Since there are so many components to the mortgage process, we have taken special care to organize the most important qualifying steps, lending frequently asked questions, home buying and mortgage processes below.
We realize that that the information contained in this site could literally take you weeks to research and digest, so please contact us at any time for a personal consultation where we can address your specific needs and questions.
Simply put, a mortgage is a loan secured by real property and paid in installments over a set period of time.
The mortgage secures your promise that the money borrowed for your home will be repaid.
According to Wikipedia:
A mortgage loan is a loan secured by real property through the use of a document which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan. However, the word mortgage alone, in everyday usage, is most often used to mean mortgage loan.
Components of a Mortgage:
1. Mortgage Approval:
Qualifying for a mortgage requires meeting a pre-determined set of guidelines established by a lender, which may include credit history, income, employment and assets.
In addition to personal qualifying factors, a property must also meet certain standards set by lenders before a borrower can obtain a mortgage loan secured by real estate.
2. Mortgage Payments
On a traditional 30 or 15 years fixed rate mortgage program that involves principal and interest, each payment made is divided into two parts (we’re not including taxes or homeowners insurance as part of this discussion):
The first part of the mortgage payment, which is commonly referred to as principal, goes to paying down the initial amount borrowed.
The second part is the interest paid for the money borrowed to purchase the property.
The amount paid in interest decreases each month, as the amount paid towards the principal balance increases. This apportioning is referred to as amortization.
Other types of mortgage payments available can include options for paying interest only or a teaser rate.
Either way, it is extremely important to have a solid understanding of the full payment and terms before moving forward with a particular option.
3. Mortgage Programs
Mortgage Programs come in many different types of flavors and colors depending on the down payment and/or monthly budget a borrower has been approved for.
There are also federally insured mortgages, such as FHA or VA loans, which have more flexible qualifying guidelines.
4. Closing Costs / Fees
The actual cost of obtaining a mortgage mainly depends on whether or not the borrower is paying points for a lower mortgage rate. In some cases, there are also other loan processing and underwriting fees associated with the work involved in the transaction.
Fortunately, there are several consumer protection policies implemented by the government to help borrowers understand their options during the initial mortgage pre-qualification process. However, please keep in mind that there may be other closing costs not associated with a mortgage or real estate transaction, be aware of appraisal, pre-paid property taxes, insurance and interest, HOA dues and inspections are a few additional out-of-pocket expenses you should budget for.
5. Mortgage Rates
While mortgage interest rates may change several times a day, there are a few market factors you can pay attention to which may impact your final payment.
Whether you’re shopping for the most competitive rate, or trying to determine the difference between the Note Rate and APR, it definitely helps to understand what questions to ask a mortgage lender about your specific loan scenario.
Whether you’re a First-Time Home Buyer or seasoned investor, the mortgage approval process can be a slightly overwhelming adventure without a proper road map and good team in your corner.
Updated program guidelines, mortgage rate questions and down payment requirements are a few of the components you’ll need to be aware of when getting mortgage financing for a purchase or refinance.
While this site is full of useful information, industry terms and calculators that will help you research the mortgage approval process in detail, this particular page was designed to give you a thorough outline of the important components involved in getting qualified for a new mortgage loan.
Mortgage Approval Components:
Mortgage lenders approve borrowers for a loan, which is secured by real estate, based on a standard set of guidelines that are generally determined by the type of loan program.
The following bullets are the main components of a mortgage approval:
Debt-To-Income (DTI) Ratio –
A borrower’s DTI Ratio is a measurement of their income to monthly credit and housing liabilities. The lower the DTI ratio a borrower has (more income in relation to monthly credit payments), the more confident the lender is about getting paid on time in the future based on the loan terms.
Loan-to-Value (LTV) –
Loan-to-Value, or LTV, is a term lenders use when comparing the difference between the outstanding loan amount and a property’s value.
Certain loan programs require a borrower to invest a larger down payment to avoid mortgage insurance, while some government loan programs were created to help buyers secure financing on a home with 96.5% to 100% LTV Ratios.
EX: A Conventional Loan requires the borrower to purchase mortgage insurance when the LTV is greater than 80%. To avoid having to pay mortgage insurance, the borrower would have to put 20% down on the purchase of a new property. On a $100,000 purchase price, 20% down would equal $20,000.
Credit scores and history are used by lenders as a tool to determine the estimated risk associated with a borrower. While lenders like to see multiple open lines of credit with a minimum of 24 months reporting history, some loan programs allow borrowers to use alternative forms of credit to qualify for a loan.
