The decision to buy a house is stressful enough without having to contend with the confusing mortgage process, which adds significantly more pressure to the entire situation. Before making the decision to purchase a home, buyers should spend some time investigating the purchasing process, so that they know what to expect and can prepare themselves for complications and setbacks. For example, the entire process does not even start with shopping for a home, but instead going through a pre-approval process that gives buyers a better sense of their budget.
Below is a brief overview of the whole home purchasing process and what to expect at each stage.
Not long ago, getting a home loan wasn’t very difficult. However, since the collapse of the housing market, the landscape has changed, and real estate agents want to ensure that people can actually get a loan before they help them look for a home. To do so, individuals should get lender pre-approval, which shows that they have qualified for a certain home loan amount.
The pre-approval process is straightforward. Lenders look at credit scores and credit histories from the three major credit bureaus and determine how much the purchaser(s) will qualify to borrow, based on their income. This step is also important to the seller because it shows that a potential buyer is truly ready to make a purchase. This leverage can prove crucial in price negotiations.
This stage is when buyers should shop around for the best lender. In addition, they should only apply for pre-approval from the companies from which they actually want to borrow.
Buyers should note that pre-qualification is not the same thing as pre-approval and that it carries much less weight, since it does not involve any sort of third-party verification.
Shopping for a Home
This stage is the fun one in the whole process. Once individuals have an idea of what they can afford, they can begin communicating with real estate agents and doing their own research on websites like Redfin, Trulia, HomeFinder, and Zillow. However, it’s important to remember that none of these websites are ever completely accurate. Zillow, for example, can be off on price by up to 8 percent, so individuals should feel free to search for homes slightly above and below their target price. However, working with a real estate agent is crucial. These professionals have the experience to know which homes can be negotiated down and which cannot.
When a home is chosen, the next step is to make an offer, which will typically include a number of contingencies to protect the buyer. Real estate agents will have standard formatting and discuss needs with their clients prior to making the formal offer. This step may necessitate earnest money—a 1 to 2 percent deposit on the final price that shows the buyer is serious. This money is released from escrow and applied to the down payment. If the seller agrees to the terms, a purchase agreement, which is a binding contract, is drawn up and signed by each party.
Finalizing the Loan
Next, buyers need to finalize the loan for which they were pre-approved. To do so, the lender will request additional information and proof of the information provided previously. A loan officer will make it clear exactly what is needed to make the loan final—for example, a certificate of eligibility for a loan from the Department of Veterans Affairs.
All of this information culminates in the loan estimate, which outlines the terms and costs of the mortgage, including closing fees, interest rate, and monthly payments. The estimate is not an approval or denial of the loan. A loan processor must still gather all information about the borrower and the property to deliver a complete package to the underwriter.
The underwriter is the person who ultimately decides whether or not the loan is a go. The underwriting process involves verifying that borrowers meet all criteria and have the financial capacity to repay the loan. Underwriters also look at collateral and other relevant information. Sometimes, a loan may be approved with conditions, such as written explanations of credit issues appearing on the report. After approval, the interest rate is locked in through a mutual decision involving the loan officer and the borrower. Next, pre-closing begins, which involves securing title insurance so that buyers can walk away from closing with the keys. During this period, buyers must also satisfy any conditions or contingencies imposed.
The last stage is closing, but this step involves a number of different processes. Individuals will find a large stack of papers at closing, but the most important is the Closing Disclosure, which confirms the Loan Estimate. The two should match very closely, and there are laws in place to prevent drastic changes. Individuals have access to the Closing Disclosure three days prior to the actual closing date, which gives them time to review everything. During this period, not much is allowed to change in loan documents other than typos. However, some events could cause issues, such as pre-payment penalties added to the mortgage, a change of loan products, or significant changes in APR.
A day before closing, buyers have the right to walk through the property, which should be vacated by the former tenants at this point. This is when buyers can check to ensure that contractually obligated repairs have been completed.
At the actual closing, purchasers will need to sign many documents, and they should bring two forms of identification to avoid any complications. Closing costs are often rolled into the loan, but if not, the loan officer will disclose how to pay settlement fees and other expenses. The whole meeting will take a couple of hours.
Federal law gives individuals a Right of Rescission, meaning that they can rescind reverse mortgages and refinance transactions up until midnight of the third business day after signing. However, this rule does not apply to purchase transactions, which are final.