The loan approval process refers to the steps a borrower must go through to get approved for a loan, from application to closing This process involves gathering documents, submitting an application, underwriting, appraisal, and finally closing on the loan Understanding the basics can help you navigate the loan approval process with confidence.
Overview of the Loan Approval Process
While specific requirements vary by lender the general loan approval process includes
- Pre-qualification/Pre-approval
- Application submission
- Verification of income and assets
- Credit check
- Property appraisal
- Underwriting
- Loan approval or denial
- Closing and funding
Now let’s look at each of these steps in more detail
Step 1: Pre-qualification and Pre-approval
Before submitting a formal loan application, it’s wise to get pre-qualified or pre-approved for financing.
Pre-qualification involves a simple assessment of your income, assets, debts, and credit score to determine the loan amount you may qualify for. Pre-qualification is quick and doesn’t require much documentation.
Pre-approval is more in-depth and requires you to submit pay stubs, tax returns, bank statements, and other financial docs. Once approved, you’ll receive a pre-approval letter stating the loan amount, rate, and terms you qualify for.
Pre-approval shows sellers you’re a serious buyer and gives you negotiating power. It also gives you confidence that you’ll be able to obtain financing for a home before you make an offer.
Step 2: Loan Application
Once you find a home and make an offer, it’s time to choose a lender and complete a mortgage application. This involves:
- Providing personal information like employment history and SSN
- Listing income, assets, debts, and expenses
- Authorizing the lender to access your credit report
- Submitting required financial documentation
- Providing property information like the purchase price
The lender has to give you a Loan Estimate with estimated rates, fees, and closing costs within 3 days.
Step 3: Verification of Income and Assets
Lenders will verify the income and assets listed on your application through methods like:
- Requesting W-2s, paystubs, or tax returns
- Contacting your employer to verify employment
- Reviewing bank statements to confirm balances
- Obtaining 401(k) or investment account statements
Self-employed borrowers may need to provide additional documentation like business tax returns.
Step 4: Credit Check
There are three main credit bureaus: Experian, Equifax, and TransUnion. The lender will get your credit report from at least one of them. They’ll evaluate factors like:
- Credit scores
- Payment history
- Balances owed
- Length of credit history
- New credit inquiries
In general, scores above 620 are considered good for conventional loans. FHA loans can be obtained with scores as low as 580.
Step 5: Appraisal
The lender will hire a professional appraiser to estimate the market value of the home you wish to purchase. This ensures the purchase price is in line with the property’s actual value.
If the appraisal comes under the purchase price, you may need to pay the difference in cash or the lender may deny the loan.
Step 6: Underwriting
Underwriting is the process of assessing loan risk and determining if you qualify. The underwriter reviews:
- Creditworthiness
- Income and employment
- Assets and downpayment
- Debt-to-income ratio
- Loan-to-value ratio
They analyze your ability to repay the loan. Issues like high debt, low credit scores, or inadequate income could lead to denial.
Step 7: Loan Decision
Once underwriting is complete, you’ll receive a loan decision. There are three potential outcomes:
Okay, you’re good to go! The rate and terms are exact what you wanted. Time to move toward closing.
Approved with Conditions – You’re approved, but need to meet certain requirements first, like paying down debts or providing more documentation.
Denied – The lender has declined to offer you financing, usually due to credit, income, or down payment inadequacies. You can re-apply with a different lender or work to improve your financial profile.
Step 8: Closing and Funding
During closing, you’ll finalize loan documents and the lender will disburse funds to the seller.
Prior to closing, the lender must provide a Closing Disclosure outlining your final loan costs. You’ll sign the mortgage note and deed of trust, agreeing to repay the loan.
Once closed, the home is yours! Funds are wired to the seller and you obtain the keys. Congrats on your new home!
Factors That Impact Loan Approval
Many elements determine your chances of obtaining a mortgage. Here are some key factors lenders consider:
Credit Scores – The higher your scores, the better. Aim for at least 620.
Down Payment – A larger down payment signals lower risk. Conventional loans often require 20% down.
Income – Underwriters want to see stable employment and income. Provide recent paystubs.
Debts—Having a lot of debt makes it harder to get approved. Pay down debts prior to applying.
Assets – Liquid assets like savings help prove you can cover costs. Have funds for downpayment and closing.
Property – The property should appraise near the purchase price and meet eligibility standards.
Loan Program – Government-backed loans like FHA and VA have more flexible requirements than conventional mortgages.
Tips for Navigating the Approval Process
Here are some tips to help you get approved with less hassle:
- Maintain good credit in the months leading up to your application
- Gather required documents early like bank statements and W-2s
- Consider getting pre-approved so you know your budget
- Be upfront about bad credit or income issues with your loan officer
- Respond quickly to lender requests for more documentation
- Shop lenders to compare mortgage rates and fees
- Ask your lender how to improve your chances if initially denied
The loan approval process can seem daunting but breaking it down step-by-step makes it more manageable. Understanding what to expect will help you prepare. With diligent preparation and an experienced loan officer guiding you, you’ll be equipped to get the financing you need to achieve the dream of homeownership.
Stage 2: Documentation Verification
Once an application is received, lenders initiate the documentation verification process. Documents from the borrower, like income statements, bank statements, tax returns, and IDs, are carefully looked over at this stage. Lenders meticulously examine these documents to ensure their authenticity and accuracy.
To help you better visualize this stage, here’s a table summarizing some common documents required for loan processing:
| Document | Purpose | |———————-|————————————–| | Income Statements | Verify borrower’s income sources | | Bank Statements | Assess borrower’s financial stability | | Tax Returns | Evaluate borrower’s tax obligations | | Identification Proofs| Confirm borrower’s identity |.
Stage 1: Application Submission
The loan process begins with the borrower submitting an application to the lender. This application typically includes personal information, financial statements, credit history, and details about the purpose of the loan. The lender carefully reviews this information to assess the borrower’s eligibility and creditworthiness.
Mortgage Pre Approval Process Explained
FAQ
What is a loan approval process?
The personal loan approval process involves application submission, credit and financial assessment by the lender, documentation verification, and approval or rejection decision. Lenders consider credit history, income, debt-to-income ratio, and other factors.
How long does the loan approval process take?
Sometimes it takes a few business days, but other times it can take up to a few weeks. It depends on the type of loan and the lender. For personal loans, online lenders are often the fastest, with some offering same-day or next-day funding, while traditional banks and credit unions may take 1-7 business days.
What does the usual loan approval process include?
Typically, the smaller the loan, the fewer documents are required. The most common documents required from applicants include: personal financial statements, authorization to release credit, the last 2-3 years of financial statements or tax returns, and copies of legal entity documents.
Does loan approval mean clear to close?
There’s almost no time left to buy a house because your mortgage lender just told you that your loan application was approved. You’re now at the “clear to close” stage.