The home buying process is not easy.
Over 5,250,000 existing homes were sold in 2015 (According to the National Association of Realtors) alone.With the millions of homes bought and sold in the US each year, the process should be efficient and streamlined by now.
But it’s not.
The legal language, steps of verification, fact checking, and inspecting(not to mention the varied professionals involved) keeps it that way. Not to mention finding the right house, in the right neighborhood for the right price.
But you’ve done it. You've made an offer and started the process.
Here you are, nearing the finish line.
Your online mortgage application shows you’re approved. Now all you’re waiting on is the closing where the deal is signed, and keys delivered. You can’t wait to put your very own John Hancock on the documents in exchange for the keys to your new home.
Now is the perfect time to prepare for unforeseen situations.
What to Expect
Mortgage loans come in a variety of shapes and styles. Some of the more common mortgage loan types are conventional mortgages, government-backed loans (FHA, VA, etc.), and a variety of Adjustable-Rate Mortgage (ARM) options.
These are the key features and how they differ:
These are the traditional mortgages, with the 30-year mortgage being the most common.
- Fixed-rate for life of loan
- Terms vary (typically, 10, 15, 20, 30, 40 years)
- 20% down payment (there are exceptions)
- Loan amount up to $417k in most US regions, any amount greater than that is the jumbo loan territory.
- Not government-backed
- Typically closes within 4–6 weeks.
- In the past, a 700 or higher credit score was needed to secure a conventional mortgage.
- Due to recent loosening loan standards, most banks only require a 620 or higher score.
These are also known as non-conforming mortgage loans.
- Do not fit the standards of the government enterprises that purchase many mortgages loans (such as FNMA or FHLMC)
- For properties typically $417k or higher based on region.
- Requires 15% to 30% down payment (no exceptions).
- 700 or higher credit score is needed.
VA loans offer special incentives to active duty and former military personnel.
- Issued to Military, Veterans or their spouse/children.
- Government backed
- Loose credit qualification terms
- 0% down payment
- Limited closing fees for buyers
- Buyer must submit a Certificate of Eligibility as proof of being a service member.
- Typically 6–7 weeks, but took longer in the past.
- Typically, most banks require a 620 FICO score, but if there is no credit history, the lender will look at payment history.
Great for first-time home buyers.
- Government backed
- 3.5% down payment
- Mortgage insurance premium
- Good option for first-time homebuyers because of low down payment option.
- 4–6 weeks to close
- Must meet FHA standard fixes on property
- FHA loans limit the % of seller’s concession.
- To qualify for the FHA loan with only 3.5% down payment, a credit score of 580 and higher is needed.
- Otherwise, if you have a score less than 580, the down payment increases to 10%.
Adjustable Rate Mortgages (ARMs)
These loans have interest rates that can increase or decrease after the initial period.
- They are both conventional and government-backed issuers.
- The interest rate fluctuates over the term of the loan.
- They have an introductory fixed period (ranging from 1 to 10 years), then adjust on a preset basis for the remainder of the mortgage term.
- For example, a 3/1 ARM is a mortgage that has a fixed interest rate for three years then resets annually after that initial fixed period.
- The interest rate fluctuates based on a designated primary index (LIBOR, CMT, etc.).
- Some have floors and caps, which limit the lowest and highest reset rates.
- Also, margin caps limit how big an adjustment can be made to the interest rate on your loan, which is rather helpful during rising interest rate environments.
- They allow borrowers to take advantage of lower interest rates (ARMS are typically lower rates than fixed-rate loans), which equates to smaller monthly payments for a short period.
- To obtain these ARM loans with their attractive interest rates, a credit score of 740 or higher is required.
Although not a type of loan but a property condition, short sales can be complicated in their own right.
- A property where the owner and mortgage holder are in agreement that the value is worth less than the loan owed on it.
- They agree to sell the property for less than the original mortgage. Bank takes a loss.
- The appeal of short sales is in their deeply discounted sale price as opposed to current market offerings.
- Short sales can take from 8 weeks up to 1 year to close.
- These tend to take longer than conventional to close due to a myriad of reasons:
- Sellers bank needs to approve all offer and loan details, requiring a lot of negotiations.
- There are limited banks and appraisers that work on short sales.
- The property is usually sold as is and therefore may run into issues meeting financing requirements. This includes determining the responsible party if repairs are needed.
- The bank can deny any requested seller's concession in part or its entirety.
Preparation is Key
Now that you have an idea of what lies ahead, you can wait with bated breath as you cross off the dates on your calendar leading up to your closing.
Before you know it the fated closing date will arrive, so be prepared.
The mortgage process requires a lot of documents that must travel cohesively through the hands of a few different professionals, from the Mortgage loan officer to the underwriter, the closing lawyer, and through the hands of the other bank's team of legal people.
It is inevitable that someone somewhere along this line will misplace a necessary document. Or there may be a discrepancy between the agreed upon figures on the different documents.
The best safeguard?
Always keep multiple copies of the information you submit and receive.
Copy and keep on file any bank statements, tax returns, the offer letter, along with documents you've received like the good faith estimate (GFE), letters of approval and any document corrections.
Asking The Right Questions
Keep the lines of communication open and frequent between you, your realtor, your loan officer, and attorney. This is your team of trusted experts to help you secure your property.
Be sure to check in with them and ask:
- Were all requested documents received?
- What are the next steps?
- How long is my rate locked in for?
- Is there anything that could prevent the closing on the date specified?
- How much will I need at closing?
Make sure to ask each one of your team members these questions, and double-check any information that doesn't line up. It could make you aware of any conflicting information ahead of time and allow you time to rectify any issues before they hold up the process.
The Closing Costs — What You Need to Know
What can make or break a deal? The closing costs. According to a 2015 survey performed by ClosingCorp, most adults know little about closing costs.
“[T]he results of a nationwide survey reveals that approximately two-thirds of Millennials, adults between the ages of 18-34, who plan to buy a home are unaware of closing costs. The survey also found that across all adult age brackets, more than one-third of potential homeowners are ‘Not Very’ or ‘Not At All’ aware of closing costs.”
The amount required to pay closing costs is approximately 2 to 5% of the property price.
Recent developments such as the TILA-RESPA Integrated Disclosure rule or TRID are putting standards into place that will give buyers more transparency and real closing cost numbers on their GFE, rather than the closing estimate which was standard practice until a year ago.
Once you know the amount (or estimate), set it aside in your bank account.
Your bank balance is reviewed throughout the mortgage process. Any major movements in or out of the account must be explained and documented.
A good rule of thumb? Err on the side of caution and forego any significant purchases or large deposits while waiting for your mortgage loan closing.
When the Unexpected Happens
The week of your expected closing date can be nerve racking. While you’re waiting for the final call to confirm the date is still a go, remember that anything can happen. This is why keeping all your paperwork together is crucial.
This is an important day. Whether it’s your first home or fifth, the next phase is crucial, but your role on closing day is simple.
Arrive at the closing attorney’s office (or other specified location) with your photo ID, certified bank check for the closing costs, your new homeowner's insurance policy, and your folder of documentation (as well as any extra items requested by lender).
Here is a mortgage closing checklist to make your life a bit easier.
The realtors, bankers, and lawyers on each side of the table comb through the documents, notifying you of the significant parts. You’ll verify the details, sign and initial multiple documents, and then receive your keys!
Finally, you exhale.
The home buying process can be arduous and lengthy at times. Numerous deals can fall apart the week of closing or at the closing table.
Knowing what to expect, having all of your documents available, and asking questions when you don't understand something will help you keep your sanity and make the closing as smooth as possible.