Property Types -
The type of property, and how you plan on occupying the residence, plays a major role in securing mortgage financing.
Due to some HOA restrictions, government lending mortgage insurance requirements and appraisal policies, it is important that your real estate agent understands the exact details and restrictions of your letter before placing any offers on properties.
Mortgage Programs –
Whether you’re looking for 100% financing, low down payment options or want to roll the costs of upgrades into a rehab loan, each mortgage program has its own qualifying guidelines.
There are government insured loan programs, such as FHA, USDA and VA home loans, as well as conventional and jumbo financing.
A mortgage professional will take into consideration your individual LTV, DTI, Credit and Property Type scenario to determine which loan program best fits your needs and goals.
Pre-Qualification Letter Basics:
Getting a mortgage qualification letter prior to looking for a new home with an agent is an essential first step in the home buying process.
Besides providing the home buyer with an idea of their monthly payments, down payment requirements and loan program terms to budget for, a Pre-Qualification Letter gives the seller and agents involved a better sense of security and confidence that the purchase contract will be able to close on time.
There is a big difference between a Pre-Qualification Letter and a Mortgage Approval Conditions List.
The Pre-Qualification Letter is generally issued by a loan officer after credit has been pulled, income and assets questions have been addressed and some of the other initial borrower documentshave been previewed. The Pre-Qualification Letter is basically a loan officer’s written communication that the borrower fits within a particular loan program’s guidelines.
The Mortgage Approval Conditions List is a bit more detailed, especially since it is usually issued by the underwriter after an entire loan package has been submitted.
Even though questions about gaps in employment, discrepancies on tax returns, bank statement red flags, and other qualifying related details should be addressed before a loan officer issues a Pre-Qualification Letter, the final Mortgage Approval Conditions List is where all of those conditions will pop up.
In addition to borrower related conditions, there are inspection clarifications, purchase contract updates and appraised value debates that may show up on this list. This will also list prior to doc and funding conditions so that all parties involved can have an idea of the timeline of when things are due.
What’s Included In A Pre-Qual Letter?
Let’s start with the most commonly asked question about mortgage loans. Getting a Pre-Qualification Letter for a new home purchase is mainly to let everyone involved in the transaction know what type of mortgage money the buyer is approved to borrower from the lender.
The Pre-Qualification Letter is based on loan program guidelines pertaining to a borrower’s DTI, LTV, Credit, Property Type and Residence Status.
A complete Pre-Qualification Letter should let the borrower know the exact terms of the loan amount, down payment requirements and monthly payment, including principal, interest, taxes, insurance and any additional mortgage insurance premiums.
Keep in mind, one of the most important items to remember when looking into financing is that there is sometimes a difference in the amount a borrower can qualify for vs what’s in their budget for a comfortable and responsible monthly payment.
7 Items to Look For On a Pre-Qualification Letter
Loan Amount – Base loan amount and possibly gross loan amount (FHA, VA, USDA)
Status Date and Expiration Date – Most Pre-Qualification Letters are good 90 days from when your credit report was run
Mortgage Type – FHA, VA, USDA, Conventional, Jumbo
Term – 40, 30, 20 or 15 year fixed, ARM (Adjustable Rate Mortgage); if ARM, 1, 3, 5, 7 or 10 year initial fixed period; Interest Only
Occupancy – Owner Occupied, Secondary Residence, Investment
Contact Info – Lender’s Name and Address
Conditions – Document and Funding requirements prior to Approval
Frequently Asked Questions – Mortgage Approval Process:
Q. Why do I have to obtain another Pre-Qualification Letter from a different lender when I make an offer on a particular home?
Cross-qualification is imminent in certain markets, especially with bank-owned or short sale properties. Some of the large banks that own homes require any potential home buyer to be qualified with their preferred lender – who is typically a representative of the bank that owns the home. This is one way for the bank to recoup a small portion of their loss on the home from the previous foreclosure or short sale.
In other scenarios, the listing agent/seller prefers to feel safe in knowing the home buyer they’ve selected has a back up plan should their current one fall apart.
Q. I was pre-qualified, but after I found a home and signed a contract, my lender denied my loan. Why is this a common trend that I hear about?
There are literally hundreds of moving parts with a real estate purchase transaction that can impact a final approval up until the last minute, and then after the fact in some unfortunate instances.
