How are Purchase Loans Made?
Steps to Homeownership:
Before you get started looking for homes, it is good to do some preparation, so when you find the home you’re looking for, you are ready to make an offer and will have a smooth process until closing.
Pre-Qualification and Pre-Approval:
1. Pre-qualification or Pre-Approval – You are encouraged to get pre-approved for a mortgage before looking for a house. However, if you don’t want to become pre-approved, pre-qualification is the next best option. Pre-qualification gives you an idea of how much you can afford based on your debt, income and credit history. The key to getting pre-qualified, is to provide your entire credit history. Neglecting to mention an outstanding car loan or previous credit problem can nullify the pre-qualification. Most people buy a mortgage payment, not necessarily the price of a home, so that is why it is so important to go through these steps before you start looking.
Pre-approval is similar to pre-qualification, except your debt, income and credit are all verified and you are actually approved for a loan, up to a specific amount and under certain conditions and terms. Becoming pre-approved also means you can search for your dream home without worrying about whether or not you can afford it.
Home Search and Purchase Contract
2. Home Search – Now that you know how much home you can afford, you can begin shopping. I can set you up directly on our MLS service with saved searches and we can monitor the properties and discuss them for potential viewings. If you found me through my website IsabellaScott.com, you have probably tried our property IDX function where you can search for properties, save them in your own Property Organizer and set up automatic email updates.
3. Purchase and Sale Agreement – When you find the right home, I present the purchase contract to the sellers. The terms of the sale are negotiated, including sales price, repair requests, move-in date, etc. Your pre-qualification or pre-approval letter will be submitted with your offer because sellers want to see that you are able to purchase their home. A pre-approval letter (vs pre-qualification) is a very big advantage in a competitive market because you have already gone through the verification process and have been approved!
4. Property Inspection and HOA (Home Owners Association) Application – Most purchase loans require an inspection for general construction, termite and water damage, as well as possible safety hazards. Some problems may need to be repaired before finalizing the sale. If there is a condominium or home owners association, these applications will also have to be initiated at this time.
5. Loan Application – Once the seller accepts your offer, you will need to apply for your mortgage, usually within 5 days from acceptance. If you have a pre-approval when you made your purchase contract, this Application (#5) and Documentation (#6) will have already been completed. So then you would proceed to the Appraisal (#7).
It’s crucial to supply the lender with as much information as possible, as accurately as possible. All outstanding debts as well as assets and income should be included. If they come back and request additional documentation, no matter how crazy it seems to you, you must be conscientious about providing it quickly.
6. Documentation – Paperwork supporting the application must also be submitted. Information commonly sought includes pay stubs and/or two years’ tax returns, and asset account statements verifying the source of the down payment, funds to close and reserves. If you were pre-approved, this step has already been completed.
7. Appraisal – Lenders require an appraisal on all home sales. This step could jeopardize a deal if a big discrepancy were to exist between the home’s sale price and appraised value of the house.
8. Title Search – This is the time when any liens against the property are discovered. A lien may have been placed on a property to ensure payment of outstanding debts by the owner. All liens must be cleared before a transaction can be completed.
9. Processor’s Review – The lender’s loan processor packages all pertinent information to be sent to the lending underwriter, including any explanations that may be needed, such as reasons for derogatory credit.
10. Underwriter’s Review – Based on the information put together by both the loan executive and the processor, the underwriter makes the final decision on whether a loan is approved. Lenders are looking for borrowers who will make their payments on time and for a property that will cover the cost of the investment, if a buyer defaults.
11. Mortgage Insurance – Many lenders require private mortgage insurance when borrowers put down less than 20 percent on a loan. FHA and some conventional programs allow as little as 3.5% to 5% down payment. The interest rate of the entire loan is the same, but there is an additional charge for the mortgage insurance. Even if a loan meets the standards of a lender, a mortgage insurance company could choose to deny coverage. Another option instead of mortgage insurance, is a second mortgage equity line, usually at an interest rate that’s about 2-3% higher than the first mortgage, but there is no mortgage insurance charge. These are more difficult to obtain these days.
12. Final Loan Approval, denial or counter offer – In most cases, when your credit and debt-to-income ratio is good, your loan will be approved with little or no problem. However, in some cases, the lender may ask the borrowers to put more money down to improve the debt-to-income ratio. If the property appraises for less than the purchase price, you may need to increase your down payment to cover the difference. In some cases, repairs or improvements on the property may be required. There may also be other conditions to meet before the final loan approval and loan documents are issued.
13. Insurance and Other Conditions to Close – Lenders require fire and hazard insurance on the replacement value of the structure. Flood insurance will also be required if the property is located in a flood zone. The first year’s premium is required to be paid in full at closing, and then monthly payments are escrowed with the principal and interest to be paid by the lender the following year. Lenders will also run another credit check (to make sure you have not incurred any other new debt) and verify employment (to make sure you still have a job!).
14. Signing and Funding of the Loan, and Close of Escrow – Closings in Florida are usually handled by a title company that acts as the intermediary. Final loan and escrow documents are signed by you (the buyer) and the seller. The balance of your down payment and closing costs are wired to the title company / closing agent. The lender sends a wire for the amount of the loan to the title company, and gives instructions to the title company to disburse the funds to the seller after all documents are confirmed to be in order. Title insurance companies use gap insurance at the closing, so that all funds can be disbursed at closing. Documents transferring title are then sent to the County Recording office for recording.
Now you get to move into and enjoy your new home and make many happy memories!