From the initial application to final funding, there are multiple stages a loan application goes through. Some stages seem somewhat benign while others are certainly more important. These stages are followed in order for every loan application. The loan is initially submitted either online or in person. The file is initially reviewed by the loan processor or loan officer. If there is any information that is missing and needed, the applicant will be contacted. The loan file is then documented, first by the individual applicant and then by the lender.
When a loan is submitted and there is enough information included, the application will be run through an automated underwriting system, or AUS. The digital application will be reviewed and within moments a decision is returned. When a loan is “eligible” it will also list certain items, the lender needs to make sure are included with the file. This stage is considered a “conditional” approval and the items listed for collection are called loan conditions. Again, some are rather tame while others are not.
For example, all credit documents within a credit report must be no older than 30 days. When the lender is preparing to order loan documents and it’s been 45 days since the initial credit report was ordered, an updated credit report will be needed. This is a loan condition. To address this condition the lender simply orders an updated credit report. Another example might be a paycheck stub that needs to be updated. Loan approvals ask that the most recent pay stubs covering a 30 day period be included. If another paycheck stub has been issued in addition to the initial ones, a new paycheck stub will be requested.
There are two types of conditions. Prior to Document, or prior to doc, and Prior to Funding or, or prior to close. Prior to document conditions are the ones that need the most attention because if they’re not met loan documents cannot be printed and delivered to the settlement agent. Prior to funding conditions are the less important ones but still need to be addressed. An updated pay stub is a common prior to fund condition. Loan papers may still be delivered for signature but until the updated pay stub is received by the lender, the loan will not fund.
Let’s take a look at a prior to document condition. Someone submits an application and includes bank statements. Bank statements are needed to both verify there are sufficient funds to close on the transaction as well as verify income and deposits. An applicant gets paid on the 1st and the 15th. The bank statements should show deposits from the employer on those dates. But one of the bank statements shows a deposit of $4,000 on the 20th. There is no source for the deposit because it didn’t come from the applicant’s employer. If this additional $4,000 is needed in order to close on the purchase, the lender wants to know where the funds came from before closing documents can be delivered.
If the additional funds are a financial gift from a family member, an additional condition will be to verify the source of funds and provide a paper trail of the funds from the donor to the recipient. If this condition is not met, loan papers will not be delivered. An appraisal will also be listed as a requirement with a minimum value.
Sometimes when a lender is asking for additional information after the loan is submitted and documented, it can cause a bit of unease for the applicant. But there’s rarely any cause for alarm. All mortgage have loan conditions, every single one of them. Even someone with debt ratios in the single digits, a credit score in the low 800s and a 25 percent down payment will receive a conditional approval.