With the borrower – credit scores, income, employment and residence status can change.
With the property – appraised value, poor inspection report, title transfer / property lien issues, seller cooperation, HOA disclosures.
With the mortgage program – Interest rates can change affecting the DTI ratio, mortgage insurance companies change guidelines or go out of business, new FICO score requirements…. the list can go on.
It’s important to make sure your initial paperwork is reviewed and approved by an underwriter as soon as possible. Stay in close contact with your mortgage approval team throughout the entire process so that they’re aware of any delays or changes in your status that could impact the final approval.
Q. What happens if I can’t find a home before my pre-qualification letter expires?
Depending on your mortgage program and final underwritten conditions, you may have to re-submit the most recent 30 days of income and asset documents, as well as have a new credit report pulled.
Worst case scenario, the lender may even require a new appraisal that reflects comparables within a 90 day period.
It’s important to know critical approval / condition expiration dates if your real estate agent is showing you available short sales, foreclosures or other distressed property purchase types that have a potential of dragging a transaction out several months.
Q: Do I have to sell my current home before I can qualify for a new mortgage payment?
If you are in a financial position where you are qualified to afford both your current residence and the proposed payment on your new house, then the simple answer is No!
Qualifying based on your Debt-to-Income ratio is one thing, but remember to budget for the additional expenses of maintaining multiple properties. Everything from mortgages payments, increased property taxes and hazard insurance to unexpected repairs should be factored into your final decision.
Credit is one of the most important components in the mortgage approval process. Lenders look at a borrower’s credit score, number of open accounts, payment history, type of credit borrowed and a series of other factors when determining what level of risk to assess to each lending scenario.
Down payment requirements, loan programs, flexibility on income and even interest rates can be impacted by a slight bump in a credit score.
According To Wikipedia:
A credit score in the United States is a number representing the creditworthiness of a person or the likelihood that person will pay his or her debts.
A credit score is primarily based on a statistical analysis of a person’s credit report information, typically from the three major American credit bureaus: Equifax, Experian, and TransUnion.
The Fair Isaac Corporation, known as FICO®, created the first credit scoring system in 1958, for American Investments, and the first credit scoring system for a bank credit card in 1970, for American Bank and Trust.
The three credit reporting agencies in the United States of America, Equifax, Experian, and TransUnion, collect data about consumers used to compile credit reports.
The credit agencies use FICO software to generate FICO scores®, which are sold to lenders. Each individual actually has three credit scores at any given time for any given scoring model because the three credit agencies have their own databases, gather reports from different creditors, and receive information from creditors at different times.
In the United States, a resident is permitted by law to view their credit report once a year at no charge by visiting the website AnnualCreditReport.com.
The individual’s “credit score” information is available for an additional fee from each of the three credit reporting agencies. In addition, the Fair Isaac Corporation sells FICO scores® directly to consumers using data from Equifax and TransUnion.
A FICO score® is between 300 and 850, exhibiting a left-skewed distribution with 60% of scores near the right between 650 and 799.
Once credit has been established and maintained, credit scores are based on five factors to varying degrees: payment history (35%), total amounts owed (30%), length of time (15%), type of credit (10%) and new credit (10%).
The largest impact on credit scores is payment history and amount owed, which is why it is important to pay bills on time.
Debt should be kept to a minimum and funds should be moved around as little as possible. It may be beneficial to leave all accounts open, even if they have a $0 balance.
Different types of credit (ie. mix of credit cards, installment loans and fixed payments) can also be beneficial to a credit score.
However, too many installment loans can negatively affect credit.
Although time is a necessary factor for improving credit scores, this can be controlled by keeping the accounts that are opened during the same time period to a minimum.
By following these guidelines over an extended period of time, credit scores can be maintained and improved in order to improve the borrower’s loan potential and interest rate.
Key Factors That Impact Your Score:
1. Payment History (35%)
It is essential to pay your credit bills on time. Every 30 days late, collection, judgment, or Bankruptcy significantly drops your score.
2. Amount You Owe Compared to Balances (30%)
Your available credit compared to the amount owed. It’s a good rule-of-thumb to be at 40% or less of the available balances
3. Length of Credit History (15%)
Easy rule-of-thumb: the longer your accounts are open, the more positive impact it will have on your overall credit score. In fact, if you happen to have a card that is over 10 years old with even a little activity, it would probably be a bad idea to close that card.
