 When can I get the keys to the house I am buying? What is a deed? What is a mortgage? Do I have to get fire insurance? What is Mello Roos? Can I make offers on several houses in hopes of having one go through? What is a good faith deposit? How big does my good faith deposit have to be? Is my deposit refundable? Should I wait to see if prices go down some more? What is a foreclosure? What is a Short Sale? Do you, the real estate agent, also do my loan? What do I do if there are other offers on the house I want? I see these ads for foreclosure auction sales. What is a foreclosure auction sale? What is a CFHA loan? What is an FHA loan? How much money do I need for a down payment? Who pays for an appraisal? Why do I need a termite inspection? Who pays for a termite inspection? This house looks in good shape to me. Why do I need a home inspection? What if we want repairs done to the home? Who pays for that?
I'm confused about loan pre-qualifying, qualifying, and approval. What are they?
What's the difference between a mortgage lender and a mortgage broker?
What is desktop underwriting?
What do they mean by pre-approval from the funding lender? What's that? When can I get the keys to the house I am buying? You can get the keys to your new house once we know you are the official owner of record. This happens when the county records the grant deed converting the property to your name. Usually, we as the buyer’s agent are notified by the title company as soon as this happens and we, in turn notify the buyer and deliver the keys. Top What is a deed? In California, a deed is usually called a “deed of trust.” It is a legal document that states a property is in the buyer’s name. The buyer is called the “trustor.” It also contains a legal description of the property, includes the terms of the mortgage loan and the rights of the lender or “beneficiary” if the buyer does not make the mortgage payments. This document is ususally notarized and recorded by the county recorder. Top What is a mortgage? A mortgage is also sometimes described as a “note” or “promissory note.” It is the buyer’s promise to pay back the loan made to purchase a property. This document includes all of the terms of the loan including interest rates, payments, pre-payment penalty, if any, when the loan is due, what the balloon payment would be if any, etc. Top Do I have to get fire insurance? If you are getting a loan to purchase the property, you will be required by the lender to get and maintain hazarad insurance coverage. This insurance covers loss due to fire and other limited hazards. This insurance is also known as “fire insurance.” If you purchase the property for cash with no loan, you do not have to get this coverage. It is strongly recommended that you do so however. It is also important to remember that this insurance usually does not cover losses due to floods, earthquakes, hurricanes, tornadoes, etc. These policies are written separately and are typically not required by lenders unless there are certain circumstances, such as the property being located in a flood zone. Top How much will my property taxes be? In California your yearly property taxes typically start at the purchase of your property at approximately 1.25% of your sales price. There is some variability. The actual amount will be reflected on your property tax statement. Top What is Mello Roos? Besides property taxes, your home may also include special assessments. That is payments that must be made to special local districts, etc. that are to pay for certain public benefits. Mello Roos is a special tax assessment usually used to fund schools, parks and other local infrastructure projects. This and all other special assessments are itemized in your property tax statement. Not all homes have the same assessments. In Antioch, California for example, most homes built after 1988 have Mello Roos assessments. Detailed information on this and other special assessments are available. It is important to know what assessments affect the property you are thinking about purchasing. It is also important to know how long the assessments will remain in affect and whether they can be paid off early, etc. Your real estate agent should provide this information to you as soon as you become interested in a particular property. Top Can I make offers on several houses in hopes of having one offer go through? This can be done, however you must disclose that you are doing this in the offers you make. This lets the seller know that if you have more than one offer accepted, you have the right to proceed with the purchase of your choice. Besides being a legal requirement, this disclosure protects you from unintentionally purchasing more than one home. Your offer to purchase a property becomes, once it is accepted and signed by the seller, the contract of sale. Without the disclosure if more than one seller was to accept an offer, you would be legally bound by contract to purchase every one that was accepted. There is a down side to this strategy. If your offer is being compared to other offers by a seller, and all other terms were equal, the seller will quite likely respond to an offer that was being made by a buyer who has made only one offer. Top What is a good faith deposit? That is an amount of money, usually in the form of a check, that is presented to the seller along with your offer to purchase the property. This is to show the seller you are entering into this contract in good faith. This check is usually not deposited until the offer has been accepted. At that time, the check is deposited in an escrow account where it remains until it becomes part of the purchase proceeds at the time of close of escrow. Top How big does my good faith deposit have to be? Different areas of the state have different common deposit amounts. This is something of a custom for an area. In some areas it can be 1-3% of the purchase price. In some areas it can be less and in others it can be more. It varies from region to region. In our area it is typically less. Sometimes, once contingencies have been removed, an increase in the amount of the deposit may be required. This requirement, if any, and the amount of the initial deposit would have been worked out at the time the purchase contract was negotiated. A good real estate agent will advise their buyers and negotiate these issues in the buyer’s