Getting Your Mortgage From Preapproved to 'Clear to Close'

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When you apply for a mortgage, your goal is to get to closing. Closing is when you and the lender formally agree to your loan and you borrow the money you need to buy your new home. 

Closing on your mortgage typically happens at the same time that you close on your home purchase, meaning that you finalize the transaction and become the home's new owner in one fell swoop. 

To make it to closing, you'll first need to clear several hurdles. Read on for an overview of the process.

Apply for loan preapproval

A homebuyer's journey with getting a home loan generally starts with applying for preapproval, which is an estimate from a lender of how much they might lend to you given some basic information about your finances. You may be asked for your Social Security number, contact information, annual income, how much you have in savings, and information about your employer as part of the application. 

Strictly speaking, you don't actually need preapproval. But it's smart to get preapproved anyway, because it shows sellers that you have a good shot at securing a mortgage. Plus, if there's a certain amount you're hoping to borrow, a preapproval offers a reality check on whether a loan of that size would be an option for you. 

Crucially, getting preapproved improves your odds of getting a mortgage application approved quickly — it can cut the timeline down by about a month. Preapproval gives a lender a head start on examining your finances and screens for red flags in your application that could cause delays if discovered later.

Get home loan estimates

In this step, which usually takes place after you've found the home you want to buy, you reach out to at least a few different lenders to explore different home loans

You start a loan application with each lender by providing your name, contact information, Social Security number, and income. You also need to give the address of the home you've chosen, how much you're paying for it, and how much you want to borrow.

Each lender then gives you a loan estimate that specifies the interest rate, dollar amount, and other characteristics of the loan they're offering. Getting an estimate does not mean you have to move ahead with the application for that loan. In fact, the estimate also doesn't guarantee that you'll ultimately be approved for a loan — you'll need to submit a lot more information about your finances before that can happen. But an estimate does let you know all the important features of a mortgage so you can compare it with other loans.

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Complete a loan application

After you get a loan estimate, you have 10 days to let the lender know that you want to submit an application for the loan. If you get back to a lender after that time is up, the estimate may not be good any more and the lender might give you an updated estimate with different terms. So when you see an estimate you like, don't delay!

To get the ball rolling, contact your lender and tell them you want to continue with the application. Make sure to confirm which loan estimate you're responding to, especially if you got a couple different estimates from the same lender.

You'll probably be charged an application fee of a few hundred dollars at this point, and you'll be asked to provide several financial documents to support your application. These generally include copies of your federal income tax returns and W-2s from the last two years, your most recent pay stubs, and bank account statements from the last two months. You'll need to provide proof of where you got the money for your down payment. And if you're self-employed, you'll likely share additional documents demonstrating that your business has enough steady revenue that you could pay back a loan.

Your lender might require some additional information or ask you questions about paperwork you've already filled out, so expect to go through a few rounds of documentation requests before your lender decides whether to approve you.

Consider locking your rate

A rate lock is a promise that you can borrow at the offered rate (possibly including points, which are fees you pay the lender at closing in order to get a certain interest rate) as long as you close on your loan within a certain period of time — say, 30 or 60 days. You can check the first page of your loan estimate to see if your rate is locked.

If your lender doesn't automatically lock in your rate, you may want to ask about getting a rate lock. That way, if it's a few weeks before you finalize your loan, you don't need to worry that interest rates might go up in that time frame and that your loan will end up being a lot more expensive than you planned for. Having a rate lock in place can make the days before closing less stressful.

However, lenders sometimes charge fees to lock your rate, or to extend a rate lock if you go past the first deadline they set. And if your rate is locked and interest rates fall before your closing, you might be stuck at the original, higher rate — or you might have to pay another fee to snag the newer rate. So it's best to learn about your lender's specific policies and weigh the costs and benefits before deciding to lock in a rate.

Get an appraisal and an inspection

Your lender will typically require the property you're buying to be appraised. This verifies how much it's worth and reassures the lender that they aren't lending you more than the home's value. Your lender hires the appraiser, but you pay the fee. You then get a copy of the appraiser's findings at least three days before closing.

