Different Stages of Loan Approval…Really?

Loan officers are taught very early on to be careful about using the term “approval.” Yet there are indeed various stages of the word that should be used with certain qualifiers when loan officers speak with their clients. It might very well surprise many to find out that no, “approval” doesn’t automatically mean, “Here are the keys to your house.” Experienced loan officers know how to properly explain how and when a loan is ultimately approved. Approved as in, “There’s nothing else that needs to be done and here are the keys to your house!”

The initial stage of an approval involves submitting the loan electronically to an automated underwriting system for a decision. The most common such system is Fannie Mae’s Desktop Underwriter, or DU. Freddie Mac also has its own system called Loan Prospector, or LP. When a borrower submits a loan application it is converted into a digital file and submitted to one of the various online approval systems. The loan is submitted and a decision returned. This is the earliest stage of an approval and the “findings” tell the lender what needs to be provided in order for the loan to be sold in the secondary market. The findings will provide a list of items needed and the lender then retrieves the requested items before moving forward.

When a loan officer first submits a loan application for an initial approval many times the file isn’t completely documented. Whether it’s gathering another pay check stub or ordering and including the property appraisal or waiting on title work, what’s important early on is getting the initial approval. But this is where inexperienced loan officers get themselves in trouble. When a loan officer first receives an automated decision it’s tempting to tell the borrower we have an approval. But while that may partly be true what is true is there can be an approval if we provide the additional documentation the automated system is asking for. At this stage, a buyer can receive a preapproval letter and start shopping for a home.

But what about the additional documentation still needed? This stage is commonly referred to as “approved with conditions.” This means the loan is conditionally approved but there are still some things needed before a final close. Borrowers can sometimes misinterpret this stage and think they’re fully approved and all they have to do is find a place to buy. The loan officer however needs to make sure the borrowers are clear that while they’re in a particular stage there are still some things that need to be done.

For example, all credit documents within a loan application need to be within a 30 day window. If someone obtains a preapproval letter and takes a few weeks to find their perfect home, suddenly those pay check stubs are out of date. The findings will clearly state to provide the most recent copies of pay check stubs covering a 30 day period. Even if the borrowers initially submitted recent pay check stubs they’re going to be out of date by the time a home is under contract. This then means the borrowers must provide new pay check stubs and listed as such as a loan condition.

But here we’re also in perhaps a confusing stage. A loan can be conditionally approved but with “Prior to Close” conditions and “Prior to Fund” conditions. A Prior to Close, or PTC means there is something that needs to be settled before loan papers can be delivered to the settlement agent. Typically this means there is something the lender needs more information about before moving onto the next stage and printing closing documents. Maybe the lender needs one more comparable sale listed on the appraisal report or there is a question about a recent deposit. Once all the PTD conditions have been satisfied, the loan moves to a “Clear to Close” stage and loan papers are delivered to the settlement agent. Finally, there can be minor conditions that can be settled at the closing table but the loan won’t be official, or funded, until any funding conditions are satisfied. Common conditions that hold up final funding might be a new pay check stub for example. Once all conditions have been met, the loan is funded and recorded.


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