best interest Top Is my deposit refundable? If it is written in the contract that the deposit is refundable, then it is. However, most of the time on home purchase contracts in California, if you have proceeded along the process of the transaction to the point where you have removed your loan and inspection contingencies in writing, and then, after that decide you want to back out of the purchase, your deposit may not be refundable. Top Should I wait to see if prices go down some more? Home prices decrease and increase in cycles. Over the long-term, home prices have increased, however there can be times where home prices drop. When a down cycle occurs, it is common for potential buyers to want to “time the cycle” and wait until the prices hit their lowest point before they buy their house. Even the experts joke that they never know when a bottom occurs until well after it happens, so a homebuyer has very little luck in timing the cycle with any accuracy. Most importantly, trying to time the market in this way can end up costing you more money. You know what interest rates are right now but you don’t know what they will be in the future. If they go up, it may not matter what the home’s price is at the bottom of the cycle. It could be very possible that the home you could have purchased at a higher price may, in fact, not be affordable at the bottom of the cycle because it may require a higher monthly loan payment. Savvy real estate investors know that the cost to borrow money is sometimes more important than the cost of the property. Top What is a foreclosure? Foreclosure is the process by which a bank or other lender takes back a property that the buyer has stopped paying the mortgage payments on. Once a property has been taken back, the property is often referred to as a “foreclosure.” Once a property has been “foreclosed on,” the bank or lender will attempt to sell it for as much as they can get for it. Top What is a Short Sale? When a homeowner must sell their house and cannot sell it for enough to pay off the loan, the homeowner will sometimes ask the lender to accept what is called a short pay off. A lender may agree to the sale rather than going through the process of foreclosure because the loss they will take could be less. The lender is said to have agreed to take a “short payoff” of the loan.< Top Do you, the real estate agent also do my loan? Some realtors do. The Guthrie Group does not. Here is why. It has been our experience that when a real estate agent acts as both the real estate agent and loan broker for a buyer, it rarely works to the buyer’s benefit. In this scenario, the real estate agent is not looking out for his or her client’s best interest. The agent is just looking to sell one of the lending options he or she has available, not necessarily the best possible loan for the buyer. Being a good real estate agent or a good loan broker are each very difficult to do. Doing both well, and to the benefit of the buyer, is just about impossible. We assist the buyer in developing a relationship with the best lender and loan product for their needs. We then concentrate on doing the best job representing our buyer in purchasing their dream home. Top What do I do if there are other offers on the house I want? This is where strategy comes into play. Often, if you know you are competing against other buyers, your agent will advise you to come in with your best offer rather than making a lower offer in the hopes of negotiating from there. The seller will be looking for the best offer when presented with more than one and will respond to that one first. If you are the one that gets responded to, you can then make the decision whether the response in acceptable to you. If, for example a counter offer is made to you that is more than you feel you want to pay, you can refuse it. If you had not made your best offer however, you may not have had the oportunity to make that decision. These situations are not all the same however, and having a skilled and experienced agent to advise and represent you, will give you the best chance possible to be successful. Top I see these ads for foreclosure auction sales. What is a foreclosure auction sale? There are different types of foreclosure auctions. These ads usually involve a home that has been foreclosed upon. The lender will attempt to sell the home through an auction sale rather than listing it for sale with a real estate agent. The home is advertised for sale at auction with the auction to be on a specific date. There may be a minimum starting bid advertised as well. There will also be a minimum acceptable bid that is known only by the lender and the auction company. Prospective buyers will submit bids to purchase the property and if the best bid is above the mimimum acceptable bid, that bidder will win the right to purchase the property at that bid price. If no bid above the minimum acceptable bid is received, the lender may attempt to auction the property again at another date or may list if for sale with a real estate agent. For details on foreclosures, auctions, etc. and how to decide if this is a good deal for you, get our special report “Buying Foreclosures and Short Sales.” Top What is a CHFA loan? This acronym has a couple pronunciations. People sometimes call it a “Cal Haffa” loan. Sometimes the call it a “Chaffa” loan. CHFA stands for California Housing Finance Agency. It was established in 1975 to assist first time home buyers purchase their first home. This program is financed through the sale of tax exempt bonds and not with tax dollars. There are buyer income and loan amount limits. The loan details do change so we suggest you consult your real estate agent and lender for details on whether this progam can help you. Top What is an FHA loan? FHA stands for the Federal Housing Administration. FHA does not make loans. What it does do is insure loans made by lenders if those loans meet certain criteria. By making a loan that is insured by this agency, the lender feels much more confidence in the safety of his investment. These loans are often a great way for first time home buyers to purchase that first home. There are different types of these loans with different terms and qualifications. The loan details do change so we suggest you consult your real estate agent and lender for details on whether this progam can help