Unit 4: Know Who You’re Working With

How Important Is Pre-approval?

Before you begin searching for a home, it’s recommended that you ask your credit union about pre-approval. By completing your mortgage application prior to choosing a home, you can get a pre-approval letter that lets you know how much home you can afford. Getting this pre-approval letter is a smart move because it lets you know exactly how much you can spend, and shows prospective sellers and real estate agents that you’re a serious buyer. In addition, many sellers will require a pre-approval letter prior to reviewing an offer. So lining up your financing ahead of time will help you get your offer in quickly in hot real estate markets.

Completing the Application

Your home mortgage consultant will assist you in completing a Uniform Residential Loan Application form. Much of the information on your application can be pre-filled from your credit report, so the amount of information you’ll need to provide is not overwhelming. Your home mortgage consultant can tell you what you’ll need to have on hand to complete the application.

There are generally six areas that must be filled in:

1. Personal Data: Full names, addresses, and Social Security numbers of all borrowers.
2. Income: The amount and sources of income for all borrowers.
3. Assets: Information on all assets you’ll be using to qualify for the loan, such as checking and savings accounts, stocks and bonds, retirement plans, and other real estate owned.
4. Debts and Obligations: Information on all outstanding debts and other financial obligations.
5. Credit References: Information concerning loans or debts that have been paid, plus any other references to good credit use.
6. Property Information: Specifics on the property you wish to buy, if you’ve chosen one.

Loan Processing

In completing your loan application, the lender will request an appraisal of the property, request a credit report, and verify the information provided in your application. 

• Property Appraisal.  The lender will arrange to have the property appraised by a professional who will estimate the market value of the home. 
• Credit Report.  The lender will review your credit report for credit history, outstanding debts, or recently obtained credit.
• Verification.  The lender will verify the information provided on the loan application as to your income, employment history, assets, and rental payment history. 

Approval of Mortgage Insurer

If mortgage insurance is a requirement of the loan, the loan also will have to meet the underwriting standards of the mortgage insurer. 

Commitment Letter

When your loan is approved, the lender will send you a commitment letter.  This is the formal loan offer.  It will state the loan amount, the term or the loan, the loan origination fee, APR, and PITI fees (principal and interest, taxes and insurance fees). 

Closing—The Big Day

The mortgage loan closing is the meeting in which your loan is finalized, your mortgage is issued, and you get the keys to your new house.  Closing is a formal meeting attended by the buyer, seller, listing agent, and a lending representative to sign all the needed documents for obtaining a home. 

Setting the Closing Date

The closing date is set after your loan has been approved and the commitment letter is accepted. 

Meeting the Conditions of the Loan Offer

Be sure you understand the conditions of the loan offer in the lender’s commitment letter.  If the seller has agreed to make repairs required by the lender, you will want to make sure the work is finished. 

Title Search

Lenders require a title search to make sure the borrower will receive a clean title to the property.  They want to make sure that the seller is indeed the owners of the property.  The title search also attempts to uncover any problems with the title such as legal claims against the property, tax liens, or unpaid bills. 

Title Insurance

The lender will require title insurance on the property as part of obtaining a mortgage.  There are two types of policies:

• A lender’s policy
• An owner’s policy

The lender’s policy protects the lender in the event a flaw in the title is detected after the property has been bought.  The owner’s policy protects you.

Final Estimate of Closing Costs

The lender is required to give you an estimate of closing costs soon after you have filed your application for a loan.  Since estimates may change, you have the right to inspect the settlement form (HUD-1 Settlement statement) one business day before settlement. 

The Closing Documents

A significant part of the process of closing is the explanation and signing of various documents.  These are described here. 

• Present Homeowner's Insurance Receipt - The buyer gives the lender a receipt to prove that homeowner's insurance has been obtained for the property.
• Review HUD-1 Settlement Statement - The closing agent will review the HUD-1 settlement statement with the buyer and seller to verify that the agreed upon dollar amounts have been entered and, if so, have the buyer and seller sign the form.
• Present Closing Costs Check - The buyer and the seller give the closing agent certified checks to cover the closing costs.
• Review All Other Documents - The closing agent will have the buyer and seller review and, if correct, sign all remaining documents that are part of the closing process.
• Establish an Escrow Account - The closing agent will establish an escrow account for the buyer to cover property tax, homeowner's insurance, interim interest, and possibly private mortgage insurance.
• Execute Mortgage Documents - The buyer reviews and signs all of the documents required by the lender, the most important of which are the note and security instrument (either a mortgage or a deed of trust).
• Present Mortgage Check - The lender gives the closing agent a check to cover the mortgage amount.
• Receive Title to the Property - A warranty deed is given to the buyer, signed by the seller.
• Receive Keys to the Property - At the conclusion of the closing process the buyer will receive the keys to the home. The seller may also provide the buyer with documents such as instructions and warranties for appliances and other major components that are part of the home.
• Record Legal Documents - The recording process is the final step in the closing process. The closing agent or title company that handles your transaction will complete the recording. The process officially records certain documents such as the warranty deed and the security instrument.

Conclusion

Although buying a home takes time and hard work, it is perhaps the greatest financial investment you will ever make.  If you are interested in purchasing a home or need information about mortgage options, contact your credit union mortgage consultant for advice or ask to speak with a housing counseling professional. 

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