Most of us have been there.
You’re settled into your seat, eagerly anticipating takeoff for a long-delayed and badly-needed vacation.
You get a big smile on your face as the flight attendant announces “The pilot tells me we’ve been cleared for takeoff.”
And then the plane just sits there, for what seems like days. The delay may really only be 30 seconds, perhaps a minute or two, but it can seem like an eternity. If the plane was cleared for takeoff, what’s the problem? Is there something wrong?
Usually, it’s no big deal. “Cleared for takeoff” only means the pilot can taxi onto the runway and hit the throttle whenever they’re ready.
The same patience is required when you’re buying a house. Even when you successfully navigate one stage in the process and get good news from your realtor or mortgage lender, there’s usually another hurdle to clear.
So when your lender tells you that you’re “clear to close,” you’re right to be happy and excited.
But it doesn’t mean that you can sign all of the paperwork and move into your new home tomorrow. It simply means that you’re closer than ever.
Here’s what “clear to close” really means, and what still has to happen before the home buying ordeal is over.
The Mortgage Lending Process
Nearly three-quarters of all buyers need to take out a mortgage in order to purchase a home. For most Americans, that means their prospective lender essentially has veto power over whether they’re able to close a deal for their new house.
These days, it’s almost imperative that potential buyers obtain a mortgage pre-approval before shopping for a home. Realtors and sellers want assurances that buyers would theoretically be able to afford a property, before showing it to them.
However, a pre-approval isn’t a guarantee. Pre-approval is generally based on an applicant’s credit report, proof of income, employment verification, and documentation of assets (showing they have money for the down payment). Once the mortgage lender verifies all of the information, they issue a letter saying that it appears the applicant is eligible for a loan up to a certain amount.
That’s good enough for realtors and sellers, but as the name says, a pre-approval is only a preliminary approval. After a buyer has agreed to purchase a home, the lender has a lot of work to do before the pre-approval becomes a firm one.
And as anyone who’s obtained a mortgage knows, that process is detailed and lengthy.
- The lender begins “underwriting” the loan. Any verifications that weren’t performed during pre-approval will be conducted; some may be done a second time. Tax returns and bank statements will often be requested, and the underwriters will run a much more comprehensive analysis of the buyer’s financial situation. They’ll calculate numbers like the borrower’s debt-to-income ratio, and ask for explanations of any glitches or problems on the buyer’s credit report. The loan won’t be issued if the lender isn’t fully satisfied that the buyer will be able to afford their payments.
- The lender orders an appraisal of the home, because they certainly don’t want to lend more money than the house is worth. (The buyer ends up paying for the appraisal, as part of their closing costs.)
- The lender waits to receive a copy of the home inspection report, because they certainly don’t want to lend money for a house with significant defects. (The buyer pays for the inspection.)
- The lender receives the results of a title search and proof that the buyer has taken out title insurance, because they certainly don’t want to lend money for a house whose ownership is legally in question. (The buyer pays for those too, as part of the closing costs.)
- If the lender still has questions they’ll go back and forth with the borrower as many times as necessary, asking questions or requesting more documents, until all outstanding issues are resolved.
Underwriting can take anywhere from a few days to several weeks, depending on the lender’s workload and how complicated the borrower’s financial situation might be. Finally, they’ll deliver a thumbs-up or thumbs-down decision on the application.
Bottom Line: Potential buyers who aren’t paying cash for a house normally must obtain a mortgage pre-approval before realtors and sellers will show them homes. After their offer to purchase a house is accepted, though, the lender will conduct a much deeper and lengthier underwriting process to be sure the borrower can afford the loan they’re applying for. The lender will also want to see appraisal, home inspection and title reports before deciding whether to approve the mortgage loan.
You’re Clear to Close
Statistics show that about 10% of mortgage applications are denied – so 90% of applicants can breathe a sigh of relief. They’ve been approved for a mortgage.
At this point, the lender tells the borrower and their realtor that they’re “clear to close.” In other words, the money for the home loan should be available when everyone’s ready to sign the papers that transfer ownership of the house.
You’ll notice we used a very specific word in that last paragraph: the money for the home loan should be available.
That’s because, in a home sale, nothing is final until the moment that the last document has been signed. And even when the buyer is clear to close, the mortgage lender can yank the financial rug out from under them at the last minute.
Bottom Line: “Clear to Close” means that the lender’s underwriting process has been completed, everything is in order, and the mortgage loan has been approved. Even so, there can still be a last-minute financial glitch that endangers the closing.
What Happens After a Buyer is Clear to Close?
In most cases, everything moves smoothly after the mortgage lender gives the green light.
The buyer receives what’s called a closing disclosure from the lender, which itemizes all of the terms of the loan. This document will itemize complete details on estimated monthly payments and loan fees, provide a full breakdown of closing costs and the amount of cash that will be needed at the closing, and spell out any terms and conditions of the mortgage loan.
