Buying Your Home
The modern mortgage market offers a variety of mortgage loans catering to the needs of homebuyers. The titles and details of these plans can become confusing, especially as new types are introduced continuously. You can make sense of these loan types, however, if you understand the basic principles that govern all mortgage loans. Again, you can look to your real estate professional for assistance.
Basic Principles of all Mortgage Loans
- The home is used as security to back up the loan. A lender can force sale of the home if the borrower defaults by failing to make scheduled payments.
- The larger the loan compared to the value of the home, the more risky for the lender and, often, the more expensive the loan will be.
- Interest earned by the lender always is equal to the periodic interest rate times the outstanding principle balance of the loan. The periodic interest rate is the annual interest rate divided by the number of payments in the year (usually one per month).
- The required payment usually is a bit larger than the interest due so that some of the loan principal is repaid with each payment. This process is called Amortization and is why most mortgage loans can be retired when all the monthly payments have been made.
All mortgage loans have one of the following features:
- Fixed payment and fixed interest rate - fixed rate mortgages
- Fixed rate but variable payment - graduated payment mortgages
- Variable rate and variable payment - adjustable rate mortgages
As you learn more about the types of financing available, you will notice that some loans appear to have more favorable terms. That may indicate that those loans are, indeed, bargains (and it does pay to shop around), but usually it means that those loans could have some feature that is less appealing to borrowers. For example, shorter-term loans often have slightly lower interest rates compared to longer-term loans. However, the monthly payment for the same amount of principal may be higher because of the shorter term. Variable rate loans usually have much lower interest rates to compensate for the risk the borrower accepts that interest rates will rise in the future.
What Is Your Home Worth?
Check current market values for your home and view profiles of potential buyers.
The Loan Process
The steps below outline the process of obtaining and closing your loan. Though they can vary depending on lender and loan program, they are fairly typical.
1. The Loan Application
The first step is to meet with your lender (loan consultant, loan officer, mortgage banker, loan originator, etc. - their titles vary) and determine which loan program fits your needs and goals. It is extremely important that you furnish them all of the information they require and that it is accurate and up to date. This will help prevent your loan from being denied later in the process.
2. The Qualification
Qualification (a.k.a. pre-qualification or pre-approval) usually takes around 24 hours for a conventional loan and slightly longer for non-conventional loan programs. If you are working with a real estate broker, your lender will forward a copy of your pre-qualification letter to him/her (or them if you are working with a team of brokers). This will aid them and, thus, you when you submit an offer on a property (more on that here).
3. The Documentation
As mentioned in step one, it is vitally important to be thorough, accurate, and timely with every piece of documentation that is requested of you. More often than not, delays in the processing of loans can be traced to paperwork and the inability to submit everything that your lender has requested (signed and dated where required). Most lenders will require the following information (and possibly more) in order to effectively process your loan application:
- Employment information for the past two (2) years.
- Residence address(s) for the past two (2) years.
- W-2 and tax returns for the past two (2) years.
- Pay stubs for the past month.
- Copy of your social security card and other form of photo I.D.
- Loan information on other real estate properties you may own.
- Certificate of Eligibility and DD214's (for VA loans)
- Divorce, foreclosure, and/or bankruptcy information (if applicable).
*** THE HUNT ***
Ideally, it is at this point in the process that you will begin to actively look at potential properties with your real estate broker. Rember that pre-qualifcation letter in Step 2 above? That will tell you how much you can afford and will be invaluable in setting an upper dollar limit to your search parameters. Again, more on that here.
4. The Appraisal
Lenders require an appraisal on all home sales. By knowing the true value of the home, the borrower is protected from overpaying. Once you have an accepted offer on a property, an appraisal will be ordered by your lender. If this is a purchase transaction, the appraisal will typically take place after your home inspection is completed and approved. This generally takes five to seven days and may be longer (or shorter), depending on volume.
5. The Title Report
This was ordered earlier (through a title company) by the listing agent in a purchase transaction or by your advisor if you are refinancing and should have been received by now. It will show if there are liens or other problems with the property that may delay or prevent closing.
6. The Submission
At this point all the information collected is organized by your loan processor and sent to an underwriter for approval. Depending on the lender, volume, and product type, this can take as little as 24 to 72 hours.
7. The Conditions
The underwriter will send back an approval which usually includes some conditions. These may be "prior to doc" or "prior to closing." It is very important that any of these requiring action or documentation be taken care of immediately. Any delay will cause a delay in signing. Once all conditions have been met, documents are sent to the underwriter for final review and approval. This generally takes another 24 to 72 hours.
8. The Docs
When everything is approved by the underwriter, the final documents can be ordered. These are the papers you will sign to close and fund your loan. These take 24 to 48 hours to be completed. They are then sent to the title company.
9. The Signing
When the title company has worked their magic with the numbers, they will call and set up an appointment for you to sign. This usually takes about 24 hours after they receive the documentation. These are then sent to the lender.
10. The Funding & Recording
Once all of the signatures and closing conditions are checked, the loan is approved for funding and recording. This usually occurs 24 to 48 hours after signing, though sometimes additional signatures or conditions may need to be met which could cause a delay.
