Mortgage Process

Save time and frustration by determining what you can afford to pay for a house before you start looking. Any affordability calculation needs to take into account costs related to owning a home (monthly mortgage payments, property taxes, property insurance and maintenance) and other financial obligations (credit cards, auto loans, student loans, etc.)

Next you need to find a lender, if you are not paying cash for your home. A lender will arrange financing for your home – he/she will work with you to find financing with rates and closing costs that meet your financial goals. Just interest loan charged on a loan is not the only factor to look at while comparing loans. Closing costs should also be compared. APR (Annual Percentage Rate) which incorporates closing costs is a better way to compare loans with similar terms. Beyond interest rate and closing costs, services provided by the lenders should be a consideration too.

There are different types of lenders to choose from:

  • Mortgage Broker –A broker is an independent entity and does not work for a particular financial institution (banks, credit union, etc.) or other direct lenders (mortgage bankers, investors, etc.). They work with various lenders to present the best loan product and loan rate/costs meeting your needs. Essentially they are “brokering” funds available from different sources that are willing to invest in mortgage loans. Financial institutions and other direct lenders invest their own funds in mortgage loans.
  • Online Mortgage Broker – An online broker is similar to a Mortgage Broker and works to find the best loan product and rate combination from multiple lenders, but uses online technologies to operate “virtually”. Online brokers usually advertise operating efficiency, paperless environment and low costs.
  • Online Lead Service – They do not directly lend money or broker loans. They gather you requirements and “pass along” the lead to lenders and brokers that subscribe to their service.
  • Financial Institution (bank, credit union, etc.) – They offer loans directly to consumers which is funded by their own funds. This is called retail mortgage lending. Some financial institutions will work thru mortgage brokers by funding loans brought to them (“originated”) by mortgage brokers. In this case, the financial institutions are providing wholesale lending funds.
  • Non-bank mortgage lender – These are regulated companies that only provide funds for financing home purchase – they could be mortgage banks or private institutions. Just like Financial Institutions, they could provide retail or wholesale funds or both to finance home purchases.

It is always a good idea to get Pre-Approved and a Pre-Approval Letter from a lender before you start shopping for a home. It gives you considerable negotiating advantage with sellers and real estate agents in a home buying transaction. Also, after going thru the Pre-Approval process, you will know a more exact amount that will be available to you for a home purchase – it avoids a surprise if you wait until you have signed a home purchase contract.

Now you can go ahead and search for a home with confidence knowing you have financing in place. Most likely you have already chosen a real estate agent who is helping you in the buying process, including this one.

During your search process you may like a home you would like to purchase. You will then work with your real estate agent to submit an offer to buy the property. Remember, in a hot market where a seller is presented with multiple offers, it is always good to have a Pre-Approval Letter. Pre-Approval is a more rigorous process and involves verification of income, employment, assets, etc. Pre-Approval also requires a credit report and credit score. This means that a Pre-Approval Letter carries more weight with sellers and real estate agents indicating a serious buyer and quick a close.

After an offer has been accepted and both parties have signed the sales contract, the Pre-Closing process begins:

  • Financing: If you were Pre-Approved, then the process may be shorter and smoother for you. You may have to provide any relevant updates to the information provided during the Pre-Approval process. If you did not get Pre-Approved, then you will have to start the loan process by submitting a mortgage loan application, including authorization for a credit report.
  • Appraisals: Most likely a lender will or an appraisal on the property. An appraisal determines the fair market value of the home and is used in the LTV (Loan to Value) calculation for the loan. The fair market value is arrived a) by comparing subject property to recently sold homes in the neighborhood or b) based on a “cost approach to value”—calculating the value based on the value of the land plus what it would cost to build a house of similar size and quality.
  • Open Escrow: Typically, the seller will choose the Escrow/Title Company. The Escrow/Title Company will prepare escrow instructions and other pertinent documents to define the process through which the property will be transferred from the seller to the buyer. The agreed documents are signed by all relevant parties and you, the buyer, then mostly likely will pay an “earnest money” which shows the seller you are serious about buying the home.
  • Inspections: Most buyers will request a home inspection before closing and this is typically a condition written into the sales contract. This allows you to uncover any potential issues with the home—structural, plumbing, electrical—that may not be visible when you visited the property. Usually there is an inspection period that’s defined in the contract, and you must have the inspection completed within that time frame. If some issues are uncovered during this time, you can either ask for repairs to be made by the seller or walk away from the property—even with the contract in place—without penalty (other than potentially forfeiting the earnest money).
  • Title Search: This is the process of searching public records to determine and confirm a property's legal ownership, and find out what claims are on the property. The search will show any easements, mortgages, tax liens or other liens on the property. If the title search reveals a problem ("cloud on the title"), such as a break in the chain of title, inaccurate property description in a previous deed or some old secured loan which has not been released, the problem will have to be cleared up before the sale can go through. A title search is usually performed by a title company or an attorney.

Your loan is approved, appraisal is done, title report came up clear and all conditions (in contact and escrow documents) are met – now the closing process begins:

  • Closing Date: An actual closing date will be provided to you. Before that date, review the list of fees and the terms and conditions of the contract. In addition, you'll need to know the amount that you'll need to bring to closing. Your real estate agent and lender will assist you with this process.
  • The lender arranges the closing and ensures that the closing agent has all the necessary documents in place. Some closings may be required to take place at a closing attorney’s office, while others may use a title or escrow company.
  • At the closing, the lender “funds” the loan with a cashier’s check, draft or wire to the closing agent who disburses funds in exchange for the title to the property. This is the point at which transfer of ownership occurs and the buyer receives possession of the property.
  • Remember to carefully review all documents before signing—ask the closing agent if you have any questions or concerns.

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