Step 3 - Closing the Deal
Home Financing Choices
In today’s fast-paced real estate environment, home buyers need every possible advantage. Coldwell BankerHunter Realty has made home buying simpler by helping buyers get "preapproved," and not merely "prequalified." What is the difference
Pre-approval vs. Pre-qualification
What could be more comforting than the peace of mind that goes with knowing your mortgage is fully approved
You will have a greatly improved negotiating position when you are preapproved for a mortgage. Sellers are more apt to negotiate with someone who already has a mortgage approval in hand. The pre-approval letter lets the seller know they are working with a serious buyer. A preapproved buyer can also close on a property more quickly—another major consideration for a motivated seller. Obtaining a preapproved mortgage is essential in a "sellers’ market" or where supply is limited.
Pre-approval uses basic information as well as electronic credit reporting. It is a true mortgage commitment. Which means a commitment to financing your home and an indication of the total mortgage amount available to you.Coldwell Banker Mortgage, as well as other mortgage lenders, can help you through the pre-approval process. In most cases, there is no charge for this service. Ask your Sales Associate for more information.
Pre-qualification, on the other hand, is not a full mortgage approval, but an estimate of what you can afford. When you prequalify for a mortgage, the lender collects basic information regarding your income, monthly debts, credit history and assets, and then uses this information to calculate an estimated mortgage amount.
Of the over 50 different mortgage types available, the two largest categories are fixed and adjustable rate mortgages, each with advantages to consider.
Fixed Rate Mortgage
The fixed rate mortgage is a traditional method of financing a home. The interest rate stays the same for the entire term of the loan — usually 15 or 30 years — so the interest and principal portions of your monthly payment remain the same.
Your payments are stable and predictable, but initial interest rates tend to be higher on a fixed rate mortgage than on adjustable rate loans. Many fixed rate mortgages cannot be assumed by a subsequent buyer.
Adjustable Rate Mortgage (ARM)
The interest on an adjustable rate mortgage is linked to a financial index, such as a Treasury security, so your monthly payments can vary over the life of the loan — usually 25 to 30 years. Most adjustable rate mortgages have a lifetime cap on the interest rate increase to protect the borrower.
The lower initial payments on ARMs make it easier for buyers to qualify. Some ARMs may be converted to fixed rate mortgages at specified times, usually within the first five years.
Frequently Asked Questions
Q. WHAT IS THE DIFFERENCE BETWEEN "PREQUALIFIED" AND "PREAPPROVED"
A. A prequalification consists of a discussion between a home buyer and a loan officer. The loan officer collects basic information regarding the customer’s income, monthly debts, credit history and assets, and then uses this information to calculate an estimated mortgage amount for the home buyer. The prequalification is not a full mortgage approval, but estimates what a home buyer can afford. A preapproval, on the other hand, is a comprehensive approach using basic information as well as electronic credit reporting. Preapprovals, in most cases, are true mortgage commitments. The lender commits to financing your home and indicates the total mortgage amount available to you.
Q. WHAT TYPES OF MORTGAGE PROGRAMS ARE OFFERED
A. Currently, there are over 50 different mortgage products available, including:
- 15, 20 and 30-year fixed rate loans
- adjustable rate loans
- new construction financing
- VA and FHA loans
- 5 and 7-year balloon loans
- and many more
Q. HOW LONG DOES IT TAKE TO PROCESS A MORTGAGE APPLICATION
A. Usually about 45 to 60 days, although it can take as few as seven days and as long as 90 days for some transactions. The actual time depends on how quickly the lender can get an appraisal of the property, a credit report and verification of employment and bank accounts.
Q. WHAT DOCUMENTS WILL I HAVE TO PROVIDE
A. Be prepared to provide verification of income (including a pay stub and recent tax returns), bank account numbers and details on your long-term debt (credit cards, auto loans, child support, etc.). If you’re self-employed you may also be required to provide financial statements for your business. In recent years, lenders have been required to obtain more specific information from borrowers in order to package and sell loans to investors. If you were lending someone such a large amount of money, you’d want detailed financial information.
Q. COULD ANYTHING DELAY APPROVAL OF MY LOAN
A. If you provide the lender with complete, accurate information, everything should go smoothly. You may face a delay if the lender discovers credit problems—a history of late payments or nonpayment of debts, or a tax lien. You may then be required to submit additional explanations or clarifications. You should also be sure to notify your lender if your personal or financial status changes between the time you submit an application and the time it’s funded. If you change jobs, get an increase (or decrease) in salary, incur additional debt or change your marital status, let the lender know promptly. You may be delayed if the home you selected fails to appraise for the agreed purchase price.
