Home buying is a substantial investment and mostly done through borrowed money. When a home is listed on the market, several buyers approach the seller. Screening of potential buyers amongst the lot is a difficult task for the seller, so to stand apart from the crowd, the buyer must do conditional approval beforehand.
Conditional approval stands as a guarantee by the lender that the buyer is eligible to get a loan from the lender. The conditional approval letter shows the seriousness and capability of the buyer. Conditional approval is better than prequalification as it involves documentation checks and thorough analysis of credit quality, income, liability, etc. of the buyer. Conditional approval is considered as the second step to a prequalification.
Why is the Approval of a Loan Necessary?
The selling of houses may be tiresome and time-consuming if the buyers presence in the market is not committed. There are several traits of a buyer who is not serious. Few traits can be identified physically, and few can be judged by seeing the financial capability of the buyer. Approval of loan differentiates a serious buyer from the crowd. Once a seller sees that the buyer has a written commitment from the lender, then the seller becomes keener towards the buyer and allows more time to him. This helps the buyer to inspect the property thoroughly and make an informed decision.
Prequalification of Loan
The prequalification of a loan is a general estimation of the repaying capability of the borrower. A rough estimate of the loan amount to be provided is mostly taken based on the credit score of the borrower by a verbal declaration of assets and liabilities. Hard documents of the buyer’s assets are not checked before providing the mortgage estimate under prequalification. This is a fundamental and most accessible form of mortgage approval. The buyer gets an idea regarding the loan amount he is qualified to get and narrows down the home search according to the budget. As the estimates are not backed by supporting documents, so the pre-qualified loan amount may vary at the time of real purchase. Sellers generally don’t give too much weightage to buyers who have only done prequalification of the home loan.
Conditional Approval of Loan
Conditional approval is a well-accepted letter from the lender, confirming the loan approval. Unlike prequalification that is based on estimates, conditional approval involves thorough checking of Income, Bank statements, Tax returns, Property documents, Analysis of assets, Pending Debts, etc. All the documents are submitted to the lender, and after careful analysis, the underwriter gives conditional approval. As the loan is not yet issued and further documents may be needed, so it is called conditional. Conditional approval is a written commitment from the lender and is accepted by all sellers. Having conditional approval shows the seriousness and capability of the buyer. It helps the seller to distinguish serious buyers from all the applications. Third-Party Mortgage Processing Companies help in the background verification of the buyer. The mortgage processing companies have highly trained individuals assigned for documentation checks, background verification, etc. Mortgage processing companies provide complete support regarding loan issuance. An extensive database containing financial information of buyers is being maintained by loan processing companies, which ease the conditional approval process.
Prequalification of loan vs Conditional Approval of Loan
Conditional approval is always preferred over the prequalification of loans. Documentation, background checks, financial stability, asset analysis, pending liabilities are all minutely analysed in case of conditional approval of loan. Conditional approval of a loan is not just an estimate of the buyer’s financial capability. Thorough research is done, and the loan amount is fixed. The lender gives written consent to the buyer, confirming the agreement. Prequalification doesn’t have a well-documented base. The estimates are usually not recognised by the seller of the home.
What Does a Lender Look for Before Approving a Conditional Loan?
Several checks are done by the lender to give conditional approval of a loan to the buyer:
- A thorough analysis of the employment history of the borrower is done. This check is essential to find whether the income source of the borrower is stable and whether the borrower will be able to pay instalments in the future. The main concern of a lender is the default of a loan. Employment history and income stability check of the borrower help the lender to draw a picture of the borrower’s future financial stability.
- Liability Analysis of the borrower involves checking credit card statements, loans outstanding, contingent liabilities, etc. If a borrower has already taken too much of loans, then chances of default are high, and the lender will not issue conditional approval of the loan.
- Tax returns are collected and checked for proper disclosure of income. Timely filing of Tax Returns portrays traits of a responsible citizen. It shows that the borrower is responsible and will make timely payments of Instalments.
- Bank Statements are analysed to check the spending habits.
All the checks come under the Mortgage Underwriting process and are performed efficiently by Mortgage Processing Companies. These tasks require expertise and are mostly outsourced to third parties having specialisation in Loan Underwriting Process.
Primary Considerations for Getting a Conditional Loan Approval
The lender gives conditional approval after a thorough analysis of the financial stability of the borrower. However, still, there are few additional documentations that may be required by the lender before the final approval. The documentation can be tax receipts, insurance papers, etc. upon receiving the desired documents, the process is completed, and the loan is sanctioned. The lender may also ask for additional inspection of the property, adjustment of Loan to Value ratio, appraisal of the property, letter from employer, scrutiny of the source for the initial down payment, etc.
Can the lender reject conditionally approved loan later?