If you're applying for an FHA loan, a USDA loan, or a VA loan, the appraisal also confirms that the property meets the standards required by those programs.

It's also best to get a home inspection to make sure the home is in good shape. While the appraisal is for your lender's benefit, a home inspection is meant to alert you to problems with the property that you might not be aware of, like things that need to be repaired.

Deal with any issues that arise

You've probably got your fingers crossed that you can coast to closing without a hitch. And in the best case scenario, no roadblocks stand in your way. But it's also possible that you'll encounter one or more of these potential, and common, setbacks:

  • You're missing documentation, or you need to provide more details. If you submitted incomplete paperwork, or if your lender has further questions about the information you gave them, they'll ask you to continue working on the application. And if some time has gone by since you first started applying, the pay stubs or bank statements you submitted might not be current anymore and might need to be replaced by more recent ones. 
  • The home's appraised value was lower than you expected. If this happens, you might not be able to borrow as much as you wanted to, and you might need to make a larger down payment. Other options are to negotiate with the seller for a lower price or to ask for another appraisal and hope its findings are in your favor. Or, you could back out of the purchase, although you might have to pay a penalty to do this depending on your state's laws and whether your offer had an appraisal contingency.
  • The appraisal revealed flaws in the home. Your lender might tell you to fix any significant problems with the home before closing or to deposit enough money to cover the repairs. In this case, you can either comply, try to convince the seller to help you out with the costs, or withdraw your offer. 
  • Your rate lock expired. You could lose your rate lock because you're still negotiating with the seller, because there was a delay in getting an appraisal or inspection, or for many other reasons. Unless the lender lets you pay a fee to extend the lock, you'll have to decide whether you still want the loan at the new interest rate.
  • Your lender changed your loan estimate. A rate lock expiration or any surprises that come up in your appraisal or in checking over your application can lead to an updated loan estimate. You might also receive a new estimate if you decide to change the size of your down payment or another feature of your loan. If this happens, it's up to you whether you want to accept the new terms of the loan or start over with another lender. 

The best way to handle any bumps in the road is to stay in close contact with your lender and respond as soon as they need you to take action. If you ignore your lender's messages, it's more likely that problems will pile up and your closing will be pushed back.

Receive a notification that you're clear to close

Once you've done everything your lender requires and they've approved your application, they'll tell you that you are "clear to close." This means that you're ready to schedule closing. You'll want to pick a time that works for you, the lender's representative, and the seller, as well as anybody else who's going to be at closing, like real estate agents, attorneys, or an escrow agent. 

Get ready for closing

You still have a few tasks left to complete before the big day. First, you'll need to select a homeowner's insurance policy — your lender will probably ask to see proof that you've obtained insurance before you can close on the loan. This is also the time to look for providers of title insurance and other closing services. While your lender can always refer you to some providers, you may be able to save money by comparing quotes yourself.

It's smart to walk through the home one more time at this point just to make sure everything still looks good. This is standard practice, and it's usually scheduled by your real estate agent.

Your lender will give you a closing disclosure with information about the loan you're going to take out. Read it closely to check that there aren't any mistakes and that the interest rate, monthly payment, and other details match what you were told in your loan estimate. If anything isn't clear, ask your lender to go over the document with you and help you understand it.

You should also get a cashier's check or set up a wire transfer so that you're ready to make your down payment and pay closing costs.

Close on your loan and your home

You've made it to the final step! It's now time to close. You'll likely close on the loan and on your home purchase at the same meeting. You'll typically be asked to show your photo ID first. Then you'll sign documents, make your down payment, and pay closing costs. 

Once everything is in order, you get the keys to the property. You'll walk away with a closing packet containing essential documents such as your closing disclosure and the deed to your new home.

It may seem like applying for and closing on a mortgage is a lengthy process, and it's true that going through all these steps often takes at least a few weeks. But since the home loan you choose will have a big effect on your finances well into the future, it makes sense to take your time and get everything right.

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