Clear To Close

Clear To Close

Gustan Cho Associates

What does clear to close mean? A clear to close is when the mortgage lender have processed the mortgage loan application, has underwritten the mortgage loan, and the mortgage loan applicant has provided all of the conditions requested by the mortgage loan underwriter such as updated bank statements, updated pay check stubs, and a final verification of employment has been confirmed.  Some mortgage lenders have a quality control department that every mortgage application needs to go though prior to a clear to close can be issued.  The quality control department has a quality control mortgage loan underwriter who will review the original mortgage underwriter’ work to make sure there is no mistakes made and that the mortgage loan is sellable to Fannie Mae or Freddie Mac.  Once a clear to close has been issued, the mortgage lender prepares docs and wire the funds and  the mortgage loan can close.  Mortgage loans that are backed by FHA, Federal Housing Administration, require additional items than conventional mortgage loans which we will discuss in the following paragraphs.

FHA Loans

FHA is not a mortgage lender.  HUD, the United States Department of Housing and Urban Development, is the parent of the Federal Housing Administration.  FHA insures mortgage loans originated from FHA approved mortgage lenders in the event a FHA mortgage loan borrower defaults in their loan and the loan goes into foreclosure.  Due to FHA, many mortgage lenders are able to originate mortgage loans which require low down payments as well as originate mortgage loans with borrowers with prior bad credit and higher debt to income ratios.  FHA mortgage lenders need to adhere to the FHA mortgage lending guidelines and must make sure that every FHA mortgage loan application meets the guidelines set by FHA in order for FHA to be able to insure the mortgage loan.

FHA Processing And Underwriting Process

Processing and underwriting a FHA mortgage loan is similar to processing a conventional mortgage loan.  Many home sellers refuse to sell a property to a FHA approved home buyer because they feel that FHA loans are much tougher than conventional mortgage loans especially when it comes to appraisals.  This is not the case.  A home buyer who is FHA approved needs to get an FHA appraisal done on the subject property.  Conventional home buyers need to get a conventional appraisal done.  The only difference between a FHA appraisal and Conventional appraisal is that safety and security is stressed with a FHA appraisal.  Both conventional and FHA appraisals need to have the property habitable and all mechanicals in working order as well as the utilities functional when the appraiser is present appraising the home.

FHA mortgage lenders go through the same process as conventional mortgage lenders in requiring the documents such as two years tax returns, two years W-2s, 60 days bank statements, 2 year employment and residence history, and other documents pertaining to the mortgage application.  Nothing is different between the processing and underwriting for both mortgage loan programs.  Both FHA and Conventional mortgage lenders require IRS 4506T tax verification from the Internal Revenue Service and require employment verification form the current employer.  Both FHA and Conventional mortgage lenders will require two years seasoning requirement to be able to use part-time income, overtime income, and bonus income.

Final Conditions For Clear To Close On FHA and Conventional Loans

Mortgage loan underwriters will require a final verbal verification of employment and final verification of funds prior to issuing a clear to close.  An updated bank statement may be required by the mortgage loan borrower.  A final verbal verification of employment will be done by the mortgage loan underwriter.  Once the mortgage loan underwriter feels comfortable that all conditions have been met, the mortgage loan underwriter will issue a clear to close which means that they are ready to fund the loan.  Once a cleared to close has been issued, the mortgage lender will then prepare docs and wire the funds to the title company.

Mortgage Process And Clear To Close On FHA And Conventional Loans

What happens after clear to close? The mortgage process and clear to close process timeline is the same for both FHA and Conventional Loans.  If you are a home seller and worried about that the FHA clear to close process timeline is much longer than a conventional clear to close timeline, you are mistaken.  FHA loans are one of the most popular mortgage loan programs in today’s market and many times is easier to get a FHA loan cleared to close than a conventional loan.  The reason being is because FHA guidelines have much lax debt to income ratio caps than conventional loan programs.  FHA has a maximum 56.9% back end debt to income ratio requirements whereas conventional mortgage loan programs have a cap on debt to income ratios at 45%.  If a conventional loan borrower has a slight increase on his or her homeowner insurance policy and that home loan borrower is on the 45% debt to income ratio cap, that slight increase can blow the deal because they went over the 45% debt to income ratio cap.  With FHA loan programs, you have up to 56.9% and plus, with FHA loans, you can have non-occupant co-borrowers as well as 100% gift funds.

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

2 Comments

  1. Carolyn says:

    Hi should I start the application process to get detailed feedback on what I need to qualify?

    If there is an update pending that may impact my score will a new report be pulled that may improve my interest rate? Does this show as 2 inquires?

    Thanks.

    • Gustan Cho says:

      You can call me at 262-716-8151 or email me at GLCProperties@aol.com. To qualify for a FHA Loan, you need a minimum credit score of 580 credit scores. Open collections and charge offs are fine as long as you have been timely with all of your payments in the past 12 months. Maximum debt to income ratios will be limited to 43% debt to income ratios for borrowers with credit scores of 43% DTI and under. Debt to income ratios can be as high as 56.9% DTI if your credit scores are 620 FICO or higher. Interest rates will depend on your credit scores. The best interest rates for FHA Loans, you would need a 640 FICO credit scores or higher. Please feel free to call me or email me with any questions.

      Gustan Cho NMLS 873293
      http://www.gustancho.com
      262-716-8151
      GLCProperties@aol.com