Kathleen’s note: This is a guest post, by Zillow, which, unless you’ve been living under a rock, you’ve certainly heard about. They have all kinds of calculators to determine what buyers can afford. I’ve moved, and I’m still trying to get my thoughts (and belongings!) organized, so this guest post could not come at a better time.
BY CATEY HILL
Home buyers are understandably eager to close on their mortgage transactions and move into their new homes. But it’s important that they understand the mortgage loan process from start to finish. Buyers who are prepared for the process can help expedite it by having the right paperwork and necessary funds ready. Here’s what buyers need to know.
Before the Closing:
To begin the home buying process, potential buyers should get pre-approved for loans from their lenders. Pre-approval is a lender’s conditional promise to lend a buyer a certain amount of money to buy a home. Though it’s not required for buyers to be pre-approved, taking this step accelerates the loan approval process once the buyer is ready to make an offer.
To get pre-approved, buyers provide financial documentation to their lenders such as pay stubs, W2s, bank and other account statements, and tax returns, while lenders run their clients’ credit reports. Buyers typically fill out an application called the Uniform Residential Loan Application, which asks for personal information including name, address and Social Security number; details on assets, liabilities, employment and income; and details on the property they hope to purchase (if they know already). Pre-approved buyers are given letters of pre-approval by their lenders.
Potential buyers then show their pre-approval letters to their real estate agents to prove they are serious buyers and to narrow their house hunt to price-appropriate properties. The pre-approval letter indicates the total cost of mortgage payments a buyer can afford to make. Once a buyer finds the property he or she wants and can afford, the buyer makes a formal offer. When that offer is accepted, the buyer then enters into a contract to buy the property.
At this point, the buyer notifies the lender to complete the formal application process: The lender reviews financial and other documentation (see above section on pre-approval) and gives the buyer a variety of documents outlining the potential costs of the loan. One of these documents is the Good Faith Estimate which the lender is required to give applicants within three days of completing a mortgage application. This document gives the buyer an estimate of the mortgage loan terms such as the interest rate, loan amount, monthly payment and closing costs (the costs a buyer can expect to pay upon completion of the mortgage transaction). Within three days, the lender is also required to give the borrower a truth-in-lending disclosure statement which outlines the total cost of the mortgage loan including the amount being financed, annual percentage rate, finance charges and payment schedule. The buyer may also get a mortgage servicing disclosure which states whether the lender can sell the loan, and depending on the state and lender, other disclosures as well. The lender also orders an appraisal of the home and the title insurance.
Once all of these steps are taken, a lender may give a potential buyer a commitment letter stating the amount and term of the loan, interest rate, APR and monthly charges. Typically, the buyer must return a signed copy of this letter to the lender within five to 10 days.
During the Closing:
Once a bank has approved a mortgage loan, the buyer needs to “close” on the loan, during which ownership of the home officially is transferred to the buyer. The process, which involves transfer of monies and the signing of myriad documents, can be intimidating to new buyers, but it needn’t be. To begin, the closing typically takes place in the offices of the title or escrow company, and the following people may be present: the borrowers, escrow officer, closing agent, and the buyer and seller’s real estate agents.
At closing, the buyer is responsible for paying closing costs, which are simply the final fees that borrowers often pay to entities such as the lender and title company before they are given ownership of the home. These may include: attorneys fees; a recording fee, paid to a city or county for recording the new land records; an appraisal fee; a loan origination fee, which lenders charge for processing the loan paperwork; charge for an inspection; discount points, which are fees paid in exchange for a lower interest rate; a survey fee, which covers the cost of verifying property lines; title insurance, which protects the lender in case of title defects; and title search fees, which pay for a background check on the title. Closing costs are typically between 2 and 5 percent of the purchase price of the home, and the average closing costs nationwide run about $3,700.
During closing the borrower signs two major documents related to the mortgage: the mortgage note, and the mortgage or deed of trust. The mortgage note is a formal promise to repay the loan, and it outlines the terms of the loan and consequences for not repaying it. The mortgage or deed of trust is a document that puts the property up as collateral and gives the lender the right to put the property into foreclosure if the borrower fails to make timely payments. At closing, the seller signs the deed, which transfers ownership of the property from the seller to the buyer. The buyer may also have other documents, affidavits and declarations to sign.
When all of these steps are completed, the buyer become the owner and is handed the keys to the new, often long-awaited home.