As you progress through the home-buying process, you will receive letters from lenders at significant steps along the way. A pre-qualification letter gives you a general idea of the size of mortgage you can acquire, while a pre-approval letter means that the lender has done a more thorough review of your finances and determined that you qualify for a loan at a particular mortgage level. However, you are looking for one letter more than the rest — the "clear to close" letter.
The clear to close letter is essentially the letter of final approval. It means that any conditions that had to be met for the loan to move forward have been met, whether those conditions are from the buyer's side or the lender's side. This letter clears the way for the closing process to begin.
A loan commitment letter is generally not the same thing as a clear to close letter. The loan commitment letter contains detailed information about the loan, but also typically contains conditions that must be met before the loan will reach final approval. Examples of major conditions include a full appraisal, proper proof of insurance, or verification of a clean title establishing ownership; minor examples usually revolve around additional documents for clarification (for example, verification of employment).
Once all of the loan conditions are met, a clear to close letter is issued. At that point, you can schedule a closing and enter the final stage of your home-buying experience.
It may be easier to think of the interaction between the buyer and the lender in these four general stages:
- Prequalification: Based on information that you provide with a cursory check, a lender assesses the level of loan for which you qualify.
- Pre-approval: With a mortgage application and a more detailed assessment of your financial situation, a bank has agreed that you qualify for a certain dollar value of loan. With pre-approval, real estate agents consider you a legitimate buyer. However, the underwriting of the loan has not yet taken place.
- Loan Commitment: The bank has underwritten your loan and agrees to lend you money assuming that all of the conditions outlined in the loan commitment letter are properly addressed.
- Clear to Close: All of the conditions applied in the loan commitment and other relevant documents have been met and the lender has fully approved your loan.
If you are not sure of your current status with the lender or the meaning of any letter that you receive from them, make sure that you clarify the situation with your loan officer. The real estate agent should be able to help you translate the relevant documents, and if you have an attorney, he or she should also be able to assist.
Keep in mind that other factors can still scuttle your buying experience after the clear to close has been issued, based on any conditions that change between the clear to close letter and the actual closing. For example, if you make other large purchases, forget to pay a bill, or open new accounts during that sensitive period, your level of repayment risk changes from the original underwriting and the bank may reassess the situation. (Of course, the seller can also introduce curveballs at or near closing).
The clear to close letter represents passing one of the major hurdles, but it isn't the last one. Getting all the way through the subsequent closing process can test your patience, but hang in there. Keep focused on the upcoming closing proceedings and soon enough you will have new house keys in your pocket and a smile on your face.
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