4. Mix of Credit (10%)
Generally speaking, if you have loans, such as a car loan, as well as open credit cards, it helps prove to creditors that you have experience borrowing money.
5. New Credit Applications (10%)
It can hurt your credit score to have multiple reports pulled in a short amount of time.
Factors That DO NOT Impact Credit:
If you’ve been turned down for credit
Length of time at current address
Whether you own a home or rent
Information not contained in your credit report
Several factors can be used to establish credit initially, including bank accounts, employment history, residence history and utility bills.
Although they are not reported directly to credit bureaus, bank account history is important to lenders for first time loans and should be kept in good standing.
While they are also not reported to credit bureaus, utility bills (such as electric, telephone, cable and water) can also show a lender the risk associated with a new borrower.
Credit may be initially established through a bank, in which a credit card is linked to a specific amount of money deposited in the bank. If the credit card is not kept in good standing, the bank can then take the secured funds for payment.
Initial credit may also be established with a department store credit card (for example), but borrowers should beware of the high interest rates associated with these cards and pay off the balances in full.
You’re probably curious why we’ve created an entire section about mortgage payments.
However, since a mortgage payment is one of the major side affects of purchasing real estate with a home loan financing program, we thought it would be important to highlight a couple topics and related articles about mortgage payments that may impact your monthly budget.
Mortgage Payment Basics:
Just in case your first mortgage payment comes due before you get your first payment coupon in the mail, there should actually be a temporary payment coupon included with your closing documents.
Your mortgage payment is generally due at the beginning of the month, and most lenders start assessing late fees on the 15th. It is extremely important to remain under 30 days late on a mortgage payment, especially within the first 8-12 months of closing on a new loan.
When you receive your first mortgage bill, there will be a few numbers that add up to your total payment:
This is the portion that goes towards paying down your balance. An Amortization Schedule will break down the exact amount of each payment that is being applied to the principal and interest.
The interest payment is essentially the amount you’re paying the bank over time to borrow the principal balance.
Depending on which loan program, interest rate and closing cost scenario you chose, the amount of interest due every month may vary.
Real Estate Taxes can either be included (Impounded) in your monthly payment (PITI), or paid by the homeowner separately.
Certain government loan programs or high Loan-to-Value (LTV) mortgages require that taxes and insurance be included with the total mortgage payment.
Either way, it’s important to make sure you ask your loan officer and/or closing agent during the final loan docssigning to clearly explain what’s included in your monthly mortgage payment.
This is your hazard insurance (Fire), which protects your home and belongings. While there are many ways to save money on your property insurance, it’s important to know and trust your insurance agent so that you can be fully aware of what’s covered in your policy. Some homeowners shopping strictly on price may unknowingly leave valuable personal items without protection just to save an extra $15-$19 a month.
Mortgage Insurance –
This can come in a few different forms, depending on whether you have an FHA loan, VA, Conventional, Jumbo…
Mortgage insurance is in addition to hazard insurance, and completely unrelated. A lender may require a borrower to pay mortgage insurance on a property with a Loan-to-Value greater than 80%. The main purpose of mortgage insurance is to protect from foreclosure losses if the borrower fails to meet the monthly payment obligations.
FHA has mandatory Mortgage Insurance, but in a different form.
VA loans have a separate Funding Fee to help protect their interests.
Frequently Asked Questions:
Q: What Is an Impound or Escrow Account?
You’ve heard of the acronym PITI (Principal, Interest, Taxes and Insurance). The escrow account covers the T&I, and is included in the monthly payment.
Q: Are Impound Accounts Required?
Government loans, FHA and VA require an escrow to be established when a new purchase or refinance transaction is finalized.
If the LTV is low enough on certain other loan programs, an escrow waiver is allowed. However, there is typically a higher interest rate associated with a mortgage payment that doesn’t have an escrow account due to the lender taking on more risk.
Q: If I refinance my existing loan, what happens to my impound account?
The remaining reserves are generally refunded back to the homeowner.
Q: Can I set up an escrow account later?
Yes, you can request an escrow account at anytime. Keep in mind that you’ll have to deposit at least 12 month’s of hazard insurance, as well as around 6 month’s of tax payments in the escrow account to get it established.
How Do I Know If I’m Getting The Best Interest Rate?
Interest rates are impacted by a borrower’s credit score, loan term, mortgage program and a series of market factors that are outside of our control.
Unfortunately, many advertisers will tease a low interest rate in a marketing campaign for the purpose of creating interest in a specific loan program which may only fit a unique type of qualified borrower.
