditions of approval are always broken down into two categories: “Prior-to-Doc” and “Prior-to-Funding”. Prior-to-Doc conditions are conditions that can affect the qualifications of the buyer and therefore must be approved prior to the lender issuing closing documents. Prior-to-Funding conditions are typically details that don’t impact the borrowers’ qualifications but are still necessary and often can’t be obtained until the time of funding.
This Conditional Approval can usually be obtained within 17 days of loan application assuming the borrowers were prompt in providing the documentation needed. If the borrowers were previously pre-approved, it helps to expedite this portion of the process. Most Buyers will remove their loan contingency at this point.
When we receive the Prior-to-Doc conditions, they are submitted to the Lender. Lenders require that all Prior-to-Doc conditions be submitted at the same time. Once received, the underwriter can clear the Prior-to-Doc conditions and issue the Final Approval with only the Prior-to-Funding conditions yet to be cleared. These conditions are typically cleared at the time of closing. Closing documents can be ordered at this point in time.
The key to a smooth closing and to closing on time is to have the borrower pre-approved prior to finding a property. If the mortgage broker can have all of the borrowers documentation in advance, there will be fewer Prior-to-Doc conditions and closing deadlines will have a much better chance of being met. When the borrower is unprepared and possibly disorganized, there file will inevitably take longer.
With purchase and refinance loan volume near all-time highs, its best to set reasonable expectations for buyers, sellers, real estate agents and all parties. Each step of the process takes time and many lenders (but not all) are quoting several weeks to issue approvals once they receive the file. Add more time to receive appraisals, clear conditions, prepare closing docs, etc. and a transaction that used to take 30 days may now take 60 days.
Understanding the Approval process can help to minimize the time required to close a purchase transaction.