FAQs & Resources – The Loan Process
Below is a list of documents that are necessary when you apply for a traditional home mortgage. However, out of the box loans may require additional documentation. When you apply for a loan, do not be under the impression that you are a customer! The lenders’ true customers are the investors who buy these loans in bulk, at the secondary market. Your loan will get sold so the lender will do everything possible to make the product attractive. Therefore, supporting documents are required from you irrespective of which lender you choose. The documentation is the same across the board so turn them in promptly and it will help speed up the application process. Rates change every day, sometimes within the day so they can be unpredictable.
• Purchase Contract, signed by the buyer AND the seller
• EMD (Earnest Money Deposit) deposit copy on the proposed home
• Contact information of all Realtors, Builders, Settlement Agents, Escrow/Title Officers, Insurance Agents, Attorneys and Home Owners’ Association
• If available: Copy of Listing Sheet and legal description (if the property is a condominium please provide condominium declaration, by-laws and most recent budget)
• Copy of signed sales contract including all riders
• Verification of the deposit you placed on the home
• Names, addresses and telephone numbers of all realtors, builders, insurance agents and attorneys involved
• Copy of Listing Sheet and legal description if available (if the property is a condominium please provide condominium declaration, by-laws and most recent budget)
Copies of last 2 pay-stubs – 30-day period
Copies of W-2 forms for the past two years
Names and addresses of all employers for the last two years
Letter explaining any gaps in the employment for the past 2 years
Immigration Status – I-94, H-1B, I-140 approval, EAD card, I-485 approval/receipt, Green card
Social Security Number
Self-employed or receive commission or bonus, interest/dividends, or rental income:
Provide full FEDERAL tax returns for the last two years PLUS year-to-date Profit and Loss statement (please provide complete FEDERAL tax return including attached schedules and statements. If you have filed an extension, please supply a copy of the extension.)
K-1’s for all partnerships and S-Corporations for the last two years (please double-check your return. Most K-1’s are not attached to the 1040.)
Completed and signed Federal Partnership (1065) and/or Corporate Income Tax Returns (1120) including all schedules, statements and addenda for the last two years. (Required only if your ownership position is 25% or greater.)
Alimony or Child Support to qualify:
Provide divorce decree/court order stating amount, as well as, proof of receipt of funds for last year
Social Security income, Disability or VA benefits:
Provide award letter from agency or organization.
Source of Funds for Down Payment
Sale of your existing home – provide a copy of the signed sales contract on your current residence and statement or listing agreement if unsold (at closing, you must also provide a settlement/Closing Statement)
Savings, checking or money market funds – provide copies of bank statements for the last 2 months
Stocks and bonds – provide copies of your statement from your broker or copies of certificates
Gifts – Provide Gift letter/Affidavit and proof of receipt of funds
Based on information appearing on your application and/or your credit report, you may be required to submit additional documentation
Current rent paid. If you are paying alimony or child support, include marital settlement/court order stating the terms of the obligation.
What is an Appraisal?
An Appraisal is an Opinion of Value – a property’s fair home value. No entity can lend you money without verifying the value of the collateral, in this case your property. In a purchase and sale transaction, an appraisal is used to determine whether the home’s contract price is reasonable given the home’s condition, location, and features. In a refinance, the borrower must establish that he/she has sufficient equity left in the property, after all mortgages are combined.
The Appraisal is performed by an “Appraiser” typically a licensed professional who will provide expert opinions concerning the property values, its location, amenities, and physical conditions.
Why should one get an Appraisal? If one is buying a property by paying cash and the buyer and seller agree on a price, no appraisal may be required. However, a clear majority of transactions are financed so they necessitate establishing home value hence the need for an appraisal. The following are the methods used. It is strongly recommended that borrower go through an appraisal report and comprehend the contents to get a clear idea.
What are Appraisal Methods?
There are 3 common Methods used by Appraisers to establish or determine the property value These are usually referred to as the “three approaches to value” and are independent to each other:
- The Sales Comparison Approach: comparing a property’s characteristics with those of comparable properties that have been recently sold in the neighborhood.
- The Cost Approach: the buyer will not pay more than it would cost to build an equivalent replacement property.