However, by promoting a lower note rate, with a higher APR, lenders are able to control the flow of the inbound phone call or Internet lead.
Understanding how interest rates work will certainly help relieve a lot of unnecessary anxiety about the home financing process.
While loan programs, credit scores and outside economic factors tend to control mortgage rates, borrowers do have the option of paying more up-front at the time of closing in the form of a discount point or loan origination fee in order to secure a lower interest rate.
Alternatively, borrowers currently have the option of taking a slightly higher rate in exchange for lower closing costs. This particular rate / closing cost scenario is sometimes referred to as a “No Closing Cost Loan” option, or something similar.
Mortgage Rate Basics:
How Are Mortgage Rates Determined?
Many people believe that interest rates are set by lenders, but the reality is that mortgage rates are largely determined by what is known as the Secondary Market.
The secondary market is comprised of investors who buy the loans made by banks, brokers, lenders, etc. and then either hold them for their earnings, or bundle them and sell them to other investors.
When the secondary market sells the bundles of mortgages, there are end investors who are willing to pay a certain price for those loans.
Top Five Market Factors That Influence Mortgage Rates
Timing the market for the best possible opportunity to lock a mortgage rate on a new loan is certainly a challenge, even for the professionals.
While there are several generic interest rate trend indicators online, the difference between what’s advertised and actually attainable can be influenced at any given moment by at least 50 different variables in the market, and with each individual loan approval scenario.
Outside of the borrower’s control, the mortgage rate marketplace is a dynamic, volatile, living and breathing animal.
Lenders set their rates every day based on the market activities of Mortgage Bonds, also know as Mortgage Backed Securities (MBS).
On volatile days, a lender might adjust their pricing anywhere from one to five times, depending on what’s taking place in the market.
Inflation, The Federal Reserve, Unemployment, Gross Domestic Product and Geopolitics are a few of the items you can pay attention to if you’re trying to track rates for a 30 day lock.
Questions Your Lender Should Be Able To Answer About Mortgage Rates
Simply checking online for today’s posted rate may not lead to your expected outcome due to the many factors that can cause each individual rate and closing cost scenario to fluctuate.
Since mortgage rates can change several times a day, it’s more important to pre-qualify your lender about his/her competency level with regards to mortgage rates. If your lender doesn’t know what to look for or how to answer some basic questions, there is a good chance you may not ever see that initial interest rate you were quoted.
What’s The Difference Between Note Rate and APR?
Low rates with a high APR may or may not be the best deal.
Comparing apples to apples is an excellent way to determine which loan closing cost and rate scenario makes sense for your short and long-term financial goals.
How Do Mortgage Rates Move When The Fed Lowers Rates?
The traditional news media generally announces mortgage rate movement a few days too late, or when rates are moving in the opposite direction of where we need them to go.
One of the big misconceptions most people have about mortgage rates is that the Fed, and / or Federal Government control what mortgage rates look like every day.
Home Buying Steps / Process:
Step 1 – Getting Pre-Qualified Prior to Shopping for a Home
It’s obviously important to know how much home you can afford, what type of down payment to budget for, monthly mortgage payment as well as what type of loan program you’ll be using to finance the new property.
Certain mortgage loans have residence type, HOA, appraisal or insurance restrictions that your agent needs to be aware of prior to showing you listings.
A personalized strategy session with a trusted mortgage professional should address all of your initial loan approval questions, as well as uncover any potential challenges that can complicate the entire transaction.
Step 2 – Assembling Your Home Buying Team – Knowing The Players
The home buying process has many steps, participating parties and potential challenges that can be overcome with the right team on your side.
Your agent, attorney, title company, insurance agent and lender all have important roles to play.
Buying a new home is literally a team sport since there are so many tasks, important timelines, documents and responsibilities that all need special care and attention.
Besides working with a professional team that you trust, it’s important that the individual players have the ability to effectively communicate and execute on important decisions together as well.
Step 3 – Purchase Offer Submitted
Assuming that you’ve already been given a mortgage approval and have a firm understanding of the type of property you are qualified to purchase, your agent will submit your purchase offer to a listing agent or seller.
Once you receive an accepted offer, the due-diligence period starts a series of timelines for final mortgage approval, appraisal, inspections and other requirements which would be spelled out in the terms of the contract.
Step 4 – Conditions and Paperwork
It comes in from all angles at this point, lenders, processors, insurance agents, sellers, real estate agents…. and the list can go on.
