Clear to Close: What Does It Mean?
Clear to Close: What Does It Mean?
Did you get the news from your lender that you're clear to close and confused about what that means? Follow along as we discuss what clear to close means, what to expect, and what happens after.
Buying a home is a lengthy process with many different steps and processes that most new home buyers don't know of or aren't aware of. One term most aren't aware of is "Clear to Close." You'll hear this term from your lender in the mortgage process, but what does it mean?
In this guide, we're going to discuss what exactly clear to close means, how you get your loan cleared to close, and what to expect after you are cleared to close. Let's get started!
Clear to Close
The simple definition of the term clear to close in a real estate transaction means that you have met the requirements and conditions to close on your mortgage. This means that your lender has reviewed and inspected all of the required documents and verified that you meet the expectations of the type and amount of mortgage you requested. Clear to close is not quite a final approval, but you're almost there. There are a few more steps you need to take, and we're going to discuss them!
What Happens Before Clear to Close
When obtaining a mortgage, you'll go through what is called underwriting. Underwriting is the process by which your lender verifies your income, assets, debt, and property details in order to issue final approval on your loan application. Simply put, an underwriter helps the mortgage lender decide whether or not you'll get approval on your loan and works with you to ensure you submit all of your paperwork in a timely manner. The underwriter also assesses how much risk a lender will take on if they decide to give you a loan. An underwriter can:
Look into your credit history
- Underwriters pull your credit and do a hard search. They look at your overall credit score and search for any late payments, bankruptcies, overuse of credit, length of credit, and more.
Deny your loan
- If you don't qualify, a mortgage underwriter can deny your loan.
Order an appraisal
- Appraisals are used to verify that the amount that the lender offers for the home matches up with the home's actual value.
Verify income and employment
- During underwriting, you must show proof of income and employment.
Look into your debt-to-income ratio (DTI)
- An underwriter will look at your DTI to ensure that you have more than enough cash flow to cover your monthly mortgage payments, taxes, and insurance. DTI compares how much you owe each month to how much your earn. It is calculated by taking all of your monthly debt and dividing it by your gross monthly income. Your gross monthly income is the amount you earn every month before taxes and other deductions.
Verify your down payment and savings
- Underwriters also want to make sure that you have enough savings to supplement your income or to use as a down payment at closing.
How to Get Your Loan Cleared to Close
Getting your loan cleared to close a transaction is a sign of relief, but there are many steps involved in getting there. Missing even one step could be detrimental to the process and could cause your loan application to be denied. Clear to close means that all of your documents have been approved by the underwriter, and you can move forward with the documents to close on the loan. You'll want to take the following steps to have the greatest chance of reaching clear to close:
Before your application can be fully approved, you must provide the underwriter with various documents. First, they'll want to verify your income and assets, such as bank statements. Second, they'll want to determine your debt-to-income ratio, where you will need to provide them with your current debt and monthly expenses. Last, they'll want written permission to access and pull your credit score.
Make an offer
Making an offer on a home is a big deal. It means you've found the home that fits all your wants and needs and is the best decision for you. Before you can close on a home, the seller will need to accept your offer on the property. By the time you're making an offer, you should be preapproved by your lender.
Appraisal and inspection
Getting an appraisal and an inspection done are two of the most critical steps in the home-buying process. Most buyers use their due diligence period to do so to ensure that if something goes wrong, they are able to get their earnest money back. An appraisal is done by a third-party licensed appraiser and determines the property's fair market value, which assures both you and your lender that the amount you'll pay for the home aligns with its actual worth. Inspections will help you, the buyer, identify any issues with a home before your purchase it.
As previously stated, the underwriting process is essential and helps lenders approve your loan. Underwriters will look at your income, credit history, DTI, assets, and the amount and type of loan you've requested.
Working through each of the above steps in a timely manner will improve your chances of being cleared to close. You will want to prepare all necessary documents in advance, fully complete your mortgage application, and stay in touch with your lender and underwriter in case any problems come up!
What to Expect After Clear to Close
After you are cleared to close, your lender will take the next steps to prepare for closing. This can include scheduling a date and time for your closing and contacting your title company, real estate attorney, and anyone else who plans on attending the closing. The lender is also responsible for preparing the final documents that you will need to sign on your closing day. Here are a few things you will be expected to review or do before closing!
