FINANCING

The Pre-approval Process

There are many different options to consider when purchasing a home. You’ll want to get at least a pre-approved price range prior to touring homes. Nothing is more disappointing than finding the home of your dreams and not qualifying for the loan. Getting pre-approved is a crucial step when negotiating the contract terms and gives a buyer leverage over competing buyers that have not been pre-approved. Depending on your loan amount and financial ability, we may recommend a full underwriting prior to submitting an offer to purchase. Underwriting is the process the lender will use to gather all the detailed information and documents needed to complete your full approval for a loan. Where a pre-approval can be done in a day, full underwriting will take a week or two. However, once you have been through underwriting, the contract-to-close process will be more streamlined.

In most cases, buyers will need a loan to purchase their home. Each lender will offer its own set of loan products.

You, your loan consultant and Riverscape Realty will work together to develop a purchasing strategy that fits your financial profile.

When shopping for a lender and a loan product, here are some questions to consider:

Does the loan consultant have an office conveniently located or are they an online or out-of-state lender?
If they are out-of-state, are they familiar with the local transfer fees and closing guidelines, etc.?
Can they provide a quote for the loan prior to formal application of a loan?
What are their origination fees and other charges?
Will they provide full underwriting prior to offering to purchase a home?
What is the interest rate of the loan product under consideration?
What are the down payment requirements for the various products?
What are the closing costs?
What is the credit score requirement?
What products have mortgage insurance minimums?
Is your loan contingent on the sale of your current home?

Types of Loans

Here are a few common loan options that are generally available at most lenders:

Conventional Mortgage-
Customarily requires a 20% down payment, although down payments may be as low as 5%. Mortgage insurance is required if the down payment is less than 20%. Seller closing assistance may be limited based on the down payment of the borrower.

VA Loan-
Veteran’s Administration guarantees mortgages for lenders to help eligible veterans. VA loans may require no down payment up to the VA maximum loan limit. VA loans can be assumed by qualified borrowers. Seller closing assistance allowed up to 4% of the sales price. In 2020, the VA has lifted the loan limits for vets purchasing a home.

FHA Loan-
FHA is a department of the US Housing and Urban Development. FHA does not lend money, but similar to a VA loan, insures mortgages. Down payments are as low as 3.5%. The seller can give up to 6% of the sales price in closing assistance to the buyer. No loan limits.

A couple other specialized products that you won’t find with all lenders:

USDA Loan-
Loan program offered in rural areas by the USDA. Geographical based with income limits. Good for primary residence only and no down payment required.

Jumbo Loan-
Non-conforming loan not purchased by Fannie Mae or Freddie Mac. They exceed the conforming loan limits and have different underwriting guidelines. Usually require a down payment of 20% and good credit.

What to Expect

The lender will require pay and tax documents from all persons on the loan. Here are some of the documents and information about the purchase they will request throughout the process:

Amount of loan; term of loan (length)
Current and previous addresses
Social security numbers
Current and previous employers’ name, address and telephone number
Proof of gross monthly income by all buyers—most recent paystubs and most recent W-2’s
Complete bank account, retirement fund, and brokerage account statements
Proof of all assets (stocks, real estate, cash, personal property, life insurance…)
A complete list of all debts
A copy of the sales contract to purchase
Any changes in your financial profile during the loan process along with an explanation

Steps to loan commitment

Review your application
Verify the facts
Get a credit report
Obtain a property appraisal
Make final consideration on loan approval

Closing Costs/Down Payments

There are going to be a lot of terms thrown at you during the buying process. One of the biggest confusions among buyers is understanding the difference between a down payment and the closing costs.

A down payment is usually a percentage of the loan that goes toward the actual loan amount. The more you ‘put down,’ the more equity you establish. Most loans require some type of down payment from the buyer. The down payment will be paid at closing and part of the amount that is ‘due from buyer’.

Closing costs are fees. Closing cost fees can include: lender fees; title fees; title insurance; HOA/Condo fees; transfer/recordation taxes; property taxes; escrows; and a variety of other charges that could appear on the Closing Disclosure (CD) statement.

Both the down payment and closing costs due from the buyer will be wired by the buyer to the title company by settlement day. The actual loan will be wired from the lender to the title company for the day of settlement.

The lender will send you a preliminary CD to review about 3 days from settlement and send those adjustments to the title company to produce the final closing document to be signed by all parties the day of settlement.

If you have to sell your current home to close on a new home, title companies do what’s called a ‘coinciding’ settlement where the net proceeds from the sale of your current home transfers to the new home settlement for closing. This allows buyers to use the equity in their existing home to purchase their new home of choice!

Earnest Money Deposit

When you submit an offer to purchase a home, you will be promising to make an ‘earnest money deposit’ to show the seller you are willing to ‘put some skin in the game’. Even if you are using a 100% financing loan product, the buyer is still required to show an EMD as good faith. There is no set amount, but typically this amount will be about 1% of the sales price and can be negotiated. The EMD is only collected from the buyer upon the ‘meeting of the minds’ between buyer and seller and they agree on who will hold the EMD until settlement. This account will be non-interest bearing. The EMD does not go in the seller’s pocket at settlement; rather it goes as a credit to you toward down payment/closing costs. If at some point, the contract is cancelled, voided, nulled, or defaulted (anything other than settlement), the parties have guidelines to follow stipulated in the contract about the return of the EMD to the buyer or as an award to the seller. If this happens, you may want to consult a lawyer.

Title Insurance

Title insurance provides protection in the event any of a number of past actions threaten the title to your property. The lender will always require you to have title insurance. Owner’s title insurance is optional, however. Many buyers don’t quite understand title insurance. Let’s use, for example, your parent’s home that they have owned since it was built 30 years ago. They have had the title to their home the whole time, without a break in history. Most likely, the title will be less of a risk of threat. On the other hand, let’s say that you want to purchase a bank-owned property that has been in and out of distress as a result of a divorce for 10 years. This would likely be a riskier title to keep secure and you would want title insurance.

Although it seems confusing, title companies will argue that title insurance spread over a 30-year mortgage is extremely nominal and affordable. Why risk not having title insurance? In the case where the risk is lower in the first example, maybe the ‘standard’ insurance will suffice and use the ‘enhanced’ title insurance for the latter example.

The whole process can be very confusing and at times, frustrating. Finding a lender that not only communicates throughout the process but delivers on-time is key to managing the stress as a buyer.

Riverscape Realty will help you find a home and a lender that meets your needs and preferences.