Step 5 – Closing
A successful closing requires all of the team players to come together at the same time, with the same agenda, on the same date…. with numbers and figures that match.
Related Home Buying Process:
Renting vs Buying
Buying a home versus renting is a big decision that takes careful consideration.
While there are several biased sources that can make arguments for or against owning a home, we’ve found that most home buyers base their ultimate decision on emotion.
Cost, Qualifying, Freedom, Maintenance and Security are some of the main reasons for renting, as well as owning.
Things Your Agent Should Know About Your Approval
While many experienced real estate agents have a general understanding of the mortgage approval process, there are a few important details that frequently get overlooked which may cause a purchase to be delayed or denied.
New regulation, updated disclosures, appraisal guidelines, mortgage rate pricing premiums, credit score, secondary approval layering, rescission deadlines, property type, HOA insurance requirements, title and property flip rules are just a few of the daily changes that can have a serious impact on a borrower’s home loan financing.
Important Factors To Consider When Purchasing A Foreclosure or Short Sale
Short sales, foreclosures and new construction homes all have caveats that need to be considered when pursuing financing.
If the guidelines and potential pitfalls are not properly understood, you could face delays in closing or potentially even a denied loan.
Property Condition, Timing Challenges, New Construction Appraisal Process… are a few issues that your agent will need to have experience paying attention to in order to ensure a smooth mortgage funding and closing process.
First-Time Home Buyer Credit Checklist
Getting a new mortgage for a First-Time Home Buyer can be a little overwhelming with all of the important details, guidelines and potential speed bumps.
Since there are so many rules and steps to follow, we’ve put together a simple list of Do’s and Don’ts to keep in mind throughout the mortgage approval and closing process.
Consolidating credit cards, paying off collections and multiple inquiries on your credit report are a few things that could have a negative impact on an approval.
Frequently Asked Questions:
Q: What Is The Difference Between A “Buyer’s” and “Seller’s” Market?
Simple economics is the rule of thumb here.
Everyone wants to “buy low and sell high,” but the truth of the matter is there is no way that can happen for everyone, every time.
Seller’s Market = More buyers than sellers
Buyers Market = More sellers than buyers
Q: Where Does My Earnest Money Go?
The Earnest Money Deposit is credited back towards the buyer’s closing costs and/or down payment.
Any additional funds are given back to the buyer from the escrow company.
Q: Do I Need A Home Inspection?
Some mortgage programs require a borrower to get a home inspection if it is mentioned in the purchase contract.
Either way, there are several reasons why it is important for a home buyer to have a licensed professional take a closer look at a property before the transaction is finalized.
Q: Does it matter if I buy a home that is part of a Home Owner’s Association?
A Home Owner Association may have the power to determine the color of your home, the number of pets you have and the type of grass you have to plant.
They also may have the power to levy assessments, dues and fines.
Or, they may be as simple as collecting a few dollars per year to make sure the grass is cut in the common areas.
The home buying process is full of paperwork, important dates, contracts, market movements and checklists that can even overwhelm seasoned real estate investors.
One of the main reasons to make sure you’re working with a professional real estate buying team is the fact that you get to lean on their combined experience to ensure a smooth and painless closing.
Some agents and loan officers can close upwards of 20+ transactions a month. Compared to the 5-7 homes an adult may purchase in his/her lifetime, you can obviously see where it helps to have a few trusted professionals in your corner.
The closing process can be argued as the most critical part of a real estate transaction where the most amount of things can go extremely wrong. This is where that professional team will really prove their value.
If all of the initial questions, concerns, documents and contingencies were addressed early in the mortgage approvaland home shopping process, then you should feel confident about walking into the closing with all bases covered.
However, we’ve listed a few bullets, links and frequently asked questions on this page to help highlight a few important topics you may want to be aware of during the closing process.
Six Prior-To-Closing Conditions That Can Delay Your Escrow:
Even though your lender may have provided a Pre-Qualification and/or Mortgage Commitment Letter, there may still be several conditions that could delay a closing.
Sometimes buyers and agents let their guard down with the relief of getting closing documents to title, and they forget that there may still be a bunch of work to be done.
Prior-to-Closing conditions are items that an underwriter would require after reviewing your file, which could simply be an updated pay-stub, a letter of explanation of recent credit inquiries or more clarification on information found in a tax return.
