Before you look at homes, take a minute to understand the loan process. Placing a bid and signing a sales contract is just a small piece of the puzzle. Without a mortgage, the contract is useless. Before you even look at homes, you should start the loan process. Not only will you know how much you can afford, but you’ll be able to close your loan faster.
Keep reading to learn how the loan process works.
Getting Pre-Approved
Before you shop for a home, get pre-approved. A pre-approval means the lender approved your income, assets, credit score, and debts. They agree that you meet the loan program’s qualifications. The pre-approval letter will include the outstanding conditions.
With the pre-approval done, you only have a few more steps before you can sit at the closing table.
Order the Appraisal
The property plays a major role in your loan approval. The home must be worth enough, after all, it’s the lender’s collateral. The appraisal also helps you. Would you want to pay more for a home than it’s worth?
The $500 out of pocket expense is worth every penny. Once you sign your sales contract, lenders order the appraisal right away. It takes a little time for the appraiser and seller to coordinate, plus the appraiser must write up the report. Once the underwriter has the appraisal report, he/she can clear conditions pertaining to the property if everything checks out.
Just what do you need from the appraisal? At a minimum, it should show a value of at least the purchase price. But, it must also show a home in decent condition. Would you still want to buy the home if the foundation was cracked or the roof was leaking?
What if the home isn’t worth the amount you bid? You have three options:
- Pay the difference between the sales price and appraised value in cash at the closing
- Re-negotiate the sales price with the seller
- Walk away from the sale
Clearing Conditions
Going back to your original pre-approval, underwriters need to clear any additional conditions. As they evaluated your paystubs, bank statements, and credit report, other issues may have popped up. For example, a large deposit on your bank statement needs proof of its origination. A late payment on your credit report may need some clarifying.
Stay in close contact with your loan officer during this time. The faster you provide the necessary documents, the faster the lender can clear your loan.
Order and Review Title Work
The property’s title work is another necessary piece of the puzzle. The title work shows ownership of the property as well as any existing liens. In most cases, the title is ‘clear’ with the exception of the current owner’s mortgage (if applicable).
If there are any unresolved liens on the property, the seller must resolve them. Property liens transfer with the home, not the person. If you were to buy the home, the liens become your responsibility. The seller must prove resolution of the issues.
The title work also shows that there aren’t any other potential heirs to the property. Even judgments could get in the way of the seller transferring the property. The title work must show the legal right for the owner to sell the home.
Order Title Insurance
After proving a clear title, the title company will write an insurance policy. This policy protects the lender, but you pay for it. The insurance policy covers the lender’s financial liabilities should issues with the home’s ownership occur in the future. You may also purchase an owner’s policy. This policy covers your interest in the home. You only pay the premium one time at the closing and it remains yours as long as you own the home.
Clear to Close
The best words you’ll hear during the loan process is ‘you’re clear to close.’ This means the lender successfully cleared all conditions on your loan. At this point, the lender also did one last check on your credit and employment. Don’t get too comfortable once you get your loan approval. Just before you close, the lender will pull your credit and call your employer. They need to know that nothing changed from the day you applied for the loan and now.
Close Your Loan
Finally, it’s here! Closing day means you sign all of the closing documents and provide a cashier’s check for your down payment and closing costs. Once you finish signing the documents, the lender clears the funds for release. The closing agent disburses the funds accordingly and you take possession of your new house keys