Review the closing disclosure
A closing disclosure is a five-page form that provides final details about your selected mortgage loan. It includes loan terms, your projected monthly payments, and how much you will pay in fees and other costs to get your mortgage (closing costs/prepaid costs). Your lender is required to give you your closing disclosure at least three business days before you close on the mortgage loan. Reviewing your closing disclosure before signing is important to ensure all payments and details are correct.
A final walkthrough is the buyer's opportunity to inspect the house before the official closing. Real estate agents highly recommend doing a final walkthrough to ensure the property is in the same condition you and the seller have agreed upon. This is your time to catch any mistakes or problems that might have occurred after the submission and acceptance of an offer. While final walkthroughs are not required, they are a very important step. After closing, any problems that weren't caught due to skipping a final walkthrough become your responsibility.
The last step in the process, and the most exciting, is to close on your home! During your closing, you will sign many documents, including your closing disclosure, the home title officially transfers to you, and you become the new legal owner of the property. In addition to signing paperwork, the deed will be updated, you will pay your downpayment and closing costs, and the deed will be recorded in your county's registrar of deeds.
How Long After Clear to Close Can You Close
Typically, you can expect to close relatively soon. You should expect at least three days between receiving your closing disclosure and the day you close. If you receive your closing disclosure the same day as clear to close, you could expect to close sooner. However, the closing may take longer if you encounter roadblocks after you are cleared to close or if you find any issues during your final walkthrough.
What Are the Underwriting Guidelines to Become Clear to Close
We briefly discussed underwriting previously, but here is what you can expect. Your mortgage commitment letter will go over the underwriting conditions that need to be met. Lenders will typically request:
- Current bank statements, tax returns, paycheck stubs, and other verification of your income and assets
- A copy of the signed purchase agreement
- Proof that you haven't taken on additional debt
- Documented explanation of any unusual financial circumstances
- A gift letter documenting funds gifted from friends or family
A purchase agreement is a legally binding agreement that governs the purchase of sale of a property. It is made between the buyer and seller and determines the terms of the transaction and the conditions under which the sale will occur.
A gift letter is a statement that ensures your lender that the money that came into your account is a gift and not a loan. The person who gave you the money must write and sign the gift letter as well as provide their personal information.
What is clear to close?
Simply put, clear to close means that you have met all requirements and conditions to close on your mortgage.
Is clear to close the same as final approval?
No. Clear to close only means that the underwriter has cleared your mortgage application to move forward with signing the documents to close, but it is not final approval. There are a few more steps and actions to take before final approval, like an appraisal and inspection.
How long does it take from clear to close to actual closing?
It typically takes three days between the time you receive your closing disclosure and the day you close. However, if problems arise, you may be waiting longer.
Can a lender deny your loan after you are cleared to close?
While it's not likely, it can happen. Rejections are typically caused by serious changes in your financial situation, like taking out another loan at the same time, creating more debt, losing your job, etc.
Do underwriters check your bank statements?
Lenders are only required to check your bank statements when you initially submit your loan application and begin the underwriting process. After that, it is not typical for a lender to check bank statements again before closing.
What happens between underwriting and clear to close?
During this time, the underwriter will be reviewing all of the documents you provided and communicating any outstanding conditions that need to be met.
Clear To Close: What Does It Mean? - Final Thoughts
While clear to close is not a final approval, it's great news in your home-buying process! Simply put, being clear to close means you're in the final steps of securing your loan and closing on your dream home. There are many steps that go into being cleared to close. First, you'll submit all the required documents and paperwork to the underwriter, who will assist the lender in approving your loan. Then, you will review your closing disclosure, do your final walkthrough, and make it to closing day! With all of that said, clear to close is an exciting step in your process, but it does not mean that you've reached the finish line.
If you're currently in the home-buying process and have additional questions, feel free to ask! If you're interested in purchasing a home in the area, we'd be happy to help! Here at Raleigh Realty, we specialize in the home buying and selling process. We have a list of phenomenal agents who can help guide you throughout the mortgage process and help you secure your dream home! Feel free to contact us or visit our website for additional information.
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