Here is a list of a few Prior-to-Closing conditions you should be aware of:
1. Updated Income/Asset Documentation-
You may have supplied your lender with a mountain of documentation, but make sure you continue to save all of your new paystubs and financial statements as you move through the process. Chances are your lender will want updated documents as you get closer to closing.
2. Credit Inquires –
If you have had recent inquires on your credit report, a lender may check to see if any new credit has been extended that may not yet actually appear on your report.
An inquiry could be for something minor such as a new cell phone, but can also be something that will impact your ability to qualify for the loan such as a car payment or another loan that you co-signed to help out a family member.
3. Employment Verification-
Your lender will be making sure you are still actively employed in the position that is listed on your loan application, and they will do this more than once in the process.
So make sure regular life events, such as maternity leave or a scheduled surgery, have been brought to your loan officer’s attention ahead of time.
Once an underwriter starts to uncover surprises, they may hold a file up for a while to do a bunch of unnecessary digging to find out if there are any other issues that the borrower failed to mention.
4. Funds for Closing-
Lenders will want to source where every dollar for the transaction is coming from and verify that it has been deposited into your bank account. If funds need to be liquidated from a retirement account or home equity line start the process sooner rather than later.
Sometimes lenders will not release all of the funds immediately after a large deposit so it is important to have these in place well ahead of your closing date. The same applies for Gift Funds-make sure the donor is aware of your time frame and is willing to supply the required documentation to your lender.
5. Title and Judgment Searches –
Typically, title and judgment searches are performed farther along in the mortgage process because they are not ordered until after you receive your mortgage commitment. These searches could reveal judgments against your name or the sellers along with liens against the property you are buying or selling.
Sometimes, even an old mortgage appears against the property since it was never properly discharged, or if you have a common name items could appear that are really not yours.
Either way, the underwriter and title company will want to be sure that these are cleared up before the closing.
6. Homeowners and Flood Insurance Coverage –
Lenders want to review your policy several days prior to closing to make sure coverage is sufficient and accurately account for it in your monthly payment.
Insurance coverage can sometimes be difficult to obtain depending on your past history with claims, credit, location and type of the property.
Items to Bring to Closing Appointment:
Your real estate agent and/or mortgage loan officer should be providing you with a final list of documents that need signatures or updated verifications, so the general list of items needed at closing is quite basic:
1. Funds To Close –
If you are required to bring in a down payment and/or pay for closing costs to finalize the transaction, you’ll need to bring a certified check from a bank. The escrow company, your agent and loan officer should provide you with a full breakdown of all fees / costs involved in the transaction.
While these final numbers may be more accurate than the initial Loan Estimate which was provided at the beginning of the application process, there will still be a small buffer amount added by escrow to cover any prepaid interest or other minor changes.
If you don’t have to bring in any funds to close, then you might actually be getting a portion of the Earnest Money Deposit back.
Keep in mind, it is important to make sure these funds to close come from the proper sources.
2. Proof of Identification –
Official Drivers License or State ID card. Passports will work as well.
Frequently Asked Questions:
Q: Does It Matter Which Day of the Month I Close?
The date of your closing is all about how you view the money being applied. Pay now or pay later, but it will always be collected.
Let’s first look at how mortgage payments are broken down:
When you pay your rent for the month, you are actually paying for the right to live in the house for the upcoming month.
However, your mortgage payment is broken into four separate components; principle, interest, taxes and insurance (PITI).
The principle is paid towards the upcoming month, interest is paid towards the previous month and the taxes and insurance are deposited into an impound account.
As far as closing on a particular day of the month to save money on interest payments, it depends on the type of loan program you are using.
If you’re more concerned about successfully closing with the least amount of stress, then early to mid month is usually a good time to close.
Q: I am refinancing an FHA loan, will it benefit me to close in the beginning of the month?
No, in fact FHA refinances should always close at the end of the month because you are responsible for the entire month’s interest.
Q: Should I be concerned about the closing date on a conventional loan refinance?
Not really, however you can save a couple dollars by closing early in the month, just avoid closing on a Friday because you could be responsible for the interest on two loans over the weekend.
Mortgage Closing Costs
In addition to the basic mortgage underwriting, processing and origination fees that are charged by a lender, there are several other costs associated with purchasing a new property.
Since every player on your real estate home buying team has a stake in your transaction, it’s a good idea to know how to budget for their services.
Common Out of Pocket Expenses to Budget For:
The items below are common to a Real Estate transaction and you may be required to pay for them up-front:
*In most cases the estimated fees for each item have been purposely left out since each scenario is different.