- Income Approach: methods used for financial valuation, securities analysis or bond pricing.
The mortgage company or lender owns the appraisal even though the borrower paid for it. This is because the mortgage company orders the appraisal on the borrower’s behalf, the borrower does have the right to receive a copy; In most cases you will not have to pay for another appraisal if you change your mortgage company, and depending on the loan program typed, the first lender can transfer it to the new lender. The property seller sets the price, especially for residential property. The real estate agent performs a Comparative Market Analysis (CMA), which real estate agents in most states can perform without an Appraiser’s License or Certification. The CMA is vital to the agent’s preparation for a listing examining recent property sales in the neighborhood to mutually arrive at a listing price. The agent will suggest a price to the seller based on the CMA findings however, the seller may choose to list their property for a higher price.
How can I assist the appraiser? It’s to your advantage to help the Appraiser perform the assessment by providing additional information:
- Is the property listed for sale, and if so, for what price and with whom?
- Is there a mortgage? And if so, with whom, when placed, for how much and what type (FHA, VA, etc.), at what interest rate, or other type of financing?
- Are any personal properties or appliances included in the property?
- With an income-producing property, what is the income breakdown and expenses for the last year or two? A copy of the lease may be required.
- Provide a copy of the deed, survey, purchase agreement, or additional property papers.
- Provide a copy of the current real estate tax bill, statement of special assessments, or balance owed on anything, i.e. sewer, water, etc.
Closing and Closing Costs
Escrow Officer is a neutral third party representing both the buyer and the seller. It is the job of escrow officer to transfer the title to the buyer while paying the seller all monies owed on the sale of real property. This process is called closing so it is imperative that the lender fund the loan to kick start the process. There are costs associated with this process, whether it is a purchase of a property or refinancing an existing loan. These costs can be either recurring on non recurring closing costs (NRCC). Principal, interest, home owners insurance, property taxes and home owners association dues are recurring costs because you need to pay them for the life of the property ownership and/or until loan I paid off. NRCC is an upfront cost you incur at the time of buying a home or refinancing it.
The following is a list of such costs but it can be paid by the seller, lender or even the agents involved in the deal. Most of the time, the seller credits the buyer a sum of money to pay for closing costs but it must be negotiated in the contract, by the buyer’s agent. You will get a CD (closing disclosure) 3 days before the final sign off so please go through this disclosure to pinpoint any discrepancies as that may be the last chance to fix an error.
- Lender’s title insurance policy
- Owner’s title insurance policy (usually paid by the seller)
- Lender’s origination/underwriting fee
- Discount Points for rate buy down (optional)
- Credit Report
- Tax Cert. from the IRS
- Flood Cert on the property
- Escrow fee and processing fee
- document preparation (if applicable)
- email loan document fee
- notary fees (traveling notary costs more)
- recording charges (at the county registrar’s office)
- Property tax (due from the day of purchase)
- Pre paid interest on new loan
- Transfer tax – due at the county registrar’s office but usually paid by the seller
- Homeowner’s annual insurance premium
- Next month HOA dues (from the day of purcahse)
- Title courier/Messenger fees
What are Statutory Costs?
These are expenses you have to pay to state and local agencies, even if you paid cash for the house and didn’t need a mortgage:
Transfer Taxes – Required by some localities to transfer the title and deed from the seller to the buyer.
Deed Recording Fees – To pay for the County Clerk to record the deed and mortgage, and to change the property tax billing.
Pro-Rated Taxes – Such as school taxes and municipal taxes may need to be split between the buyer and the seller since they are due at different times of the year. For example, if taxes are due in October and you close in August, you would owe taxes for 2-months, and the seller would owe for the other 10-months. Pro-rated taxes are usually paid based on the number of days, not months of ownership. Some lenders may require you to set up an escrow account to cover these bills. If not, you may want to set one up yourself to insure the funds are set aside for these important expenses.
State & Local Fees – Other state and local mortgage taxes and fees may apply.
What are Third Party Costs?
There may be expenses paid to others like inspectors or insurance firms, even if you paid cash for the property:
Attorney Fees – You may want to hire an attorney when purchasing a home. They usually charge a percentage of the selling price up to 1%, or some work on an hourly basis or for a flat fee.