you. Top How much money do I need for a down payment? This varies depending on the loan program. Each loan program has its own requirements. One example is that FHA loans can require a down payment as low as 3%. Others can be higher and others lower. Some programs have down payment assistance money available. In affect, you could be making no down payment if you meet certain criteria. This information, including FHA down payment information is as of the date this was written and may not be totally correct at the time you read this. Please understand that these programs are constantly changing and it is always best to consult with your real estate agent and lender for the latest up to date information on this and other details about available loan programs. Top Who pays for an appraisal? Normally the buyer pays for the appraisal. It is often included in the loan as part of the closing costs. Top Why do I need a termite inspection? Termite inspections are focus on whether there is termite infestation, other wood destroying organisms such as dry rot fungus, or water damage. These can all potentially cause considerable and expensive damage to the wooden parts of your home. The termite inspection will also look for conditions that can lead to future infestation and damage as well. These conditions are often hidden out of plain site or when in plain sight, can be missed by the average person. The inspector will crawl under the house and inspect all accessable areas to look for these conditions. Knowing the conditions covered in the termite inspection report allows the buyer to get a much better feeling as to the underlying condition of the property. In fact, some lenders will require a termite inspection as a condition of making a loan. Finally, the termite inspection is separate and distinct from a home inspection. These two inspections look for distinctly different things. Please see our answer regarding home inspections for details on what those inspections cover. Top Who pays for a termite inspection? This varies from region to region. In our area, the seller usually pays for the termite report. However, in cases of short sales and foreclosures, we are seeing this cost falling more to the buyers. Top This house looks in good shape to me. Why do I need a home inspection? The decision whether or not to have a home inspection is one that is made by the buyer. We believe however, that a home inspection is money that is always well spent. A home inspector is a professional who inspects the home, including all accessable areas for possible defects. He or she will look at the electrical systems, plumbing systems, appliances, furnace, windows, etc. The inspection will be done in a methodical manner and a complete written report will be made. These inspectors almost always have more knowledge and experience regarding all of the thousands of components that go together to make up a house than any buyer does. The home inspection may result in revealing issues that could actually convince the buyer that maybe this is not the house to buy after all. It can also reveal issues that can be worked out in further negotiations with the seller that can be fixed before the transaction is completed. The inspection and report will definitely give the buyer a much more thorough understanding of true condition of the house he is buying. Finally, the home inspection is separate and distinct from a termite inspection. These two inspections look for distinctly different things. Please see our answer regarding termite inspections for details on what those inspections cover. Top What if we want repairs done to the home? Who pays for that? You may have seen one or two things in the home you want to buy that you feel need repair. Also, as a result of a termite or home inspection, you may become aware of something that needs repair. At this point of the transaction process, you can instruct your agent to go back to the seller with requests for repairs. This is a point where your agent will again negotiate for you. The seller may agree to make the requested repairs. The seller may also refuse to do so. If that is the case, and you decide the issue is important enough to you, you could decide to withdraw your offer if the terms of the purchase contract allow you to do so. Details such as this are another good reason to have a with good, experienced real estate agent represent you when that contact is negotiated and written. Top I'm confused about loan pre-qualifying, qualifying and approval. What's that all about?
Those are probably the most mis-understood bits of jargon in the real estate business. If you have not been through the process of getting a mortgage loan and purchasing a home, it can be really confusing if not explained to you. Unfortunately many real estate agents and lenders just assume their client the buyer knows and this can be very frustrating for the buyer.
Getting a mortgage loan is a process of steps. Completing each of the steps has a name attached. Though there are a tremendous variety of loans out there with their own unique issues, I think what I am outlining here pretty much covers the general field.
Sellers, whether they are home owners or an institution like a bank selling a foreclosure, in most cases now, require a document from the buyer’s lender stating that the buyer has been “pre-qualified” for their mortgage loan. They won’t even look at an offer without this document included. A pre-qualification is an indication from the loan officer or loan broker that in their opinion, the buyer will qualify for the loan. This is not an approval! We will get to that later.
Sellers don’t want to mess around with someone who cannot get the loan in the first place, so this requirement at least gives them some idea that it can happen.
Getting pre-qualified involves providing mostly verbal information to the loan officer or broker. Information such as income, debt, job status, etc. He may run the buyer’s credit at this time. Often, the loan officer can tell right then and there that the buyer obvioiusly will not qualify to get the loan. If that is the case, a lot of time has been saved by everyone. However, if the information provided fits into the basic requirement of that lender’s loan programs, the lender will provide a pre-qualification document. Often called a “pre-qual letter” in lending jargon.
