The following steps outline the general process the typical home buyer goes
through to obtain financing for a new home:
Pre-qualification: Lenders encourage buyers to get pre-qualified for a mortgage even before they begin to search for a home. This generally includes a review of the buyer’s credit report and recent bank statements by a lender and allows buyers to know in advance “how much house” they can truly afford. Lenders caution, however, that pre-qualification is only as good as the information supplied by the borrower. Neglecting to mention an outstanding car loan or previous credit problem, for instance,
could nullify the pre-qualification.
Loan Search: Although buyers often use a lender recommended by their real estate agent, many prefer to comparison shop on their own. In the current heates real estate market, buyers who plan to do their homework will want to begin the loan process before they even find a home they want to purchase. Borrowers may choose to use a mortgage broker who has access to a wide variety of loans, or a direct lender (such as a savings & loan, commercial bank or mortgage banker).
The Hunt: At this point, the buyer can begin shopping for a home. When the right one is found, the terms of the sale are negotiated, including the sales price and often the type and conditions of the loan being sought. Buyers generally need to submit a loan pre-qualification or pre-approval letter to the seller when the offer is made. This can tilt a sale in the buyers favour in a competitive market.
Loan Application: The loan representative or mortgage broker, depending on who supplies the loan, will be the borrower’s main contact through the process. It is crucial to supply the lender with as much information as possible, as accurately as possible, in order to ensure the you get the best rate possible. All outstanding debts, as well as assets and income, should be included. On the application is an optional check-off for ethnic background. The information is intended for research purposes only and should not be used in evaluating the loan application.
Documentation: Paper work supporting the application must also be submitted. Information commonly sought includes pay stubs, previous years tax returns and financial statement verifying the source of the down payment and closing costs.
Verification: The lender will verify the borrower’s employment, income, and down-payment/deposit. The down payment cannot be borrowed , although it can be a gift. A credit report is again ordered and verified. In some instances, this process may be waived.
Appraisal: Lenders require an appraisal on ALL home loans. This step can kill a deal if there is a large discrepancy between the loan amount and the appraised value of the home.
Title Search: This is the time when any liens against the property are discovered. A lien may have been placed against the property to ensure payment of an outstanding debt by the seller. All liens must be cleared by the seller before a transaction can be completed and title can be transferred.
Termite Inspection: All loans require an inspection for termite and water damage and “clearance” from a licensed company, which basically certifies that all necessary work has been done, prior to funding a loan. As a general rule, some work always needs to be completed prior to receiving “clearance” from the termite company. Pursuant to the new California Residential Purchase Agreement (Nov 2002) the costs associated with the required work may be allocated by contractual agreement between the parties.
Processor’s Review: The lender’s loan processor packages all pertinent information to be sent to the lender’s underwriter. If the buyer is using a mortgage broker she is crucial in properly preparing this package.
Underwriter’s Review: Based on information put together by both the loan representative and the processor, the underwriter makes the final decision whether or nit the loan is granted. Lenders are looking for borrowers who will make their payments in a timely manner and for property that will cover the cost of the investment if the buyer defaults.
Mortgage Insurance: Most lenders require private mortgage insurance when borrowers put down less than 20% of a fixed rate loan or less than 10% on an adjustable rate loan. Even if a loan meets the standards of a lender, a mortgage insurance company could choose to deny coverage.
Approval, Denial, or Counter-Offer: In order to approve a loan, the lender may ask the borrower to put more money down to improve the debt-to-income ratio on the loan. The lender could also request a larger down payment if the property appraises for less than the loan amount. In some cases, repairs or improvements on the property may be required.
Hazard Insurance: In California, lenders require fire and hazard insurance on the replacement value of the structures on the property. This can often kill a deal if their have been ANY claims against the property within the last three years. Sellers are now requires to disclose any such claims known to them.
Signing: Final loan and escrow documents are prepared and signed. Generally they must be notarized, as well.
Funding: Once they receive the escrow and loan documents properly executed and notarized, the lender sends a check for the amount of the loan to the title company.
Close of Escrow: Documents transferring title are recorded with the Los Angeles County Recorder.
Confirmation of Recording: The title company then authorizes the escrow company to draft a check to the seller. The escrow company pays the seller (and/or the seller’s lender for the outstanding loan on the property) the proceeds of the transactions after subtracting all the costs incurred by the seller.
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