Thursday, July 06, 2006

Your Typical Purchase Home Loan Process

Buying a home is probably one of the most important and stressful times for many couples. Finding the right place to fit your needs, obtaining financing, and educating yourself on everything to do with the process can be very intimidating.

  1. Pre-Qualification / Pre-Approval- I always advise buyers to get pre-approved for a mortgage loan before looking for a home. Pre-approval is similar to pre-qualification, except it goes one step further. Your debts, income, credit history and score are all fully verified and you are actually approved for the loan in advance. You'll be approved for a loan of up to a specific amount and under certain conditions and terms, and will receive a written letter of approval. Being pre-approved means you can go out and search for your dream home with out worrying if you can afford it or not. It also gives you possible preference over other some other buyers because you are ready to move forward immediately, where others still may need to obtain financing. Pre-qualification is not as good as pre-approval, you still provide information on your credit, income, detbs and the such, you are given an amount of a loan you can afford and qualify for; but you are not actually 'approved' for a loan.
  2. House Hunting - Once you know how much house you can afford, you can start visiting open houses, or working with an agent to shop for the home that meets your needs. You have multiple options here, and could work with a Real Estate Agent, search MLS listings, or find For Sale By Owner properties from a variety of places.
  3. The Offer and Purchase & Sales Agreement - Once you've found the property that fits your needs and desires, the terms of the sale are negotiated. Negotiations will cover, the sales price, reapir requests, move-in dates, and other common conditions and stipulations. You may have a Buyers Agent (which I generally advise people to do), who will then present your offer to the seller, or if you are not using a buyer's agent, you may make this offer personally. You can and should also include a copy of your pre-approval letter, as it could give a positive influence to tilt the sale in your favor if the seller has received similar offers from other buyers who are not pre-approved.
  4. Loan Application - If the seller accepts your offer, it will now be time to obtain your mortgage if you have not already been pre-approved.
  5. Documentation - If you were pre-approved, this step has already taken place; otherwise, paperwork and supporting documentation for your application must be submitted. This information usually includes things such as pay stubs, two years of tax return statements, personal or business (if self employed) banking statements, and verification of the source of your down payment, funds to close, and cash reserves.
  6. Appraisal - Lenders always require an appraisal on home sales. This step could hurt a sale if a large discrepancy were to exist between the sales price and the value of the property, this rarely occurs though.
  7. Title Search - At this point the lender will want to know if there are any leins against the property, and a search for such information is conducted. A lein may have been incurred by the owner for a variety of reasons, including but not limited to tax leins, mechanic's leins for home improvements, etc... The lender will require that all leins must be resolved before the transfer of the title can take place, and often many leins can be resolved through closing, and will come out of the sellers side. The Title Company that performs the search will then insure it's findings to protect the buyer and lender from any subsequent leins that they may have missed.
  8. Property Inspection - Many lenders, and it's generally a good thing to do otherwise, will require a property inspection. A property inspection is different from a property appraisal, as an appraisal determines value of property, where an inspection determines a properties possible safety hazards, termite or insect infestations, water damage, or other discrepancies with the condition of the physical structures. Some of these findings may need to be resolved prior to finalizing the sale.
  9. Processor's Review - At this point a loan processor will review your total application for completeness and quality control, and all pertinent information and verifications; package them up and forward it on to the underwriter.
  10. Underwriters' Review - The underwriter will look at the information submitted by the loan officers and loan processor and make a final decision on whether the loan will be approved. Lenders are looking for and concerned with whether a borrower will make their payments on time, and for properties that will cover the cost of the investment if the borrower defaults on their loan.
  11. Mortgage Insurance - When a borrower applies for a loan that is 80% or more of the properties value, a lender will normally require Private Mortgage Insurance (PMI). This insurance ONLY covers the lender in cases where the borrower defaults on their loan. Consult your mortgage planner on possible ways to avoid paying this insurance. Also, a mortgage insurance company may deny coverage even if the loan meets the criteria of the lender depending on a variety of factors (not a common occurence).
  12. Stipulations for a Clear-to-Close - Otherwise known as Final Lown Approval, In the majority of instances, when your debt-to-income and credit are meet the specific program requirements, your loan application will be approved with very little or no problems at all. However, in some cases, you may have last minute stipulations, like an increased down payment because the property appaisal came in lower than expected, or to improve your debt-to-income ratio. In some cases, you may also be required to have certain reapirs to the property resolved before closing. Those are a couple examples of the many possible conditions that may need to fulfilled before final loan approval. Your mortgage planner will be able to help you negotiate anything that pops up last minute.
  13. Homeowners' Insurance - Lenders will require fire and hazard insurance equalling the repalcement costs of the buildings. If the property is located in a flood zone, you will also be required to obtain Flood Insurance. In some areas, earthquake insurance is mandatory as well.
  14. Signing the Papers - A.K.A. "Closing" is where you will meet with the seller and sign the final loan and escrow documents.
  15. Funding of the Loan - A wire or check for the amount of the loan will be sent to the title company by the lender.
  16. Closing Process - The documents transferring title are recorded with the County Recorder and the title company then authorizes the escrow company, or closing agent, to draft a check to the seller.
  17. Move In!! - Now you get to move into your new home, it's always good practice to change all the locks for safety.