‘Approval’ in the mortgage and real estate industries is a term thrown around sometimes a bit too regularly. It’s the stage of a loan application where the terms of the application and submitted documentation meet the requirements to take the loan to its final state, referred to as ‘funding.’
It’s the stage where every loan applicant wants to get to because it one step closer to moving into their new home. There’s a preapproval and then there’s a final approval. The preapproval is a stage where the homebuyers have submitted and application, provided some documentation and have given the lender authorization to run a credit report. The lender then reviews this information before moving the application to the next phase. Many however aren’t familiar with how loan applications today are in fact reviewed and approved.
The first stage might be called a prequalification where the loan officer reviews the loan application and, based upon the information provided, deems the applicants can qualify for a particular loan amount. Yet the prequalification is only a temporary stop, as this only gives the lender an idea that there is an ultimate approval possible. The initial application is digitized or retrieved online and ran through and automated underwriting system, or AUS. The AUS quickly reviews the electronic application and provides an almost immediate response. Yet the AUS cannot issue an approval. We’re not there yet.
The AUS says that based upon the information provided the application meets the loan guidelines. The AUS will also list needed items to complete the approval process. Items such as updated paystubs and bank statements, for example. Still, though, we’re not at the approval stage. The loan file still needs to be reviewed by the Underwriter. The underwriter is the individual within the mortgage company that makes the determination that what the AUS needs is included with the package. This really is the first time a person is in the evaluation stage heading toward an approval.
For example, if the AUS states that since the applicant is self-employed, there might be a year-to-date profit and loss statement needed. For those with a good-sized down payment and high credit scores, maybe the AUS will return a decision requiring very little documentation in order to get the full approval stage. Whatever the requirements, it’s the underwriter that really, really approves your loan.
But hold on, we’re still not there. Loan papers will have to be created and sent to the settlement agent where the buyers sign all required documents. Once the papers have been signed, they’re returned to the lender for one, final review. This review makes sure the settlement agent followed the ‘lender’s instructions’ to the letter and if so, this is a final approval and funds can be released to finance the new mortgage. Lenders refer to this final stage as ‘funding.’
There are multiple stages but the one most sought after is the loan approval. Be careful when your loan officer calls you up and says you’re approved if the loan has yet to make it to the underwriter’s desk. If it has and all required documentation has been reviewed an approved. The golden stage has indeed arrived: Approval.
