Loan applications go through several stages before loan documents are actually printed. There’s the initial submission and documentation stage. It’s here where the loan officer reviews the application before submitting the loan through the automated underwriting system, or AUS. The AUS digitizes the application and runs it through an online app where a list of things needed to finalize the loan are delivered. This tells the loan officer what is needed to get the loan to the approval stage and get loan documents delivered to the settlement agent. These needed items issue a “conditional” approval based upon a review of the final information delivered.
They’re called loan conditions and some are more important than others. Most of these conditions are relatively tame. For example, all credit documents within a loan file should be no older than 30 days. If a pay check stub is say 45 days old, a loan condition will appear asking for an updated pay check stub. A loan condition will also ask for an appraisal supporting the stated value of the subject property. Two years of federal income tax returns for self-employed borrowers is also part of the conditional approval. These common items are typically referred to as “prior to doc” conditions which means loan documents may not be prepared until a requested item is reviewed and approve.
For example, someone submits the requested documentation including bank statements. The individual works for a company that pays on the 1st and 15th. The bank statements will reflect the direct deposits on those dates. The bank statements will both verify pay as well as demonstrate there are enough funds in the account to cover the transaction, including a down payment, closing costs and cash reserves. But those statements also show an additional $5,000 on the 20th that obviously didn’t come from the employer. If those additional funds are needed for the closing, a condition will be issued to verify the funds come from a legitimate source, such as a financial gift from a family member. This will be a prior to doc condition.
Another type of condition is referred to as a “prior to fun” condition and will fall into the relatively minor category. Not to minor that it can be ignored but not something that will bring up a red flag. An updated pay stub within 30 days is a prior to fund condition. A prior to fund condition is one where loan documents may be prepared and delivered to the settlement agent for signatures, but funds from the mortgage company will not be released until the prior to fund condition is signed off.
When a loan is submitted through the AUS and both prior to doc and prior to fund conditions are listed, as those conditions are reviewed and cleared, the loan moves to the next stage. But to some, when the loan officer contacts the applicant asking for more information or to explain something, it can cause some uneasiness for the applicant. This unease however is typically unwarranted and the loan officer is simply collecting the final paperwork so the loan can move forward.
All loans will have conditions. First time buyers who have never gone through the home buying process might be alarmed that the lender is asking for more stuff but it’s typically routine. Your loan officer will ask for upfront documentation to support the application but once the loan is underwritten, the final pieces of paperwork will still be needed. Even an applicant with a credit score in the 800s and a 20 percent down payment will be issued a conditional approval. Once the prior to doc conditions have been provided, the loan goes to the settlement agent and at this stage prior to fund conditions will be met. Once these conditions are cleared, the funds are released and a brand new mortgage is made.