A. Principal and interest on your loan. Depending on the terms of your loan, the payment also may include hazard (homeowners) insurance, mortgage insurance and property taxes.
Q. CAN I PAY THOSE OTHER THINGS SEPARATELY
A. Not if it’s an FHA or VA-insured loan. With most other loans, you can pay your own taxes and insurance if you borrowed no more than 80 percent of the purchase price or appraised value of your home. Check with your lender to be sure.
Q. WHAT DO THE CLOSING COSTS INCLUDE
A. Closing costs cover processing and administration of your loan. In addition to a loan fee, you’ll usually be asked to prepay interest charges, to cover the partial month in which you close, and impounds for property taxes, hazard insurance and mortgage insurance.
Q. WHEN DO MY MORTGAGE PAYMENTS START
A. Usually about 30 days after closing. The actual date of your first payment will be included in your closing documents.
Ask our Coldwell Banker Hunter Realty associate or Contact Us.
Documents Needed to Apply for a Mortgage
When you apply for a mortgage, you will need to furnish information regarding your income, expenses and obligations. It will save time if you have the following items available
- Two most recent pay stubs
- W-2s for the last two years
- Federal tax returns for the last two years
- Last two months’ bank statements
- Long-term debt information (credit cards, child support, auto loans, installment debt, etc.)
Repairing Past Credit Problems
Have you had situations in the past that have put blemishes on your credit There are many reasons why credit problems occur. Some explanations are:
- You were a co-signer on a loan that wasn’t paid on time
- You allowed someone else to use your credit cards
- You may have thought your spouse paid the bill
- You thought your insurance company was going to handle the payment
- You are divorced but your former spouse had credit problems
Some lenders will work with you to find a credit solution. They have special programs and financing options that allow you to get a mortgage even with minor credit blemishes. However, it is in your best interest to keep your credit report in good standing. Here are some helpful hints for your credit report:
- Never go past due on any accounts
- Keep your credit card debt below 50% of your monthly obligations
- If paying bills after the due date, always pay within the grace period
There are literally hundreds of points that you can negotiate in a real estate transaction, and it is important to feel confident about negotiating with potential sellers, or there may be a danger that a seller will talk you into agreeing to terms in a contract that are not in your best interest.
There are many potential points that can protect and enhance your purchase, including financing and home inspection contingencies. Most purchase contracts, even if they are standard documents, contain boilerplate language that may not fit your situation and may in fact be unfavorable to you. Your Coldwell Banker Hunter Realty agents will explain the language, so that you can make an educated decision in order to make the best possible purchase decision.
There are two types of contingencies found in most transactions-a financing contingency, which makes the purchase conditional on the buyers' ability to obtain a loan from a lender, and an inspection contingency, which allows the buyers to have professionals inspect the property to determine potential property issues prior to entering a binding contract to purchase. You could forfeit your Earnest Money deposit under certain circumstances, such as by terminating a purchase without legal reasons provided for in the contract. In order to protect your position, your Coldwell Banker Hunter Realtysales associates will make certain that the purchase contract contains provisions which protect your purchase interests including a clear and marketable title, having the seller agree to maintain the property in its present condition until closing and making any agreed-upon repairs to the property.
Deciding what stays and what goes is usually up for negotiation. If sellers want to take fixed items out of a house, they must specify so in the sales agreement. Appliances that are not built in such as washer, dryer, refrigerator, portable dishwasher, portable microwave, and freestanding stove are all negotiable, as is anything else not permanently attached to the property.
Neighborhood Price Comparison
Neighborhood Price Comparison or Comparative Market Analysis is an estimate of market value performed by a real estate agent or broker. A comparative market analysis takes into account aspects of the home you're looking at, including size, features, and annual costs associated with each home, as well as any repairs and improvements on the home. You may also receive a list of recently sold, comparable homes in the neighborhood, and a list of comparable homes currently for sale.