Title Search Costs – Usually your attorney will perform or will arrange for the title search to ensure there are no obstacles such as liens or lawsuits regarding the property. Or you may work with a title company to verify a clear property title.
Homeowner’s Insurance – Most lenders require you prepay the first year’s premium for homeowners insurance, sometimes called hazard insurance, and must show proof of payment at the closing. This insures that the investment will be secured even if the property is destroyed.
Real Estate Agent’s Sales Commission – The seller pays the real estate agent’s commission, and if one agent lists the property and another sells it, the commission is usually split. The commission is negotiable between the seller and the agent.
What are Finance and Lender Charges?
Most people associate closing costs with finance charges levied by mortgage lenders. The charges you pay will vary among lenders, so it’s good to shop around for the best combination of mortgage terms and closing, or settlement costs:
Origination Fee – For processing the mortgage application there may be a flat fee, or a percentage of the mortgage loan.
Credit Report – Most lenders require a credit report on you and your spouse, or an equity partner. This fee is often a part of the origination fee.
Points – One point is equal to 1% of the amount borrowed and can be payable when the loan is approved either before or at closing. Points can be shared with the seller which is negotiable in the purchase offer. Some lenders will let you finance points which will add to the mortgage cost. If you pay the points up front they are tax deductible in the year they are paid. Different deductibility rules apply to second home loans.
Lender’s Attorney’s Fees – For your attorney to draw-up documents and to ensure that the title is clear, and for representation at the closing.
Document Preparation Fees – There are several documents and papers prepared during the home-buying process ranging from the application to the closing. Lenders may charge for this, or the fees may be included in the application and/or attorney’s fees.
Preparation of Amortization Schedule – Some lenders will prepare a detailed amortization for the full term of your mortgage. This is usually done for fixed mortgages or adjustable mortgages.
Land Survey – Lenders may require that the property be surveyed to ensure it has not been encroached and to verify the buildings and improvements to the property.
Appraisals – Professional Appraisers can do a comparison of the value of the property to that of other recently sold neighborhood properties. Lenders want to be sure the property is worth the value of the mortgage loan.
Lender’s Mortgage Insurance – If your down payment is 20% or less, many lenders require that you purchase Private Mortgage Insurance (PMI) for the loan amount. If you should default on your loan, the lender will recover their money. These insurance premiums will continue until your principal payments, plus the down payment equal 20% of the selling price and may continue for the life of the loan. The premiums are usually added to any amount you must escrow for taxes and homeowner’s insurance.
Lender’s Title Insurance – Even with a title search for any property obstacles, liens or lawsuits, many lenders require insurance to protect their mortgage investment. This is a 1-time insurance premium usually paid at closing, and is for the lender only, not the homebuyer.
Release Fees – If the seller has worked with a contractor who put a lien on the house and is expecting payment from the proceeds of the house sale, there may be fees to release the lien. The seller usually pays these fees which could be negotiated in the purchase offer.
Inspections Required by Lenders – The lender may require a Termite Inspection if you apply for an FHA or a VA mortgage loan. In many rural areas a water test may be required to ensure the well and water system will maintain an adequate water supply to the house; for quantity not quality. Depending on the sales contract and property type, additional inspections may be required.
Prepaid Interest – The first regular mortgage payment is usually due from 6-8 weeks from closings; however, interest costs begin at closing time. The lender will calculate the interest owed for that period of time, and that fraction of interest is sometimes due at closing.
Escrow Account – Lenders often require that you set-up an Escrow Account, where you will make monthly payments to, for taxes, homeowner’s insurance, and sometimes PMI (Private Mortgage Insurance). The amount placed in this account at closing depends on when property taxes are due and the timing of the settlement transaction. The lender can give you a cost approximation during the application process of your mortgage loan.
Are there any other upfront costs?
The major portion of other up-front expenses is the deposit or binder you make at the time of the purchase offer, the remaining cash down payment you make at closing, or can include:
Inspections – Lenders may require inspections, and you can make your purchase offer contingent based on satisfactory completion of some other inspections such as structural, water quality tests, septic, termite, roof and radon tests. You and the seller can negotiate these inspection fees.