The next step is to get qualified for the loan. This means completing the loan application and providing to the lender documentation about the buyer’s ability to pay the loan. That will be things like pay stubs or W-2 forms, copies of income tax returns, bank statements, etc. The lender will also want a copy of the sales contract and other documentation about the property being purchased. Whether a loan is made also depends on whether the property being purchased fits into the loan requirements. All of this information goes from the loan officer or broker to the loan underwriter. The underwriter is the one who will actually make the decision on whether the loan gets made. Not the loan officer or broker. During this process it is quite common for the underwriter to ask for further documentation of what has already been provided does not quite provide a clear enough picture for him to back up his decision on the loan. This is the part of the process that some buyers have difficulty with. Digging up certain documentation can be difficult if you are not a great record keeper. However going to the effort is absolutely vital.
If everthing provided by this time tells the underwriter what he must know, he will say you are qualified or approved for the loan. This is still not the final answer though. At this point there are usually a few conditions required by the underwriter to be met before formal approval is given. These last conditions are usually things like getting the appraisal back with the value of the house matching or exceeding the agreed upon price. Also there could be other things like getting hazard insurance in place, etc. Once these have been finalized, the underwriter gives final loan approval.
Once final loan approval is achieved, the actual loan documents can be drawn up for the buyer to sign. In lending jargon this is what they mean when they say “draw docs.” After the buyer has signed the loan documents, the loan is funded. This is where the lender transfers the loan money to the escrow company for eventual final distribution to the seller on close of escrow.
So, pre-qualifying is just the first step. Knowing how the process works can make the home buying experience less mysterious and frustrating for the buyer.
See also FAQ’s:
What do they mean by pre-approval from the funding lender? What’s a funding lender?
What’s the difference between a mortgage lender and a mortgage broker?
What is desktop underwriting? Top What's the difference between a mortgage lender and a mortgage broker?
Usually, in the real estate lending business, a mortgage lender is a company you work with who will make the loan themselves. This is also known as a “direct lender.” The loan officer you work with on preparing the paperwork, etc. works directly for that company.
A mortgage broker is independent of the actual lender. The definition of broker is “one who acts as agent for others.” If you work with a mortgage broker, that broker takes your completed documentation and submits it to one of a number of actual outside lenders who may loan you the money.
What this difference means to the buyer can important. The direct lender typically has fewer loan products available than the broker. Not always though. However, the direct lender works with underwriters that are in the same company and usually knows very well what the underwriter’s rules are. The ease and speed of communication is quick. A broker may be working with a lender for the first time on your loan and know nothing about what that lender’s underwriters rules are. This can lead to delays and even an unapproved loan when the broker thought it would be approved.
So, you can see that if you go the broker route, it is best to use a very experienced broker who has worked with the lender of choice a number of times and knows what they want. Top What is desktop underwriting?
Fannie Mae, (Federal National Mortgage Association) has developed an automated system for pre-qualifying loans that they will buy from lenders. The process of running a prospective buyer’s preliminary info (See FAQ regarding Pre-qualifying) through this system is called “desktop underwriting” or D.U. in the business.
There is a lot of mis-understanding about desktop underwriting even among lenders themselves. This is the pre-qualification step and nothing more. Some lenders think that if a buyer is pre-approved through desktop underwriting they have formal approval and that is not the case. The qualifying and approval steps with gathering and submission of documentation and property info, contract, appraisal, etc. still must be completed before there can be formal approval of the loan. Top What do they mean by pre-approval from the funding lender? What's that?
Many banks and other owners of foreclosed properties are now stating that they will not even look at an offer on the home for sale unless that offer is accompanied by a pre-approval letter from the funding lender. Savvy owner-sellers are requiring this too. If you have read the answer to the question about the difference between a direct mortgage lender and a mortgage broker, you will probably guess the answer.
A direct lender will also be the “funding lender.” That lender will be making the loan, or “funding” it themselves. That means they have the final say in whether the loan gets made.
If the loan is being obtained through a mortgage broker, that broker, which often has a business name with lender or loans in it, is not the actual funding lender. That is another business entirely. What can happen quite often is that the broker, thinking you will qualify for the loan writes a pre-qualification letter on that assumption. That broker may not know the detailed requirements of the actual lender and just assumes it is going to be O.K. Then, after the sale is in contract and many days later, the broker finds out that no, the lender will not make the loan after all because you are not qualified for that lender’s product. The deal falls apart and everybody has lost time and is frustrated.
So, to overcome this issue, the seller’s are now often requiring that the pre-qualification letter be provided by the funding lender and not the broker. If the funding lender has pre-qualified the buyer, the odds are much better that the loan is going to go through. |