The Home Buying Process

The home buying process can be very complicated and confusing, especially if you are a first time homebuyer.  Even if you have previously purchase a home you will find that there have been some changes in the process.

The intent of this information is to take the mystery out of the home buying process by setting forth the activities that usually occur in a typical home purchase transaction.  And to hopefully provide some information that will make for a smooth process.  

Pre-Approval

Before starting to look at properties to purchase, you should get pre-approved for a mortgage loan. The obvious reason to take this action is so you are not looking at properties for which you have no hope of purchasing. And you might discover that you can qualify for a loan that would allow you to purchase a property at a price higher than you were expecting.

The term “pre-approval” is sometimes used synonymously with the term “pre-qualified”.  Some people suggest there is a difference between the two terms. It is not important what term is used – what is important is that you deal with a competent mortgage provider who performs adequate due diligence during the pre-approval process.  The worse thing that can happen is to spend a significant amount of time looking at properties based on a pre-approval, enter into a contract, and then discover that you cannot buy the property because you cannot obtain a loan.

The pre-approval process starts with you providing financial information, including such items as your residency and employment for past two years, current income, and assets. And it involves a credit report being obtained.

The types of loans available and loan terms are dependent on the type of property – single family detached, condominium, townhome, duplex, etc. Thus, during the pre-approval process it is helpful to attempt to determine the type of property you might be purchasing.

Obtaining a mortgage loan requires that you provide documentation supporting your income and assets (i.e. paystub, bank statements, W-2s).  For some borrowers, tax returns and other documentation will be needed. However, the documentation must be reasonably current. Thus, depending upon where you are in the home buying process and your specific income and asset sources, you may or may not be asked to provide documentation during the pre-approval process.

There are numerous types of mortgage loans (Conventional, FHA, VA), and numerous ways to structure a mortgage loan (i.e. loan term, down payment amount, fixed rate loan or adjustable rate loan, etc). Many borrowers will have choices as to the best type of loan and best structure that will fit their specific financial situation. As part of the pre-qualification process we will discuss the options available and the pros and cons of the various options, and attempt to identify the preferred loan type and loan structure. 

Because the pre-approval is based on the information you provided and information on the credit report, it is best to avoid making any major changes to your employment or financial situation.

Actions you should take:

• Save recent paystubs and bank statements
• Start locating W-2s and tax returns from previous years
• Make sure payments on current debts are made on time

Actions you should avoid taking:

• Do not quit your job or change jobs
• Do not take on new debts or increase current debts
• Avoid moving money from one bank account to another

Property Acceptability

Many homebuyers mistakenly think that if they are qualified for a mortgage loan, they can purchase any type of property they want. What they forget is that a mortgage loan is a secured loan and the property acts as collateral for the loan. Thus, the acceptability of the property as collateral is an important part of the loan approval process.

Generally speaking, most residential properties are eligible as collateral for a mortgage loan. However, there are certain types of properties that are not eligible, and some properties where obtaining a mortgage loan can prove challenging.

The following types of properties are not eligible collateral for a mortgage loan:

• Condominium Hotels / Condotels
• Homes that are not habitable and accessible year round
• Log Cabins
• Manufactured homes and mobile homes
• Properties with potential health or safety risks
• Residential properties located in commercial zoning
• Time-Share Units
• Properties that have been built with unique construction materials, such as rammed earth, cob (mud and straw), compressed earth, and straw bale construction.
• Unimproved land
• Properties that are commercial in nature (i.e. not residential), such as working farms and ranches
• Properties that are in extremely “poor” condition. This is somewhat subjective in nature, but effectively what this means is that the property is not immediately habitable .

Condominium properties are in most cases eligible for a mortgage loan, but some condos are not eligible or financing is somewhat limited. With a condo, the acceptability of the property is dependent upon the overall condition of the condominium project. Items that are reviewed for loan purposes include the number of owner occupied residents vs. rental units, and the overall financial condition of the homeowners association. If a new construction condo project, the number of sold units is a key item that will dictate whether or not financing is available.

Making an Offer

Once you have identified a property that you want to purchase, you will make an offer on the property. This involves the completion of the standard Colorado real estate contract. Assuming you have hired a real estate agent, your agent will assist you in the completion of the contract.

Your agent will present the contract and a “pre-approval letter” (aka – “lender letter”) to the real estate agent that represents the seller.

The purpose of the lender letter is to make the seller feel “warm and cozy” that you are qualified for a loan that would allow you to purchase the property. We will customize the lender letter to match the offer you are making on the property and include corresponding loan details.

The contract will have a deadline by which the seller must respond to the offer in order for the offer to remain valid. The seller can respond to your offer in a number of ways. The seller can accept the offer “as is”. Or the seller can make a counter offer. Or the seller can reject the offer. In rare situations, the seller will simply ignore the offer.

If the seller makes a counter offer, you need to decide whether or not to accept the counter. Or you could counter the counter. It is possible that you may decide not to pursue the counter, and simply move on to a different property.

Under Contract

At some point in time you will identify the property you want to purchase, and will agree on a purchase price and other terms. Once you are under contract, there are a number of things that will happen, many of which will be happening simultaneously.

Lock the Interest Rate

Once you are under contract, you have the ability to “lock” the interest rate. When you lock the rate, you are also locking the “price” of the interest rate – the rate may have “discount points” or a “lender credit” (money passed through to you to offset the closing costs).

A lock is a mutual agreement between you and the lender that the loan will be at a specified rate and corresponding price, provided that the loan closes within the lock period.

Lock periods are for 30 days, 45 days or 60 days, and the price is slightly higher the longer the lock period. If the closing date (per the contract) is within 30 days, we would use the 30-day lock period. If the closing date is within 45 days, we could use the 45-day lock price, or wait for 15 days and use the 30-day pricing - however, by waiting you run the risk that rates could go up.

