While “pre-approval” and “clear to close” may sound similar, they serve distinct purposes and signify different milestones in the mortgage approval process.
Since February is known as the start of the Spring real estate market, many people are likely sprucing up to list their homes for sale and others are getting their ducks in a row to find their dream home and make an offer.
We recently were involved in a closing transaction for a client who was selling his home. The deal fell through because the buyer could not obtain the mortgage.
Our client was upset because this buyer had produced a “pre-approval letter” when they presented the offer. Unfortunately, a pre-approval letter does not necessarily mean that the buyer will get the mortgage and be “clear to close”.
Understanding the disparity between these two stages is essential for prospective buyers and sellers alike, so they can make informed decisions. Let’s delve into each stage to grasp their significance and implications.
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Pre-Approval for a Mortgage
Pre-approval is typically the initial step in the mortgage application process. It involves a thorough assessment of a borrower’s financial background by a lender to determine their eligibility for a home loan. Here’s what pre-approval entails:
- Financial Evaluation: Lenders scrutinize the borrower’s financial documents, including income statements, credit history, debt obligations, and assets. This evaluation helps lenders assess the borrower’s financial stability and ability to repay the loan.
- Pre-Qualification vs. Pre-Approval: It’s crucial to distinguish between pre-qualification and pre-approval. Pre-qualification provides an estimate of how much a borrower might be able to borrow based on self-reported information, whereas pre-approval involves a comprehensive verification process by the lender.
- Conditional Commitment: Upon successful pre-approval, the lender issues a conditional commitment letter, indicating the maximum loan amount for which the borrower qualifies. This letter is contingent upon the property appraisal, satisfactory title search, and other underwriting requirements.
- Advantages: Pre-approval offers several advantages, including a clearer understanding of one’s budget, enhanced negotiating power with sellers, and expedited processing during the subsequent stages of mortgage approval.
Clear to Close
Clear to close represents the final stage in the mortgage approval process, signifying that all conditions and requirements have been met, and the lender is ready to proceed with the loan closing. Here’s what clear to close entails:
- Completion of Underwriting Process: Following pre-approval, the borrower’s file goes thorough underwriting, where the lender verifies all documentation, conducts a property appraisal, and ensures compliance with lending guidelines.
- Resolution of Conditions: Any conditions outlined during the pre-approval stage must be satisfactorily addressed before obtaining clearance to close. These conditions may include additional documentation, explanations for discrepancies, or resolution of outstanding debts.
- Final Approval: Once all conditions are met, the lender issues a final approval and provides a clear to close letter, confirming the borrower’s readiness to proceed with the loan closing.
- Preparation for Closing: With the clear-to-close status, the borrower and the seller can finalize the closing arrangements, including scheduling the closing date, signing the necessary paperwork, and transferring ownership of the property.
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While pre-approval and clear-to-close both signify progress in the mortgage approval process, they serve distinct purposes and occur at different stages:
- Timing: Pre-approval typically occurs early in the home buying process, providing borrowers with an initial assessment of their eligibility, whereas clear to close signifies the final stage, indicating readiness to proceed with the loan closing.
- Contingencies: Pre-approval is conditional upon the satisfactory resolution of specific requirements, while clear to close indicates the removal of all contingencies and confirms the lender’s readiness to finalize the loan.
- Documentation: Pre-approval involves the submission and verification of financial documents, whereas clear to close necessitates the resolution of any outstanding conditions and the finalization of paperwork for closing.
In essence, pre-approval serves as a preliminary assessment of a borrower’s eligibility, while clear to close represents the culmination of the underwriting process and the green light to proceed with closing the loan.
What Should Sellers Do?
- Validity and Credibility: When reviewing offers, pay close attention to the buyer’s pre-approval letter. Ensure that it’s recent, typically within the last 30-60 days, and issued by a reputable lender. Verify the authenticity of the letter to gauge the buyer’s seriousness and financial capability.
- Contingencies and Conditions: Evaluate any contingencies or conditions outlined in the pre-approval letter. These may include specific loan terms, property appraisal requirements, or additional documentation needed for final approval. Understanding these conditions can help anticipate potential delays or challenges in the closing process. The contract itself will include a contingency date by which time the buyer expects to have “clear to close” or an unconditional loan commitment.
- Communication with Buyer: Stay informed about the buyer’s progress towards obtaining clear-to-close status. Regular communication with the buyer’s real estate agent or attorney can provide insights into any issues or obstacles encountered during underwriting.
- Timely Resolution of Contingencies: Encourage the buyer to promptly address any outstanding contingencies or conditions outlined in the pre-approval letter. Delays in resolving these issues can prolong the closing process and impact the sale timeline.
- Flexibility in Closing Timeline: Be flexible regarding the closing timeline to accommodate the buyer’s mortgage approval process. Understand that unforeseen circumstances or underwriting delays may arise, necessitating adjustments to the closing date. But do not agree to extensions of the contingency dates if you have valid concerns about the buyer’s ability to obtain “clear to close” or if the contingency date has already expired.
Hire and Consult with a Real Estate Attorney
- Legal Guidance and Protection: Engage the services of a qualified real estate attorney to review the terms of the contract and provide legal guidance throughout the transaction. An attorney can offer invaluable insights into potential risks, contractual obligations, and negotiation strategies.
- Contractual Compliance: Ensure that the terms of the contract align with your best interests and comply with local real estate laws and regulations. An experienced real estate attorney can help identify any discrepancies or ambiguities in the contract and advocate for your rights as a seller.
Understanding the disparity between pre-approval and clear-to-close is crucial for prospective homebuyers navigating the mortgage approval process. By comprehending the significance of each stage and the requirements associated with them, borrowers can streamline the process, mitigate delays, and achieve their homeownership goals with confidence.
For personalized guidance and expert assistance throughout the mortgage approval journey, having an experienced and knowledgeable real estate agent and attorney is highly recommended.
Joan Reed Wilson Esq. – Managing Partner
Practices in the areas of estate planning, elder law, Medicaid planning, conservatorships, probate and trust administration, and real estate. Admitted to practice in the States of Connecticut and California, she is the President of the CT Chapter of the National Academy of Elder Law Attorneys (NAELA), an active member of the Elder Law Section of the Connecticut Bar Association, accredited with the PLAN of CT for Pooled Trusts, with the Veteran’s Administration to assist clients with obtaining Aid & Attendance benefits for long-term care needs and with the Agency on Aging’s CareLink Network.