You’ve filled out numerous forms, double-checked documents and spent time talking with your lender, and you’re finally told that you’re “cleared to close.” This phrase signals that the finish line is in sight, although you’re not quite there yet.
Here’s what clear to close means when you apply for a mortgage.
[See: Best Low- and No-Down-Payment Mortgages]
What Does Clear to Close Mean?
Clear to close means that your lender is giving you the green light to schedule closing.
To reach this step, you must provide all the information and documents your lender requires to approve your loan. When the underwriters find that everything in your loan application checks out, and they have no more questions for you, you can be cleared to close.
What Conditions Do You Have to Meet to Be Cleared to Close?
Before you’re cleared to close, your lender might issue a conditional approval. This tells you that your application looks good so far, and that you appear to meet the lender’s requirements. However, you still need to finalize your loan approval, and that means taking a few more steps.
“When a conditional approval is issued, it’s based upon the representations that have been made. They think that they’ll be able to approve the loan, but it’s still subject to all that backup,” says Mercedes Diego, partner at Cohn Lifland Pearlman Herrmann & Knopf LLP.
The conditions can range from explaining potential problems in your credit history or bank statements to completing routine paperwork or waiting for third-party service providers.
“It could be simple things like all we need is the title work from the title company, your insurance and the appraisal, or it can be your bank statement is not the most recent one so we need an updated bank statement,” says Paul Richman, senior loan originator at Choice Mortgage Group.
Once those conditions are met, you’re given full approval — also known as final approval — of your loan. This is when you receive the notice that you’re cleared to close.
The conditions you meet are called prior-to-document conditions. Once you satisfy these conditions, the lender can draw up the closing loan documents.
Following clear to close, there are still some additional conditions you need to meet before the lender can disburse the loan funds. Prior-to-funding conditions include paying your down payment and closing costs, signing the mortgage documents and passing final checks of your employment status and credit to make sure nothing has changed.
[Read: Best Mortgage Lenders]
What Happens After Clear to Close
At least three business days before closing, your lender must give you the closing disclosure, which is a standardized five-page document that sets out the details of your loan. The closing disclosure states the amount you’re borrowing, the interest rate and how much money you need to pay at closing. It also tells you the loan term and the type of loan — conventional, FHA, VA or other. And it lets you know what fees you’ll be charged for late payments and whether the lender has set up an escrow account to incorporate your insurance and property tax payments into your monthly mortgage bill.
The closing disclosure also lists the loan costs and summarizes the whole transaction, and it’s crucial that you review it before closing your loan. Compare the information in your closing disclosure to your most recent loan estimate. If you see any discrepancies, contact your lender to find out what has changed and why.
If the transaction is a purchase, you’ll schedule a final walkthrough of the property and plan to close shortly after that. This allows you to confirm that the seller has made any repairs that were agreed on and that nothing is amiss.
“Let’s say the seller left some old heavy furniture there that was supposed to be removed, because usually the seller has to deliver the property vacant and broom-clean condition. So if there’s any issues like that, we need to be informed so that we could address it with the seller,” Diego says.
Your lender and title company will be in frequent contact to give you instructions you need for closing. You’ll sign loan documents and pay closing costs with a wire transfer or cashier’s check.
“This is not the time to go on vacation. This is not the time to not have yourself available. There’s going to be a flurry of information,” says April Gleason, chief lending officer at University Credit Union.
Some scammers try to impersonate mortgage and title companies and tell homebuyers to wire closing costs to the scammer’s account. To guard against closing scams, call your lender or title agent at a number you already have on hand to confirm that any new instructions came from them.
[Read: Best FHA Loans.]
Can a Lender Still Deny Your Application Before Closing?
Ideally, final loan approval happens soon after you’re cleared to close, and you get your home loan funded. But in some situations, a lender might deny a loan after giving the clear to close.
One possible reason is that the condition of the property has changed so that it can no longer serve as collateral.
“If a hurricane had damaged the property, then of course the lender is not going to be able to close on a loan on damaged property,” Richman says.
Lenders often perform a final quality assurance check before funding a mortgage. That means refreshing your credit report and reverifying your employment. If you’re laid off or switch jobs shortly before closing, the loan could be denied. The discovery of any fraudulent statements in your application would also result in a denial.
Another reason a loan would not be approved after the clear to close is if a borrower loses a co-signer or if the borrower gets divorced and is no longer buying a home with a spouse. And of course, the death of a borrower would mean the lender won’t approve the loan.
A significant change in your bank account balances in the days before closing could prompt a denial or delay. Actions that affect your credit score, such as missing a payment on a debt, taking out a new loan or co-signing a loan could cause a denial, too.
Making large purchases that change your debt levels can also cause a lender to deny your loan. For example, if you start shopping for furniture for your new home and put those purchases on your credit card, your debt-to-income ratio might increase enough that you no longer qualify for the mortgage.
Even if last-minute spending doesn’t prompt the lender to deny your loan outright, your closing might have to be postponed as your lender inquires about the change in your finances and lets you know the steps you have to take to get back on track to close your loan.
“I’ve had TVs that have had to be returned before closing,” Gleason says.
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What Happens When You’re Clear to Close originally appeared on usnews.com