Yes, conditionally approved loan may be rejected by the lender. The loan is not yet finalised, and the lender has the right to decline the issuance of the loan if the borrower’s situation changes after the approval. Several situations may trigger rejection.
- The additional documentation fails in the audit.
It may happen that the borrower produced false employment certificates and that was noticed in the background verification.
- The mortgage meets an unexpected natural disaster.
If the mortgage value deteriorates, then the lender may stop the loan process and decline conditional approval of the loan.
- Contingent liability of the borrower gets triggered.
If the borrower faces sudden liabilities that have to be paid, then it affects the creditworthiness of the borrower, and the lender may reject the loan.
- The macro-economic condition worsens.
Pandemics such as coronavirus has affected the global economic condition. Several have lost jobs, and the situation may worsen. If the lender feels that the income-generating capability of the borrower may take a hit due to macro factors, then the lender can decline the issuance of a loan.
- A sudden decrease in the credit rating of the borrower
Underwriting is a long process, It takes time to close a loan fully. So, if the credit rating of the borrower declines before closure, then the lender may call off the loan.
- Appraisal shows a much lower value for the mortgage.
If the independent appraisal value of the mortgage is found to be lower than the loan approved, then the lender may reject the conditional approval or decrease the loan to value ratio. Hence, a lesser value loan will be issued.
There are several benefits to outsource mortgage underwriting services:
- Rapid Turnaround Times
Underwriting involves checking several documents ranging from salary slips, bank statements, tax returns, etc. Manual checking will involve several days or weeks. Specialised underwriting partners can accelerate the process as most of the work is automated. This helps the lender to concentrate on its core operation and improve its business.
- Improved Customer Retention
Automation reduces the time it takes for underwriting. Customers receive a prompt reply, and wait time is much shorter due to process automation. The satisfaction of customers helps to build a better bond between the lender and the borrower.
- Cost Savings
The setup cost for the loan underwriting process is astonishingly high. Mortgage Processing partners invest a lot of money to create the setup. It is always economical to outsource the underwriting process to the specialised Mortgage Processing Partners.
- Greater Scalability
The In-house underwriting team of the lender is mostly permanent employees of the lender company. A sudden increase in underwriting volume can put extra pressure on the in-house team as they do most of the things manually. Outsourcing the process will allow the lender company to take advantage of automation and will help to deal with the business cyclicality, without increasing or decreasing in-house employees.
- Reduced Errors
A single error in the underwriting process may lead to a sanction of bad loans. Underwriting processes under lenders are carried manually, thus exposed to the probability of human error. Mortgage Processing companies’ carryout the underwriting process through machines, thus leaving no scope of human error at all.
There are several Outsourced Mortgage Processing companies in the market. A lender needs to choose the right Mortgage Processing partner to ensure there is error in conditional loan approvals. Below mentioned are primary factors that should be considered for choosing the right partner.
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- Experience of the Mortgage Processing Outsource Partner
Experience of the outsourced Mortgaged Processing Partner is extremely important. The underwriting process requires knowledge and experience. Proper tools, resources, data, etc. are all essential. Partners with several years of experience, know the correct use of human resources and technology to generate the best results.
- Best Technology and Processes
Computers don’t make mistakes, a human does. Human intervention in the underwriting process will increase the risk of error. So, the best Mortgage Processing Partners are investing a huge amount of money in automation and Artificial Intelligence. Lenders should look for partners with the best technology and process in place.
- Team with the Best Talents
Most of the work in the underwriting process is automated now, but still, there are important areas that require human intervention. These areas require fine judgemental skills and expertise. Lenders must check the skill of the underwriting team of the Mortgage Processing Partner.
- Mortgage Compliance
Regulations keep on changing. The Mortgage Processing Partner needs to have an effective compliance team. Abiding by regulations will prevent lenders from unnecessary sanctions by regulatory bodies. So, lenders should check the compliance Team of the Outsourced Mortgage Processing Partner before hiring.
- Quality Standards
Best things are never cheap. There are several Mortgage Processing partners in the market, and the competition is high. Some partners compromise with quality to provide affordable rates. A lender should always weigh the fee charged with the services provided. Lesser fee at the expense of quality is a bad bargain.
How We Helped our Client as an Outsourcing Partner
Who we are and What Makes us an Industry Authority?
Expert Mortgage Assistance (EMA) is a division of Flatworld Solutions. We are spread across eight global delivery centres. We are driven by an experienced team of mortgage assistance professionals with up to date know knowledge of mortgage rules and regulations. Over the years we have served a range of mortgage lenders and credit unions and assisted them in turning out quality loans for easy saleability in the secondary market. Our proprietary automated platform MSuite has helped us provide our clients with the technological edge needed to stay ahead in market.