PREAPPROVAL and PREQUALIFICATION
Before the loan application, you'll strive to obtain a preapproval & a prequalification letter from a lender. A preapproval letter is a written commitment, after verification of employment, assets, and bank accounts, among other things, of what the lender believes the institution can extend you. It follows through on not only your personal information, but also information on the property you're making an offer on. Remember, this is more than the original prequalification letter that you'd receive before writing up a purchase agreement.
With a prequalification letter (which would typically come first before a preapproval), is general information about your person, and not the property. Many lenders require tax returns, current employment information, bank statements, 1099s or W-2s, as well as authorization to pull credit. Just as using a realtor to view homes, it is also a no cost situation to talk to a lender to at least see where you stand in the bank's eyes.
Once your offer is accepted on the home of your dreams, your lender will probably continue to get requests from their underwriters on information needed for the loan. For example, some homes and neighborhoods have a shared drive, and a shared drive agreement may be requested by loan review team.
Among these small items that are requested from time to time, there are two property contingencies that are big when it comes to loan approval. The inspection process and the loan approval.
Inspection: When purchasing a home, you can elect, within the purchase agreement, to reserve the right to an independent inspection. This will involve hiring an inspector (at a fee) to look over your house - on the roof, in the basement/crawl, electrical, plumbing, everything. There is a WIDE range of quality when it comes to home inspections, so be sure to check with your lender or realtor on who to choose, or at least get their recommendations.
Appraisal: The market value of a home, once a buyer and seller come to terms on an agreement, is finally determined by an appraisal company, which is ordered through the bank or lender. Lenders usually loan money to home buyers under the terms of "loan to value or loan to purchase, whichever is less." This is important, because if the appraisal comes in lower than the agreed upon purchase price, then a couple of options lay ahead. The buyer can elect to make up the difference with cash at closing (remember, if you have a loan application for 80% Loan to Value, the lender will only allow a loan amount of 80% of appraisal amount). If the buyer does not have the cash, or is not willing to pay more than the appraisal amount, then the seller can elect to come down from the agreed upon purchase price to the appraisal amount to keep the deal together. If neither party is willing, then the transaction has fallen apart.
A borrower can pay points (a dollar amount based on a percentage of the loan amount) to the lender to reduce the interest rate on the loan. This requires additional costs up front, but you may realize savings in the long run by paying less interest.
Typically, for a conventional loan, lenders prefer that a borrower have 20% of the purchase price for the down payment. If you make a down payment of less than 20%, you generally have to purchase Private Mortgage Insurance (PMI). PMI protects the lender if you default on the loan, and is part of your monthly mortgage loan payment. We have a built relationships with lenders that do offer 0% down conventional loans, but these loans are restrictive by your income as a purchaser, or the income level of the neighborhood in which you're looking at buying.
LOAN REVIEW PROCESS
Once an appraisal is completed, the loan will be sent to a separate department to be gone over with a fine-tooth comb.
ESCROW & TITLE PREPARATION
A title company is an independent and unbiased third party that is hired by either the buyer or seller to take all of the documentation, from the purchase agreement to the details of the loan application, and create all of the necessary documentation to complete the transaction. The buyer's money is wired to the title company who holds the cash until the closing is completed, in which the lender will be sent the closing documents by the title company, and upon approval, will release all monies to the seller after all conditions have been met. The title company also produces a title commitment, made from title search/exam to ensure the title to the property is clear. Other documents such as the mortgage note and deed will be prepared.
The costs associated with processing and closing a mortgage loan, such as application fees, points, title, insurance, and credit processing. Your lender should provide you with a "Good Faith Estimate," advising you of the estimated costs you may have to pay at loan closing. When budgeting for your new home purchase, be sure to factor in closing costs.
The documents will be sent to a title company for you and the seller to sign. Funds such as any remaining down payment and closing costs will be due at this time. Mortgage closing costs normally include such items as appraisal fees, title exam, settlement fees, title insurance, credit report fees, and application fees.
When all funds are collected and the contract has been verified, the title is transferred and the purchase price funds are disbursed to the seller. After this step, you can take over the keys to your new home - congratulations!
Mackenzie Allen Polston & Associates
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126 East Washington Street
Shelbyville, Ind 46176