After that there’s a three-day waiting period, during which the buyer must sign the disclosure form to signal their acceptance of the loan and its conditions. After the waiting period is over, the buyer can do their final walkthrough, and the actual closing can occur as soon as all parties are available.
There’s one more potential problem, though. It doesn’t happen often, but it can put a swift halt to the closing.
Mortgage loans in America average more than $350,000. Needless to say, that’s a lot of money – even to a bank that writes mortgages every day. So lenders don’t stop working on applications after they’ve told the borrower that they’re clear to close. They take one last look at the file, to be absolutely sure that the interest they’ll earn on the loan is worth the risk they’re taking.
More specifically, they check the applicant’s credit and job status one more time.
If the borrower has taken out a car loan after the lender checked their credit, for example, they may have accumulated more debt than the lender’s guidelines allow. If they’ve quit or lost their job after their employment status was verified, they may no longer have enough income to make their mortgage payments.
Usually everything checks out fine and the closing proceeds as scheduled. But a significant change in the borrower’s financial situation can blow up the process. The bank can actually step in and withdraw the mortgage loan offer at any point after initially declaring it clear to close.
What happens next?
In some cases, the closing may just be delayed while the borrower clears up any issues with the lender. If the problem is a job change, though, there’s usually a 90-day waiting period (to show that the applicant will be staying at their new position long-term) before the mortgage can be re-approved – even if they’re being paid more at the new job. It’s unlikely the seller will be willing to wait another 90 days to close.
Otherwise, the buyer may try to find another funding source for the home purchase, if the seller agrees to wait the extra weeks it may take. Much more often, however, the loan is simply denied and the sale falls through.
Bottom Line: Mortgage lenders are extra-careful before giving final approval to loans for hundreds of thousands of dollars. Even after they’ve declared a mortgage “clear to close” they can step in and withdraw the offer. That doesn’t happen often, but usually occurs when the borrower has changed jobs or made a big purchase after the underwriters have checked their credit reports and verified their employment.
How to Prevent Problems with Your Mortgage Application
You probably already know the steps you need to take in order to have the best chance of being approved for a mortgage:
- Keep your credit score high; pay bills on time, pay down debt, and don’t apply for new credit in the months before you’re going to apply for a mortgage.
- Check your credit report regularly; immediately correct any errors you spot.
- Save more than you need for the down payment; lenders want to see that you can also afford the closing costs and still have enough left for maintenance and repairs.
- Don’t change jobs in the months before you want to buy a house.
- Understand how much house you’ll be able to afford; applying for a mortgage (or even a pre-approval) that’s out of your realistic price range will mean a quick denial.
But once you’re cleared to close, how do you make sure that the bank won’t withdraw their mortgage approval at the last minute? You simply have to be smart.
We’ve already said it, but we’ll say it again: even if you’re offered a position that pays more money, do not change jobs once you’ve filed your mortgage application. The lender won’t care that you’ll be earning more, since there’s no guarantee that you’ll be able to keep the job. A job switch during the process will almost automatically derail or destroy your “clear to close” status.
Once you’ve applied for a mortgage, do not buy anything out of the ordinary. Definitely do not make a major purchase. Absolutely do not buy anything big on credit. Don’t even apply for a new credit card. Anything you do that negatively affects your credit or your debt will put you at risk of having your mortgage offer withdrawn, even if you’ve already been cleared to close.
The notification that you’re “clear to close” is a huge step forward toward owning your new home. Don’t take anything for granted, though, and don’t be foolish; just bide your time, and wait to make any other financial decisions until you have the keys and have moved in.
Bottom Line: Waiting for a mortgage approval can be nerve-wracking. Common-sense decisions, though, can improve your chances – and ensure that you avoid a dreaded mortgage denial after your loan has been cleared to close.
Clear To Close FAQ
Q: How many loan approvals are withdrawn after a transaction has been cleared to close?
A: Very few; some realtors will tell you that they’ve never seen it happen. It shouldn’t happen, either, as long as the buyer is smart about their financial decisions and doesn’t do anything to derail the process at the last minute.
Q: Who will tell me that my home purchase is clear to close?
A: Your mortgage banker or broker. You will be in touch with them throughout the underwriting process, because they’ll almost certainly have at least one or two questions for you before your loan is approved. Eventually you’ll get the call or email with the good news.
Q: How long does it take before the sale is clear to close?
A: It all depends on how quickly your lender works, how many other loans they’re processing at the same time, and how complicated your application is. Some lenders use an underwriting process that’s mostly automated, and those approvals usually come more quickly. Those that are manually underwritten will take longer – sometimes requiring as long as a month, if your financial situation is making mortgage approval or denial a close call.