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When I get that phone call from the office receptionist to say "Your clients are here for their appointment," it always makes me smile. In the next 30 minutes, I'm going to witness a really special time in the lives of these strangers as they go from nervous and hesitant about buying a home to relaxed, excited, and totally engaged in the process of buying a Crofton home. I can't wait to meet them and get started!
But the excitement sometimes disappears for a moment when I mention getting a loan pre-approval because most first-time buyers have no idea what to expect when they meet with a lender - they're very concerned about their credit history, the adequacy of their savings for a down payment, and whether they earn enough to qualify for a home loan.
Unravelling the mystery of home financing is an essential element of educating my clients about the home-buying process, so I took the time several years ago to create a handout that addresses this topic:
THE SEVEN-STEP HOME FINANCING PROCESS
1. You select a local lender.
I've found that most online mortgage factories offer loans with hidden costs which more than compensate them for their so-called lower closing costs or interest rate. These lenders are confident that borrowers don't know the right questions to ask to protect themselves. Unfortunately, this includes some beloved credit unions that rely upon members' loyalty over good sense when it comes to home loans. A local lender who lives and works in your new community is eager to please you, his or her new neighbor.
There are many other reasons for using a local lender, as well, including the lender's network of local appraisers, the convenience factor for you if additional information is required, and the lender's ongoing relationship with local title companies. 'Not to mention how good it feels for buyers to put a face and handshake together with the name and voice. That can be very reassuring, especially if any problems arise.
2. You make application for a pre-approval.
You will speak or meet with a local lender (before we begin looking at homes) and provide him or her with details of your financial situation. It is possible that you could have a written pre-approval for home financing within hours.
3. You make a formal loan application.
You will follow up with the lender to provide any documentation or information that you did not previously provide. You will sign required forms and pay for an appraisal (approximately $400) and credit reports for each borrower (approximately $65 each). At this time, the lender is required to provide you with the following information (and I caution you to keep this information handy rather than pack it for your move):
- Truth-in-Lending disclosure - This disclosure includes a summary of the total cost of credit, such as the Annual Percentage Rate (APR) and other specifics of the loan.
- A Home Buyer's Guide to Settlement Costs" - This guide is a government publication that describes the closing or "settlement" process, associated costs, and your rights.
- Adjustable-Rate Mortgage (ARM) disclosure - This disclosure includes information about terms and costs associated with an ARM, past performance of the index to which the interest rate will be tied, and the "Consumer Handbook on Adjustable-Rate Mortgages."
- Annual Percentage Rate (APR) information - This is the cost of credit expressed as a yearly rate. The APR includes the interest rate, points, broker fee and any other charge you're required to pay in order to obtain your mortgage loan.
4. Lender orders an appraisal.
The appraisal is an opinion of value based upon certain criteria established by the lender and the secondary market. The appraisal will verify the fair market value of the property to be used as collateral for your loan. The appraised value must equal or exceed the sale price.
5. Lender verifies your personal information and credit history.
Your lender may accept the information and documentation you provided as adequate OR may further verify the information through phone calls, email, or mailing a Verification of Employment form (VOE) and/or a Verification of Deposit form (VOD).
If your loan is pre-approved, a complete credit history has probably already been done and no further verification of your credit will be necessary. If, for any reason, you do not have a pre-approval, the lender will order a credit report for each borrower to obtain a complete credit history. This information is used to determine if your payment history satisfies the requirements established by the lender and the secondary market.
6. Lender underwrites your loan.
All the information that is relevant to your loan - the information you provide and the appraisal - is submitted to a loan underwriter, who will issue the formal final approval for your loan. Occasionally, the underwriter may request additional information from you or the appraiser before issuing the formal final approval. When I call to tell you "Your loan is approved!" it means that your loan is out of underwriting, the last step before closing.
7. You attend Closing.
Congratulations! This is the final step of your loan process. After you sign the mortgage and other paperwork required by the lender, that new home will belong to you. We'll exchange hugs, I'll hand you the keys to your home, and you will live happily ever after!
By unraveling the mystery of home financing for my clients, I eliminate their fear of the unknown (as it relates to this, anyway) and we can focus on finding the right home. In fact, it gives home-buyers a sense of being "in control" when I point out that "You" is the first word in four of the seven home-financing steps.
Whether you are a prospective home-buyer with questions about home financing, or a rookie agent just learning how to help your new buyer-clients, please feel free to contact me.
- FNMC Mortgage, Chris Washburn
- 1st Metropolitan Mortgage, Lou Colletti
- Capital Mortgage Finance, Rod Luck