*** CLOSING ***
Documents transferring title will now be officially recorded by the County Recorder.
As you can see, each step leads into the next. While the process is not overly complex, it is dependant on all parties comunicating effectively and in a timely & efficient manner to keep your transaction moving ahead smoothly and without delay.
General Dos & Don'ts
- DO CONTINUE TO USE YOUR CREDIT AS YOU NORMALLY WOULD
Red flags are easily raised within the scoring system. If it appears you are diverting from your normal spending patterns, it could cause your overall credit score to drop. For example, if you've had a monthly service for internet access billed to the same credit card for the past three years, there’s really no reason to drop it now. Make any changes after the loan closes.
- DO STAY CURRENT ON ALL OF YOUR EXISTING ACCOUNTS
Late payments on your existing mortgage, student loan, car payment, child support, or anything else that can be reported to a CRA (Credit Reporting Agency) can cost you dearly. A single 30-day late payment can lower your credit score by 30-75 points. Make your mortgage payments on time, but notify your lender prior to making any payments that are scheduled within two weeks of the closing of your new loan.
- DO OBTAIN HOMEOWNERS INSURANCE
At a minimum you want your coverage to equal your total loan or the replacement value of the house.
- DO KEEP ALL FINANCIAL DOCUMENTATION
Maintain a paper trail of any significant financial transactions. This includes checks, deposit slips, receipts, loan paperwork, and any other forms that might be needed to prove a financial transaction took place. This also includes any documentation pertaining to a transaction that moves funds from one account to another.
- DO CALL YOUR LENDER
If you have any question at all and/or are considering any decisions that will impact your financial picture - no matter how big or small - contact your lender. What may seem like a minor decision, may have significant implications on your loan. This includes changing jobs, receiving a raise, etc.
DON'T APPLY FOR NEW CREDIT OF ANY KIND
Don't respond to invitations to apply for new credit cards or new lines of credit. Doing so, will trigger that company to pull your credit report. This in turn will have an adverse effect on your overall credit score. This includes co-signing with anyone for a line of credit. Likewise, don’t establish new lines of credit for furniture, appliances, computers, etc. (i.e. store credit cards). All of these examples will show up on your credit history as additional debt.
DON'T MAX OUT OR OVERCHARGE YOUR EXISTING CREDIT CARDS
Running up your credit cards is the fastest way to bring your score down and it could drop up to 100 points overnight. Once you are engaged in the loan process, try to keep your credit cards below 30% of the available limit.
DON'T PAY OFF COLLECTIONS OR CHARGE-OFFS
Once the loan process is initatiated, don’t pay off collections unless specifically directed to do so by your lender. Generally, paying off old collections causes a drop in your credit score.
DON'T CLOSE CREDIT CARD ACCOUNTS
If you close a credit card account, it can affect your ratio of debt to available credit - which has a 30% impact on your credit score. If you really want to close an account, do it after your loan closes.
DON'T CONSOLIDATE DEBT TO ONE OR TWO CARDS
You dont want to change your ratio of debt to available credit. You also want to keep your active beneficial credit history on your record.
- DON'T CHANGE JOBS WITHOUT LETTING YOUR LENDER KNOW
A change in income can affect your ability to qualify for a loan. Additionally, as a quality control check, some lenders may verify your employment very close to closing.
- DON'T MAKE ANY ADJUSTMENTS OR TRANSFERS IN YOUR ASSET PICTURE
Don't change investments, move positions, open or close accounts, or substantially change your asset picture without first contacting your lender.
- DON'T MAKE LARGE UNEXPLAINABLE DEPOSITS INTO BANK ACCOUNTS
Deposit amounts exceeding those of your past history will be questioned by an underwriter unless the deposit is a documented gift.
- DON'T RAISE RED FLAGS TO THE UNDERWRITER
Avoid co-signing on another person's loan or change your name and address. The less activity that occurs while your loan is in process, the better it is for you.
- DON'T NEGOTIATE YOUR CONTRACT WITH AN ALLOWANCE EXPECTING TO GET MONEY BACK AT CLOSING
Allowances can only be applied towards prepaids and closing costs.
See also this handy infographic from AmeriFirst Home Mortgage.
How long will it take to close?
This depends on a number of factors. Arguably the biggest of them is how well communication is working between all parties - client(s), lender, real estate broker(s), title company, etc. This loan calendar tool developed by Waterstone Mortgage can give you a a quick estimate. Simply enter your loan application date & desired closing date and the calendar will automatically fill in all the important loan milestones along with their anticipated dates. It’s an easy and useful way to get started in the home loan process and better understand it.
Our local title companies have a number of informational documents to assist you with the closing process.
"I will forever believe that buying a home is a great investment. Why? Because you can't live in a stock certificate. You can't live in a mutual fund."
– Oprah Winfrey
All original content, formatting, and layout © Mitch Darby. All rights reserved. Information provided deemed reliable, but not guaranteed and is subject to change without notice.