Owner’s Title Insurance – You may want to purchase title insurance in case of unforeseen problems so you’re not left owing a mortgage on property you longer own. A thorough title search ensures a clear title.
Appraisal Fees – You may want to hire an Appraiser either before you sign a purchase offer, or after reviewing the lender’s appraisal report.
Money to the Seller – You’ll need to pay for items in the house you want that were not negotiated in the purchase offer such as appliances, light fixtures, drapes, lawn furniture, or fuel oil and propane left in tanks.
Moving Expenses – If you are changing jobs, your new employer may pay for your relocation, otherwise you must figure in the moving costs such as truck rentals, professional movers, cash for utility deposits like telephone, cable, electricity, etc.
Escrow Account Funds – In the purchase offer, you can request that the seller set up an Escrow Account to defray any costs for major cleanup, radon mitigation procedures, house painting, appliance repairs, etc. Depending on the purchase offer contract and contingency clauses, you may discover that you have expenses upon moving in.
Example: Your purchase offer contract has a clause making the purchase contingent on a satisfactory structural inspection, and it’s determined that the house needs a new roof. You can negotiate to have the seller arrange for the work to be done but, this will delay the closing date. You may have to agree to a higher price for house, or to pay some of the new roof repair expenses. Or you and the seller may split the cost using estimates from a contractor of your choice, and each of you will put funds into an Escrow Account. Or, the seller may be willing to reduce the sale price of the house, but either way cash will be needed for the new roof.
Time Investment – One often overlooks major up-front costs in buying a home. The time and expenses invested in house-hunting, which can take up to 4-months, plus the time spent searching for the best mortgage for you, the right real estate agent, an attorney, and other related things that take up your valuable time.
Private Mortgage Insurance (PMI)
PMI kicks in when homeowners have less than 20% invested in a home. It is no secret that a home owner with higher than 29% equity is less likely to default on his mortgage payments. Naturally, loans with <=20% equity are riskier for lenders and investors. Simply out, Private Mortgage insurance is a policy that covers this risk. PMI enables a borrower become a home owner when they do not have 20% in down payment. At the same time, the policy coverage protects the lender when the borrowers default on their mortgage payments.
PMI is a tool helping first time home owners and borrowers so it should be seen as help not hindrance. PMI buys an insurance policy but the beneficiary is the lender not the borrower. PMI payment tends to be higher for a lower down payment coupled with a higher loan amount. Borrowers with a lower credit score are subject to a steeply higher PMI so it can quickly add up. Your loan officer can run a PMI quote for you but the bare truth is this: If you can’t afford PMI, you probably can’t afford the home either.
The good news is that you can call the mortgage servicer upon reaching 20% equity and demand that the PMI be scrapped off your monthly payments., Most of the time, this should be a straight forward process but if you run into road blocks, you can refinance your way out of the PMI payments. Ask us about the no cost refinance process that eliminates your PMI. (We specialize in this process).
There are several ways you can pay for PMI but the most common method is to pay it monthly, alongf= with your mortgage payments. You can also pay for the policy upfront in one lump sum payment but it can cost several thousand dollars. There is also a novel method called LPMI (Lender Paid PMI), that lets the cost be borne by the lender. We do a ton of these loans so please call us about this loan.
What is RESPA?
The Real Estate Settlement Procedures Act (RESPA) contains information regarding the settlement or closing costs you are likely to face. Within 3-days from the time of your mortgage application, your lender is required to provide you a “good faith estimate of settlement costs” (GFE) based on their understanding of your purchase contract. This estimate will indicate how much cash you will need at closing to cover prorated taxes, first month’s interest, and other settlement costs.
RESPA requires lenders to give you an information booklet about settlement costs, written by the U.S. Department of Housing & Urban Development which address how to negotiate a sales contract, ways to work with professionals like attorneys, real estate agents, lenders, etc, and your given rights as a home buyer. It gives an example of the Uniform Settlement Statement used at your closing. You are entitled to see a copy of the statement 1-business day prior to closing indicating your final costs.