Beginner Guide to Buying a Home – Week 10

This step-by-step series will take you through the entire home-buying process — from finding a buyer’s agent to settlement day, and all the details in between. Every first-time buyer will find this information-packed series easy to follow and understand. Make sure to tune in for the next few weeks!

Once you’re under contract to buy a home, you want the final stages of the mortgage process to go smoothly – you don’t want anything to sidetrack the sale from here on out!

Nothing is a done deal yet even when you’re under contract. There are still several steps in the process and some of them have target dates in the contract.

So, here’s what you need to keep in mind when you reach this stage:

Appraisal of Your New Home

Once you sign the contract, a copy is sent to your mortgage lender. They will then order an appraisal which you are responsible to pay for, usually they will take payment information from you at this time. Even if you are paying cash you may want to get an appraisal for your own information.

Why do you need an appraisal now? An appraisal is an accepted evaluation of the home you are purchasing to make sure the market value is at least what you have agreed to pay. Your lender has already approved YOU and your finances but now it’s got to approve the home you’re about to buy.

It wants to make sure that this is a sound investment in case you default on the loan. If the property appraises lower than the sales price, the loan might be declined.

A licensed appraiser’s report is much more detailed, and the only valuation report a lender will consider when determining if it will lend money to a borrower. The report will include:

• details on the property/home
• comparisons to three other similar properties
•  an evaluation of the local real estate market at the time
•  statements on any issues that may hurt the property’s value, such as structural damage, or even if the property took too long to sell.

Don’t confuse an appraisal with a home inspection! Appraisers are not home inspectors so don’t rely on them to determine if your home is in good condition. They are strictly looking at your home and comparing it to similar homes that have sold recently in the area to determine if the price you are paying is in-line with the local market. They will take into account renovations or upgrades that are recent when comparing the home to others that are local.

Locking In Your Mortgage Rate

What exactly is a lock-in?  A lock-in is a lender’s promise to hold a certain interest rate and a certain number of points for you, usually for a specified period (typically 30 or 60 days), while your loan application is processed.It’ll protect you against any rate increases during the loan process.  However,rates may drop after you lock in and prevent you for taking advantage of any decreases during this period.

When you first look for a lender to get pre-approved make sure you find one with a favorable rate, the lowest points, and other upfront charges such as a lock-in fee. Since rates and some fees are subject to state and federal regulations, don’t just look for the “lowest rate” most banks use the same software to calculate your rate based on income, down payment amount, and credit score to name just a few of the criteria used. So make sure the mortgage person you are dealing with is someone you are comfortable with.   

Some lenders have a “float down,” whereby if your rate lowers more than a certain amount within a short time before settlement, you get the lower rate for no charge. However, YOU must be the one to ask if your lending institution offers this option AND be the one to keep track. 

Ask your lender upfront about what the criteria are to get the lower rate if rates fall before your settlement or refinance.

Discuss the interest rate outlook with your lender. Work with your lender to understand current rates and what they are doing or expected to do. Understand the impact a quarter or half percent increase in the rate will have on your monthly payment and ability to qualify. Will more money down have an impact? Then, based on current conditions, what you have learned and your risk tolerance you can decide how quickly you want to lock-in your rate.

Determine the lock-in period with your lender and have them estimate the time needed to process your loan. The lock-in period should be long enough to allow for settlement and any other contingencies imposed by the lender.

Make sure you factor in any possible delays (construction issues, appraisal title search, etc.). Lock-ins of 30 to 60 days are common, but some may range from seven to 120 days.  Usually, the longer the lock-in period, the greater the fee.

Have a tangible record of your arrangements with the lender in the event of a dispute. Make sure you have a written rather than verbal lock-in agreement. You MUST fully understand your lender’s lock-in rules and procedures.

It’s best to obtain a blank copy of a lender’s lock-in form to read before you apply for a loan. If possible, show the lock-in form to a lawyer or real estate professional.

If your lock-in period expires, you could lose the interest rate. Some banks allow you to extend the rate lock for a fee, you should be aware of this fee and be prepared in case something delays your closing. If you cannot extend the rate lock most lenders will offer you a loan based on the prevailing interest rate and points, which may now be higher due to market conditions. Sometimes, though, the rates are lower.

If the delay is the lender’s fault such as heavy demand, the lock-in period may be extended; and sometimes it may be extended even if it is your fault. Again, check the lock-in rules.

Commitment Letter

Once the appraisal is done and the underwriters have verified all the information they need to approve the loan, you will get a commitment letter. Often, they are issued with final conditions to be cleared. These conditions can be, requiring you to obtain a homeowners policy effective on the closing date, providing updated employment information, and a clean title report to name a few.

Title Search what is it and why do you need it?

A title search is done to ensure that the property is owned by the seller or that the seller has the right to sell the property. A title search looks for liens or encumbrances against the property, checks for certificates of occupancy, open permits etc. Whether you are paying cash or getting a mortgage a title search is key. Once the title is considered clean the title company issues “title insurance” which insures you (and the bank) in the event someone comes along claiming that they own the property or should have inherited it way back when.

Besides the mortgage which is a form of lien. There could be a second mortgage, a home equity line of credit (HELOC) with a balance, a tax lien if the seller has not paid property taxes, or a mechanics lien. A mechanics lien is a lien placed by a contractor such a plumber who has done work on the home and not been paid.

 In addition, the title company will search back and trace the history of sales or property transfers back as far as they can to make sure each transfer or sale was properly done. If there is a “cloud” on the title it will need to be cleared up before you can close. Things like a current mortgage are often handled on the day of closing out of the seller’s proceeds.

There you have it—what needs to happen after you go under contract.  If we work together, I’ll help you through it when we get there, so don’t worry about it too much right now.  Your next step in the homeownership journey is meeting with a few agents to ask them those questions from Week 1—How To Find The Very Best Agent. I just want to be one of the agents you speak to when you are ready.  Contact me 3-6 months before you want to even start looking at houses, as there is a lot to do between now and when we start looking 🙂 We are in the homestretch in the Beginner Guide to Buying a Home series. Next weeks article we talk about what needs to be done during the pre-closing stage to get ready for closing day!