After you have locked the rate, then the rate and the price for that rate cannot change. If interest rates go up, you are protected. If rates go down, the rate and price will stay the same. Having said this, if rates go down significantly (i.e. 1/2% or more) I have had fairly good success in getting the lender to improve/lower the rate. But it is rare that rates will move down 1/2% in a 30 to 45 day period.

You do not have to lock once you go under contract. You could wait until at least 2 weeks prior to closing to lock the rate/price. By waiting to lock you run the risk that mortgage rates could get worse. But of course, the rate could get better too.

While the choice of when to lock is certainly in your control, unless you have a crystal ball that tells you that rates are going down it is generally a good idea to lock the pricing soon after going under contract.

Property Inspection

An important item that you will need to arrange as soon as practical after going under contract is an inspection of the property by a competent property inspector. If you do not know of a qualified property inspector, your real estate agent should be able to recommend someone.

The entire inspection process could take as long as couple of weeks to complete. It usually is a good idea to delay ordering an appraisal of the property until the inspection is done and any inspection issues are resolved – we do not want to spend money on an appraisal if the inspection reveals items that make the property unacceptable. Since we need an appraisal to obtain final loan approval, getting the inspection process completed quickly is key to a timely loan approval.

After inspecting the property, the inspector will issue you a written report that describes the condition of the property. Since no property is ever perfect, the report will most likely set forth some deficiencies in the property. You will need to decide how to deal with these deficiencies.

If there are major issues with the property, you could simply cancel the contract and receive a refund of your earnest money deposit. Or you could ask the seller to repair the items. Or you could ask the seller to give you money at closing and you will make repairs after closing. Since for loan purposed there is a limit on how much money the seller can give a homebuyer, if any money is flowing from seller to you, I will need to be involved with this.

This entire process – the inspection and resolution of inspection items - is subject to specific deadlines that are set forth in your contract.

Processing the Loan

With a contract in place, we begin processing the loan. The end result we are seeking is a final loan approval with no specific conditions, or no conditions that you cannot satisfy.

Loan processing includes verifying/documenting your income, employment, and assets. The specific documentation that will be needed will vary from borrower to borrower. I will send to you a list of the specific documents that will be needed, usually very soon after you have an executed contract.

Another part of the loan processing involves obtaining “title work” on the property. The title work is generated by a title company. In Colorado, it is common and customary for the seller to pay for the buyer’s “owners’ title insurance”, which means that the title company that will be utilized will usually be selected by the property seller. The title company will send all parties involved in the transaction a “title commitment” that will set forth the requirements necessary in order to obtain title insurance.

The loan processing also involves obtaining an appraisal of the property. I will arrange for an appraiser to visit the property and issue an appraisal report.  

Property Insurance

Another item that you will need to be arranging soon after going under contract is property insurance.

If the property is a condo or townhome, the building will usually be covered under a blanket policy which is handled by the homeowners association and is included in the HOA dues. But in most cases you will also need a separate “contents insurance” (an HO6 policy) to cover items inside the unit such as cabinets, plumbing fixtures, carpeting, and window coverings.

You can obtain property insurance through any insurance company of your choosing. Once you have identified the insurance company you will need to provide me with the name & phone number of your agent or the insurance company representative.

The first year’s premium for the property insurance will be paid at loan closing. The title company handling the closing will disburse the funds directly to the insurance company.

Final Loan Approval

In most cases, we should have final loan approval no later than 3 to 4 weeks after contract has been executed.  Depending upon how quickly the property inspection was done and inspection items resolved, it is possible we could obtain final approval earlier than this.

Once we have obtained final loan approval, do not make any major changes to your employment or financial situation – do not quit your job, and do not take on any new significant debts. 

After we have received final loan approval, we will begin the closing process.

Closing Process

The closing process starts with my arranging for “loan closing instructions" to be sent to the title company. The title company will use the closing instructions, plus information from the contract and other sources to generate the final "Closing Statement".

The Closing Statement will itemize the transaction - showing the purchase price, loan amount, closing costs, etc and will show the final amount that you will need to bring to closing. The money you bring to closing needs to be “good funds” – either a wire transfer to the title company or a cashier’s check. 

Some title companies move faster than others, but generally it takes the title company 1-2 business days from receipt of the closing instructions to have a Closing Statement available for our review.

Closing

The date of the closing is set forth in the real estate contract. The closing is conducted by the title company, and is usually held at the title company’s office. The typical closing takes about 1 hour. The parties at the loan closing are usually a representative of the title company, the seller, the seller’s real estate agent, yourself, and your agent. Unlike most mortgage providers, I always attend the closing.

Although it may not be apparent, there are actually two closings that take place virtually simultaneously – one involved the transfer of real estate (the real estate closing) and the other involves the mortgage loan (the loan closing). Thus, at the closing you will be signing two sets of documents.

The real estate closing and applicable documents that you will sign relates to the sale/transfer of the real estate. These documents are prepared by the title company, and include such items as the Closing Statement, a document that sets forth the final settlement between buyer and seller relating to property items (i.e. real estate taxes, water, HOA dues, etc) and other documents required pursuant to the sales contract.

The documents relating to the mortgage loan are the "Loan Documents". One of the services I provide my customers is the opportunity to review the Loan Documents they will be signing at the closing in advance of the closing. This avoids any surprises and makes the closing go a bit quicker. In most cases you should receive the Loan Documents at least 2 -3 days prior to the closing.

After all the documents are signed and you have provided whatever money is needed to complete the transaction, you will be the proud owner of a new property.