A loan application goes through several stages before a final approval is eventually issued. As the loan application is documented with items from the applicant as well as third parties, soon the loan file gets to a stage where the lender underwrites the loan. The underwriter is the individual within the mortgage company that makes the final determination whether or not the loan meets the guidelines for the program being applied for. The underwriter will review the file and the documents included and issue a decision. The initial decision however is rarely without “loan conditions.” At this stage the file is in a conditional approval stage. The loan can be approved, just based upon these particular items listed.
All loans will have loan conditions. But for those not familiar with the approval process, when the lender contacts the applicant after having reviewed the file it can cause some uneasiness. Why does the lender want to know this or that? Is there something wrong with my application? Am I going to be turned down? The fact is that most of these conditions are relatively tame.
There are two types of conditions lenders issue- Prior to Document and Prior to Fund. Prior to “doc” conditions are those that command a little more attention because it’s holding up the loan approval. The lender can’t deliver closing papers to the settlement agent until these items are cleared. For instance, an applicant submits bank statements and paycheck stubs as part of the documentation process. The applicant gets paid on the 1st and the 15th. The paycheck stubs also reflect these dates and the bank statements also show direct deposits matching the pay on the 1st and the 15th. But there is also a deposit on the 10th that doesn’t match up with anything. The deposit is $6,000. If those funds are needed to close, there will be a prior to doc condition wanting verification for the source of funds. The approval process essentially stops until this explanation can be provided and approved.
The more benign condition is the prior to fund condition. This condition is typical of most all loan approvals and not serious enough to hold up closing documents, but still needs to be addressed. A common prior to fund condition might be an updated paystub. Credit documents within a loan file need to be no more than 30 days old. If the most recent paystub covering a 30 day period is 45 days old, the lender will assume the next paystub is coming and move forward with the approval.
The borrower will attend the settlement, sign the closing papers and send the most recent paystub to the lender, satisfying the condition. The lender will see the new paystub and release the funds for the mortgage. Other common prior to fund conditions will be for things like an appraisal with a specific minimum value or an insurance policy covering the property.
The main takeaway here is that when, not if, the lender asks for more information is to stay calm and provide the requested items as soon as able. Don’t delay answering the request. The sooner you provide what’s needed, you’ll make your closing date on time.