What Does Clear to Close Mean?
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Summary:
The phrase “clear to close” refers to the point when a home buyer has gone through all the due diligence with their lender and they are now free to proceed with closing. There are many stages in buying a home with a mortgage, from preapproval to the application and final approval. Throughout, a lender will want to see certain documents to determine your risk profile before giving you the go-ahead to close. There are also circumstances in which someone might receive a “clear to close” but doesn’t progress to the closed deal.
“We are clear to land.” When you travel via airplane, nothing shoots dopamine into your nervous system like the sound of that phrase. At that point, you can relax because you know you are actually going to get off the plane and embrace whatever plans you have for your final destination. If you suffered through turbulence, you might even hear the other passengers clapping upon landing. Hearing that you are “clear to close” in the mortgage process can bring similar feelings. But instead of your pilot communicating that you are about to land, it means the home you are buying is nearing its final stage, the closing.
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What is clear to close?
Clear to close, or CTC, is a term commonly used by mortgage lenders. It means that the borrower has passed through all of the stages of due diligence during the mortgage process and can thus proceed to close on the home. These stages include a preapproval typically accompanied by a soft credit pull (although sometimes it can include a hard pull), a more intense mortgage application stage, and finally, the final approval stage. Think of it as a road with checkpoints, and as you pass the final hurdle or checkpoint with your loan documents, you are clear to close.
Mortgage lending process
Let’s break down those three main stages required to get to closing: the preapproval process, the mortgage application process, and the final loan approval process.
Preapproval process
The preapproval process can seem like a sales tactic for a mortgage company, as it’s a way to get you in the door to fill out a mortgage application. During the preapproval process, the lender begins to assess the risk profile of the borrower. Here is some of the information they might ask for during this stage.
- Proof of identity
- Your credit/FICO score
- Your credit report (using a soft pull)
- Income information
- Assets and liabilities (to calculate your debt-to-income ratio)
Mortgage application process
Now, the loan officer and underwriters start to delve much deeper into your financial life and financial documents, as well as the asset you want to purchase. Some of the documents they will want to see include:
- Proof of identity, again
- Proof of income (using pay stubs and bank statements)
- W2s, 1099s, K1s, etc. if you are self-employed
- Your credit score and report (using a hard pull)
- Employment verification
- Assets and liabilities (again, for your debt-to-income ratio)
- Tax returns (two years for Fannie/Freddie loans)
- Documents regarding the asset
- Appraised value
- Title/deed
- Information about the home’s condition
This can be an arduous process, and the lender might ask for everything under the sun except a blood sample before issuing a mortgage commitment letter and approving you. In order to facilitate a clean mortgage application process, make sure you keep and store excellent supporting documentation.
Pro Tip
Even if your income and credit are sparkling, if you overpaid for the property, you could have an issue with your loan-to-value ratio. For instance, if you bought a property for $100,000, but the appraisal says that it’s only worth $90,000, then you will have issues your loan amount. If the lender agreed to a 70% LTV, for example, they would lend you the 70% on the appraised $90,000, not the $100,000 you bought it for. In this case, you will need to come up with more money to buy the house.
Final loan approval (clear to close)
After you receive your final loan approval and all the Is are dotted and Ts are crossed, you will be free to close. However, your lender will still need more information after the underwriters give them the go-ahead. This could include:
- Title company or escrow accounts to facilitate the closing, such as the one used for the down payment
- Banking facility for your mortgage payments
- Escrow account for disbursements made by the lender to pay items like property tax and insurance
- Any other issues regarding your mortgage structure (fixed or adjustable-rate mortgage or ARM)
- Any other issues regarding taxes, fees, insurance, and payment facilities/schedules
Houston, we are “clear to close!”
Great, now what? Once your lender gives you the go-ahead and says you are clear to close, they will issue you the following documents so you can start the closing process.
Clear-to-close letter
Also called a “close letter,” a clear-to-close letter is an official recognition by your lender that you have been approved for the loan. This is your official ticket to the closing party to prove that you definitely have a mortgage.
Closing disclosure
The final closing disclosure is a breakdown of how your mortgage works and all the closing costs and fees associated with both the mortgage as well as the property purchase. Think of it as a summary of the exact closing process, including everything and everyone involved.
Clearing to close but never closing
If you are cleared to close, then you are definitely closing, right? In the vast majority of cases, yes, according to Robert Thompson, a veteran real estate agent with Allison James Estates and Homes. “I have never seen a clear to close not go through,” Thompson says. “Normally any red flags show up way before that and either get resolved or the contract becomes terminated.”
There are some rare exceptions, though. Here are some situations in which you might be cleared to close but never actually close.
Your financial situation drastically changes
If anything changes drastically regarding your financial situation, you are obligated to tell your lender. If you lose your job, have a large debt spring up, or any other big change to your finances, your closing could be disrupted. This is why lenders ask you not to take out any other loans during this process.
You forget major documents
If you’ve been given the clear to close and you forget important documents that are vital to the closing, you could have a false landing. You’ll need to go back to collect the documents and then finish the closing.
There is an unforeseen extreme event
If you encounter a “The Last of Us” situation in which a fungus decimates the world and humanity is almost eradicated, a clear-to-close might not result in an actual close. More likely, your closing could be interrupted because of unexpected legal issues, the house burning down, or tornado damage, for example.
The mortgage provider makes a mistake
Sometimes the mortgage provider or the underwriters can make a mistake. This happened to Joshua Massieh, a seasoned mortgage broker in San Diego. “There was a moment when a clear to close was issued, and the lender caught an underwriting error, which then required the bank to pull the clear to close,” he says. “These are very rare instances, but it does happen with some of the lenders whose process is not streamlined.”
Make sure you find a lender with a streamlined closing process. Here are some options to consider.
FAQ
How long does it take from clear to close to actual closing?
There is no set rule, but if you are eager to close after submitting all the loan documents and receiving your CTC, communicate with your lender to determine a specific timeline for closing. In general, you should give yourself a three-day window. This all depends on when your closing date is set, however. If it’s set for a couple of weeks from now, then the closing date will be further away. Make sure you also have your down payment in escrow and everything else you need before you attend the closing.
Is it clear to close final approval?
From your lender, yes, it is considered final approval. You will receive that along with a closing disclosure that will summarize your purchase with a closing table.
Does the underwriter give the clear to close?
The underwriter will approve the loan and the lender will confirm the closing date. They will both assess your loan documents throughout the due diligence process before going ahead with the clear to close.
What is the 3-day rule for closing?
After receiving the closing disclosure and your clear-to-close letter, you should expect to close within three days. This also takes into account that all other factors are good to go with the purchase of the property, other than your mortgage loan.
What should you not do before closing?
There are a few things you shouldn’t do before closing. You shouldn’t change your employment status. As credit and employment status sometimes go hand in hand, you wouldn’t want a slight change in employment to affect your credit. You also shouldn’t lose your documents, take out additional loans, or involve yourself in risky activities.
Key takeaways
- “Clear to close” is a term used when a home buyer has gone through all the due diligence with their lender and they are now free to proceed with closing.
- There are typically three stages to the loan process: preapproval, mortgage application, and final approval with a clear to close.
- After receiving a clear to close, you will receive a clear-to-close letter and closing disclosure for your loan. You then need to attend your scheduled closing date with all the relevant documents related to your loan and the property purchase.
- Sometimes a clear to close does not result in a close. This could be because of a change in your financial status or credit history, the loss of documents, or a major unforeseen event.
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