Buying a house can seem like a daunting task. Earnest money, discount points, closing costs, and mortgage insurance, what does this all mean? Though there are many moving parts, starting the purchasing process is quite simple. I had the opportunity this week to sit down with first time home buyer and lender expert Jackie Lynn Hurtis from Interlinc.
“I’d say that the first step is a quick pre-qualification application with your lender. A lot of people will check their scores through their bank or some other app, but those can be really inaccurate. The only way to actually know for sure is to have the lender pull it. we pull from all three and look at the middle score for all borrowers – we’ll use the lowest middle score. FHA doesn’t actually have a minimum score, but most investors won’t go below 580.” –Jackie Lynn Hurtis
What if you scores don’t match up? Do not worry! This is the time to rebuild your credit before you apply for a loan. Some lenders offer assistance consulting applicants on how to raise credit scores. The better your financial health, the better interest rate you will receive.
Interest Rates & What Influences Lender’s Decisions
Following the housing bubble of 2008, mortgage underwriting guidelines are regressing to more traditional methods. Before the crash, mortgages used more of a “one size fits all” approach, whereas now, the individual borrower’s financial health is more heavily weighted. This approach mitigates the lender’s risk, while also protecting borrowers from acquiring loans they simply cannot afford. Interest rates reflect risk of the borrower and the property type they are buying. Twelve factors influence and drive interest rates:
- Credit Scores
- Type of Loan
- Escrow Accounts
- Discount Points
- How soon will you be closing? (interest rates lock for 15, 30, or 60 days)
- Who is paying your closing costs?
- Term of Loan
- Loan Amount
- Type of Home
- Private Mortgage Insurance (required on homes with less than a 20% down payment)
- Occupancy (Investment, Primary, Secondary)
Pre-qualification is an extremely beneficial step offered by many lenders. This is essentially a free consultation, giving you an approximate amount you can borrow based on a full credit report. Presenting a full credit history report including prior problems, debts owed and other obligations will give a more accurate approximation. This doesn’t mean you’re guaranteed loan approval. The pre-qualification process is free from many lenders and is a great step in determining where you stand.
Similar to pre-qualification, pre-approval obtains your verified credit score, debt, and income. An underwriter will take these into account and pre-approve you for a loan up to a specific amount. With a number in mind, it’s time to start the housing hunt! Ask an agent to start daily searching the MLS (Multiple Listing Service) for homes that not only meet your budget, but your personal criteria as well.
You’ve Found the One!
Once your dream home has been found, your agent will negotiate terms of the sale and present your offer to the seller. Usually, your letter stating your pre-approval for a loan will be submitted as well. This assures the seller that you can actually purchase the home.
When the seller accepts your offer it’s time to secure financing within 2 days of the sales contract. If you have not been conditionally approved (pre-approved), you will need to finish the loan application and submit paperwork to support the application including:
- Pay stubs
- 2 years of tax returns
- Account statements verifying down payment source
- Funds to close
Within 3 business days of the sales contract, you will need to read through, sign, and return the initial disclosure forms. These forms are used to inform the borrower of all terms and conditions of the mortgage. You can expect to see the following documents sent during this period:
The Truth-In-Lending Disclosure Form
- Annual percentage rate
- Total amount financed
- Total monthly payments
- Total of all payments
- Total finance charges
- Late payment charges
- Prepayment penalties
- Insurance requirements
- Assumability restrictions
Settlement Costs & Information
- This document will explain and set expectations of the incurred costs of taking out the loan
The Good Faith Estimate (indication of what the loan will cost to originate)
- Loan origination fees
- Credit report fees
- Appraisal fees
- Loan points
- Prorated interest
- Homeowners & mortgage insurance premiums
- Title search fees & title insurance premiums
- Document preparation fees
Transfer of Servicing Disclosure Statement
- Informs you about the lender’s possible right to transfer service of your loan to another lender
Initial Escrow Account Disclosure
- Escrow account requirements
- Cash requirements at closing
Whew, enough documents to read through? Good news, you’re close to calling this YOUR home! To ensure the seller’s disclosure form was accurately filled in, you will want to order a property inspection. A property inspector will check for safety hazards, pest damage, water damage, ect. Some items may need repair before the sale can be executed.
Once the physical property itself has been inspected, acquiring a title search will check for any liens against the property. Title cannot be transferred until all liens have been cleared and payments made by the owner.
Finally, lenders will require an appraisal to ensure that at the time the loan is granted, the home’s value justifies the loan amount. A Certified Appraiser will determine the property’s condition and fair market value, utilizing a comparative market analysis.
The Home Stretch
A processor will package all pertinent information relating to the borrower and the property. This will be sent to the underwriter for the final approval. The underwriter will be searching for lenders who can make payments on time, as well as, a property that can cover the cost of the loan, if the buyer defaults. Finally, the processor will review the final appraisal, conditions, and repairs or improvements.
The final step before signing and funding the loan include:
- Flood (if in a floodplain)
- Earthquake (certain areas)
- Hurricane (coastal areas)
FINALLY, signing the final escrow and loan documents by both the buyer (you) and the seller. The County Recorder will record documents stating transfer of title. The lender will then send funding to the title company by wire or check for the loan amount. Once this is complete, hand over the keys and the home is yours!
The process can seem a bit convoluted and difficult, but asking plenty of questions and building a team around you can set you up for a smooth home-buying process! If you have any further questions feel free to give us a call.