You’ve found the perfect home, made an offer, completed all the paperwork with your lender, and you receive the exciting news: you’re “clear to close.” For many homeowners, it’s the news they’ve been waiting for: the finish line to a long and sometimes arduous process. However, a clear to close is not the finish line. Unexpected inquiries or activity on your credit report can cause your mortgage to be denied, even up to the day of closing. Nothing is final until you and your lender sign on the dotted line.
Why do mortgage denials happen after initial approval, and how can you be sure it doesn’t happen to you?
Understanding Clear to Close
The clear to close is one of the last steps in the mortgage lending process.
When you first contact a lender, you’ll be pre-qualified based on a few basic questions. This process generally doesn’t take more than a day or two, but it’s the first step in the lending process. Think of the pre-qualification as an estimate of what you can afford.
Next comes a pre-approval, a more detailed assessment of your financial position and liabilities. The pre-approval usually allows buyers to make an offer on a home. While many people tend to use the terms “pre-qualified” and “pre-approved” interchangeably, there are distinct differences between the two. If you have been pre-qualified, but not yet pre-approved, the sellers probably will not entertain your offer. The pre-approval process is integral to making an offer on a home. This process can take several days to weeks, so if you’re considering buying a new home, it’s best to contact a lender and get the process started soon.
Once the offer is accepted, your mortgage application moves to the underwriting process, after which the lender agrees to loan you the money. During this step, the lender determines the risk level of your mortgage. In essence, the lender must determine that you are a solid candidate for a loan. They’ll take into account your financial position, debt, and past financial history. Once they have determined that you are indeed creditworthy – and you’ll therefore repay the loan – they will move to the next step.
Clear to Close
Finally, once underwriting is complete and all relevant forms and conditions are completed, your loan is “clear to close.” Now, you can schedule your closing date.
Although clear to close is nearly the last step in the process, it isn’t quite the end. Most financial institutions will conduct another credit pull a few days before closing to ensure there haven’t been any significant changes to your credit report. If the lender sees significant changes in your credit report, your loan could be denied, your closing delayed or canceled, and you’ll have to start the entire process over again (maybe even finding a different home). It is possible to be denied after clear to close.
Prevent Being Denied After Clear to Close
If you want to prevent your loan from being denied before closing, be very conservative with your spending between the time you apply for a loan and the time you close. The lender will monitor your spending and your credit history up to the day of closing.
Moving into a new house is exciting. It might be tempting to purchase everything you need for your new space: new furniture, appliances, or that large television you’ve been eyeing. Don’t do it – at least not before closing. If you apply for financing for these items, your credit score will be affected. Even small fluctuations in your credit score can have a significant impact on your mortgage loan acceptance.
If you’re cleared to close, follow these tips to keep your closing day on track:
- Make all your payments on time. Missing payments can damage your credit score, and potentially impact your loan approval.
- Stick with your job. Do not change or leave a job prior to closing. Changes in employment history will raise a red flag for your lender and could lead to delays or cancellations in your closing.
- Wait on major purchases. Even if the local home improvement store is offering low-interest rates and high credit limits, resist the temptation to apply for financing. Even a small loan can derail the approval of your mortgage. Save the spending for after closing day.
- Do not open new bank accounts or close old accounts. If you must modify an existing account, contact your lender and ask for their advice.
If you’re borrowing from a 401k or other investment account to pay closing costs or a down payment, be sure to talk with your lender ahead of time. Large deposits to your bank accounts could delay closing.
Purchasing a home is an exciting experience. If you’re mindful of your spending habits, you’re less likely to be denied after clear to close. Congratulations on your new home!