Homebuyers and lenders alike await receiving a clear to close status, meaning all loan documents have been approved by the underwriter and that any conditions required for the loan to be approved have been met, so that a closing date can be scheduled. The path to a clear to close is not always easy or fast and can be further complicated by missing documents or missteps in the lending process. An automated, organized method can help lenders improve the chances of receiving a clear to close and can help to get one in a timely manner.
How To Get a Clear To Close
The mortgage timeline from initial application to closing can be lengthy. It will usually include the following important steps:
- Processing of the loan: During this first step, the lender is responsible for verifying all of the required documents and coordinating things like the home’s appraisal. This is also when the title company will need to do a title search.
- Underwriting: Once the lender collects all of the required documents, they will send the application to underwriting. This is when they will also order a credit check and any additional verification documents. It is possible that the underwriter will have additional questions, or that they will require more proof.
- Conditional approval: The underwriter may issue a conditional approval in which the application is approved, as long as certain conditions are met.
- Clear to close: A clear to close means the underwriter has signed off on all documents and approved the application. At this point, the borrower and lender do not need to do anything, unless income or employment changes.
- Closing: During closing, the buyer, seller, each realtor, the title company, and the lender will meet to go over documents and issue and collect payments.
The timeline from the borrower first submitting an application to closing can be long, with an average of 47 days. Some types of loans, as well as unique financial situations, can increase this timeline even more. Loan timelines that extend too long run the risk of never making it to closing. In addition to the buyer becoming frustrated, the longer interval between start and finish provides the increased possibility that more problems may occur.
Fortunately, many lenders are using certain methods to shorten this timeline, helping them get their clients a clear to close faster. With platforms like Lendsmart’s end-to-end solution, the whole process is automated, keeping the timeline efficiently moving through each phase, sometimes beginning the lending process in as little as five days. The product can also help different parties, like the mortgage loan originator and real estate agent, coordinate required information.
Important Documents To Obtain a Clear To Close
Collecting documents is an important part of obtaining a clear to close. The underwriter will need to evaluate certain documents on the path to a clear to close. These include the following:
- Proof of income: The lender needs to verify employment and proof of income, both when initially applying for a mortgage and then again before the final approval. Proof of income can be verified using pay stubs, tax returns, unemployment transcripts, proof of real estate or rental income, and proof of alternative income like child support or alimony payments.
- Proof of down payment: Because most loans require that the buyer put a down payment on the house, the lender will also need to obtain verification of these payment funds. This verification might include copies of bank statements, copies of retirement accounts, or brokerage or investment statements. If the borrower is being gifted the funds for the amount of the down payment, then they will need a gift letter.
- Debt verification: Lenders will need to re-evaluate a borrower’s debt before issuing a clear to close. This is verified using a credit report.
- Credit check: A credit check may also be re-issued before a clear to close to ensure that the borrower’s credit situation has not changed. Lenders rely on the three major credit bureaus: Equifax, Experian, and TransUnion. Many of the top lenders use the FICO score, which is a type of credit score that offers industry-specific information about a borrower’s credit history.
Depending on the borrower’s financial situation, additional documents may be needed to close the loan. These documents are usually specified when the borrower receives the pre-approval or conditional approval documents and could include things like a divorce decree, asset certification, a letter explaining a gap in employment, or a profit and loss statement if the borrower is self-employed.
Clear To Close — What Happens Next?
Clear to close is a part of the lending process that realtors and lenders alike patiently anticipate. While obtaining a clear to close is a positive step toward closing the loan, it does not mean that the lender’s work is finished. Clear to close simply means that the underwriter has evaluated and approved the lending documents. If there were any conditions present, such as is common with a conditional approval, a clear to close means that these conditions have been met.
While the loan being denied at this point is unlikely, it is always a possibility. These are a few of the top reasons why a mortgage loan can still be denied after a clear to close:
- A change in credit: If the borrower’s credit changes during this time, they may need to reapply or the loan may be denied.
- A change in employment: Lenders will confirm employment before closing. If they are unable to complete this step, the loan may not go through.
- Increase in debt: Even minimal changes to debt, like opening up a new credit card or buying furniture, can change the debt-to-income ratio, thus affecting the loan.
- A change in income: A change in income also affects debt-to-income and can ultimately lead to the borrower being denied the loan.
Lenders need to complete these important steps before meeting the buyers at the closing table. They also need to facilitate other processes, like ensuring the title company follows through. Additionally, the realtor and mortgage broker may need to work together to ensure all required documents on their ends are submitted in time.
This application process can be hectic for lenders, especially if they are working with multiple borrowers. By having a well-organized system in place, the lender can identify these challenges ahead of time. This helps them speed up the process, helping borrowers get into their new homes faster. It also allows lenders to increase the number of borrowers they can work with at one time.