This is usually money well spent since the inspector will evaluate many aspects of your new home to ensure all systems are functioning as they are intended to.
Condominium Questionnaire Fees-
This may be required by your lender, and can take up to 30 days to receive. Fees can range anywhere from $0 to $300 depending on the complex.
Well and Septic Certifications-
If your new home has either of these systems you will want to be sure that they are functioning properly.
This document outlines the borders of your property, and the price can vary depending on the size of the lot and if it was actually staked out. A survey is not a requirement for all purchase transactions.
Depending on your state, loan size, property type, loan program and lender, the appraisal may be required to be paid for up-front by the borrower. And, in some cases, more than one appraisal may be required, especially if the borrower is switching lenders and using conventional financing.
A typical purchase transaction will involve some, but not necessarily all of these services. It’s important to discuss any other potential out of pocket expenses with your agent and loan officer, since some of these items may not be included on the initial Good Faith Estimate.
The important thing to realize is that the vendors providing these services will expect to get paid whether or not your transaction closes, and they may ask that you pay when services are rendered.
A combination of just a few of these fees could easily add up to over $1,000 so it is important to have the funds set aside at the start of the process.
Frequently Asked Questions:
Q: Where Does My Earnest Money Go?
An Earnest Money Deposit (EMD) is simply held by a third-party escrow company according to the terms of the executed purchase contract.
For example, there may be a contingency period for appraisal, loan approval, property inspection or approval of HOA documents.
In most cases, the Earnest Money held by the escrow company is credited towards the home buyer’s down payment and/or closing costs.
*It’s important to keep in mind that the EMD may actually be cashed at the time escrow is opened, so make sure your funds are from the proper sources.
Q: Do I Have to Pay My Real Estate Agent on a Purchase Transaction?
In most cases, the buyer is not responsible for covering the cost of their real estate agent.
When a home owner hires a real estate agent to list, market and sell their property, they’re also (in most cases) agreeing to compensate the agent representing a buyer.
A common myth is that a buyer will get a better price on a property if the seller doesn’t have to pay the typical 3% to a buyer’s agent. However, it’s more expensive to buy an overpriced property, not negotiating properly for the acceptable seller paid closing costs, overlooking important language in the purchase contract, missing potential commercial zoning updates on a nearby lot, or buying a home that has a lawsuit against the HOA.
Q: What Are Mortgage Points?
Mortgage points are fees charged by the lender for services and/or a lower interest rate.
One Mortgage point is equal to one percent of the loan amount. For example, on a $100,000 mortgage $1,000 would be equal to one point.
Understanding what points are and how they work can save you thousands of dollars on your mortgage. Borrowers can pay mortgage points to reduce the interest rate charged on their mortgage.
The Borrower may also choose to raise the interest rate to reduce the closing costs. This is sometimes called buying up your interest rate. This buy-up strategy is used when the intentions of the borrower is to keep the mortgage for a short period of time.
To decide whether or not to buy-up or buy-down your interest rate you must first calculate a breakeven point. The following formula can be used:
Cost of buy down / monthly savings = months to breakeven point. If you plan to keep the mortgage longer than the breakeven point then buying down points may be beneficial to you.
For example: $1,000 cost to buy down rate / $100 savings per month = 10 months to breakeven
In the above example if you plan to keep the mortgage for more than ten months (the breakeven point) you should buy-down the interest rate. In the above example if you kept the home for five years your savings would be $5,000.
Make sure you consider mortgage points in your strategy when getting a loan. It can save you thousands of dollars.
Q: Are Discount Points Tax Deductible?
Yes, they may be tax deductible, but make sure to speak with your tax advisor.
Q: Can I Pay More Than One Point For a Lower Rate?
Mortgage points usually are calculated in 1/8 increments. A good rule of thumb to follow on a 30 year fixed rate is for every .25% drop in interest rate it will cost you one mortgage point.
Q: Is a “No Origination Loan” or “No Cost Loan” a Form of Buying Up a Rate?
Yes, this strategy is usually used when the borrower is planning to keep the mortgage for a shorter period of time.
Properly estimating neighborhood property values and your closing costs will help determine the net benefit of a refinance transaction.
Some homeowners just want to know the best approach of finding money to make home improvements, while other borrowers are in a situation where their rate is adjusting.
Either way, it’s easy to get caught off guard if you don’t have the essential knowledge about your mortgage refinance options.