This article continues a series on getting a home loan. Read Part 1: How to Get Pre-Approved.
What must be done to get a loan fully approved? Following pre-approval, your loan representative will instruct you to provide the required supporting documents. The loan representative will then submit your loan application, along with the documents, to the underwriter. Soon thereafter, the underwriter will return one of four possible decisions about your application: approval, approved with conditions, suspended (more documentation required before a decision can be rendered), or denied.
In most cases, an approved loan application will be “approved with conditions.” Satisfying those conditions is the first of two critical tasks that you must complete in order to turn your “approval with conditions” into a full approval. The second critical task is to lock in your interest rate and loan terms.
Congratulations! You are cleared to make an offer on a house with full confidence that you will be able to close the deal. Nevertheless, it’s still up to you to do everything you can in order to ensure that your closing goes smoothly.
Remember, changes to your credit reports and credit scores can derail the process at any time. The lender may check your credit hours before your loan is finalized. It is wise to stay on top of your credit by at least monitoring one of your credit scores for free. You may also want to spring for three-bureau credit monitoring to catch any major changes as quickly as possible.
Satisfy the Underwriter’s Checklist of Borrower Conditions
When your application is approved it’s important to check the underwriter’s checklist of borrower conditions. This list will specify everything that you need to do in order to ensure that their loan will be approved for closing. The conditions often include requests for alternative and supplementary documentation, explanation and correction of anomalies, and verifications and attestations.
Lock in Your Interest Rate and Loan Terms
Once you know when your transaction is going to close, you should consider locking in the rate. Locking in commits your lender to fund your loan at the specified rate. It takes the risk of interest rate fluctuations out of the picture.
Why are the Borrower Conditions and Locking in so Critically Important?
Each phase of the loan application process involves a number of steps the loan officer and borrower have to execute carefully in order to ensure that the borrowers get the best loan available and their purchase comes to a smooth and efficient close. Consider the following example of what can go wrong.
Elizabeth had received loan approval and the lender had sent loan documents to the closing agent. She had signed them and put her down payment into escrow, and was expecting the loan to fund, but the lender had refused to fund the loan, stating that she had not satisfied certain conditions. What she had not been shown were the lender’s Specific Closing Instruction, a sheet that tells the closing agent what they must do to complete the transaction. Most of these items are perfunctory but a loan representative’s foremost job at this point is to assure that someone is taking care of each of these items.
In this instance, the closing agent did not bring these instructions to the attention of the borrower at the time documents were signed, and it sounded as if the loan representative stopped doing his job. While common sense would tell you that it was in their best interest to get your loan funded, it is still your loan and your responsibility to assure success.
Locking in your interest rate and loan terms
Locking in your interest rate and loan terms sets your whole application in stone. Lock-ins protect you against increases while your application is processed. However, a locked-in rate may prevent you from taking advantage of price decreases during this period.
How Should You Satisfy Borrower Conditions and Lock In?
When a lender issues its approval letter there are almost always some conditions, which frequently include the following:
Alternative and Supplementary Documentation
- If you lack credit histories or scores, service accounts–such as utilities, cable, or telephone–are acceptable.
- If you are self-employed or have rental or other unconventional income, you may need profit and loss statements prepared by a licensed Certified Public Accountant.
- You must supply updated account statements immediately prior to closing.
Explanation and Correction of Anomalies
- You must explain or correct inconsistencies in credit reports.
- You may be asked to get official explanation of wages, tax statements, pay stubs, etc. from payroll departments or authorities.
Verifications and Attestations
You may be asked for verifications of…
- employment and income
- housing or rental history
- gift funds (by means of a sworn letter from the donor foregoing repayment)
How to satisfy the borrower conditions
As a preliminary step, you should get pre-approved by a reliable lender before searching for a home. When your lender tells you the loan has been approved, you should demand to see the approval sheet and work with your loan rep to assure that you are complying with all requirements. Later, when you sign your loan documents, get a copy of the list of all remaining conditions from the closing agent and make sure someone is handling the items listed so your loan funds come in on time. It’s especially important to leave plenty of time for items to be corrected on your credit report, and for any legal issues to be documented and settled by the relevant authorities. Otherwise, it’s entirely possible for the sales contract or loan approval to expire before all of the conditions are met. Make sure any errors on your credit report have been corrected, since the report is always pulled again just prior to closing.
How to lock in your interest rate and loan terms
Once an appraisal report has been filed with your lender, it may be time to consider locking in your interest rate and terms. First, get your lender’s current rate sheet and compare it with the one you kept from when you were pre-approved. This will show you what has happened to the market since you began the process. Then you can sit down with your loan officer and review the rate versus-fee alternatives.
You will also see that every program offers lock periods of 15, 30, 45, and say you have a 45-day escrow. That means you can lock immediately and ensure your rate so long as you close within that 45-day period. You could wait 15 days and lock for 30 days at a slightly cheaper price, but that good rate you got 15 days before may not be available now. Interest rates can change a lot in 15 days. That’s why it generally makes sense to lock in right away and avoid the risk of having increased interest rates blow your deal.
Let’s say you can lock in for 6% and 1 point today but you choose not to do that. If the market moves against you and 15 days later the rate is 6.375%, you are going to have to pay $375 more per year for every $100,000 you borrowed.
Once you have locked your rate it is extremely important that you get a copy of the lock confirmation from your lender. This confirmation is not customarily sent to borrowers, but it is the only way to verify all sources of origination fees, borrower names, loan terms, the interest rate, and the date and length of lock. With the lock confirmation you can verify that your loan representative has honored the agreement you were originally offered. Without it, the loan representative could charge you points “to lower the rate” but leave it high enough to get undisclosed points from the lender, too. A loan rep might even charge you to lock in but not do so, and keep the fee if rates hold.
To learn more about mortgages and the home-buying and financing process, read more from our experts by visiting our Mortgage Learning Center.