Earnest Money Deposit
This is a deposit paid by the prospective buyer of real property evidence of the good faith intention to complete the transaction. The amount earmarked for earnest money usually does not exceed five percent of the purchase price and it serves as a source of payment of damages to the seller if the buyer defaults. The amount and the form of earnest money may also play into the negotiation strategy your Coldwell Banker Hunter Realty agent employs. Once the offer is mutually accepted, the earnest money is held in trust by either the Real Estate broker or the escrow company. Earnest money is credited toward the buyer's purchase price at closing. If closing fails to occur, the defaulting party may lose any claim they have to the earnest money deposit.
The Contract of Sale otherwise known as the Purchase and Sale Agreement is a legal document which binds the buyer to a set purchase price and binds the seller to convey the title. The contract also services as the initial directions to the escrow company to begin processing the transaction. When your agent prepares your Purchase and Sale Agreement, make sure you are perfectly clear about the following details:
Who is paying the various expenses of the sale, including closing costs
Sellers customarily pay for the real estate commission, one-half of the escrow fee and their portion of the past year's taxes and assessments. Buyers customarily pay for one half of the escrow fees and their loan fees. Sellers and buyers share some of the expenses of buying and selling, such as title expenses. This needs to be negotiated during the purchase offer time and often depends on local real estate market conditions, other terms of the purchase contract, and the seller's proceeds and timing considerations.
Seller concessions, as they are known in real estate jargon, pay for at least part of the buyer's closing costs, are more common in a buyer's market than in a seller's market. These concessions typically occur during the offer-counteroffer-acceptance cycle. On rare occasion a seller will make further concessions during the closing time period. Any concession after the purchase contract is mutually agreed upon must be in writing and agreed to by all parties.
Some lenders will allow a credit from the seller to the buyer for the buyer's nonrecurring closing costs. But they usually won't allow a credit that reduces the amount of the buyer's down payment, or that includes any of the buyer's recurring closing costs, which include such expenses as fire insurance premiums, interest on the buyer's new loan and other prepaids. Lenders' policies vary on how large a credit for nonrecurring costs they'll allow.
What is the actual closing date
The closing date is the date in which the net proceeds are available to the seller and the title has been recorded. It is set in the original purchase agreement by agreement between the buyer and seller. It is always nice to set a closing date that leaves you enough time to prepare to move in, and which doesn't cost you unnecessary money. The date of closing can affect your closing costs (make sure to ask your lender for a good faith estimate).
What is the date of occupancy
Many times the seller will request to remain in the property after closing, in part to assure that closing actually occurs without the seller having moved from the property. If that is the case, the seller actually becomes the tenant of the buyer after closing, so proper written documentation is needed redarding the seller's occupancy.
Home warranties are becoming more of a standard in homebuying and homeselling transactions. The homeseller may have already purchased a home warranty. If not, you should consider buying a policy yourself at closing. The Coldwell Banker Home Protection Plan will cover the cost for repairs or replacement to most mechanical systems or most major built-in appliance for one year from the date of closing.
In addition, the Coldwell Banker Home Protection Plan offers:
- Savings - You have one low deductible perservice call instead of paying the full cost of repairs.
- Security - You don't have the worry of you're going to pay for costly repairs if a breakdown occurs.
- Convenience - You have a network of local, professional technicians at your service with a toll-free, 24 hour Customer Service Hotline.
Ask your Coldwell Banker Hunter Realty Agent or visit American Home Shield for details about the Coldwell Banker Home Protection Plan.
A professional building inspection will bring to light problems or repairs that are recommended to be made on the home. In the event that the inspection recommends one or more major repairs, based on the terms of the purchase agreement, the buyer, with the help of your Coldwell Banker Hunter Realty sales associate and seller, enter into re-negotiations on how the repairs are to be addressed.
An appraisal is an opinion of a property's monetary value as of a specific date usually completed at the request of the lender and for the lender's benefit. Appraisers consider numerous factors such as square footage, construction quality, design, floor plan, amenities, energy efficiency, lot size, topography, view and landscaping. Other issues taken into account are neighborhood quality and a property's proximity to transportation, shopping and schools.
Title / Escrow
The final stage of a closing occurs with the transfer of title from one party to another. The policy of title insurance is sent to the buyer after closing has occurred.
Escrow is the third party which transfers the money and documents (including title and deed) from the buying and selling parties. The escrow company prepares documents, draws up the closing statements, obtains necessary signatures, records documents and receives and disburses funds.
If you would like more information about Title/Escrow services, please contact your Coldwell Banker Hunter Realty Agent, HL Title Agency, or Lawyers Title and its consumer education site.
Now that you've found a home to purchase, you want to protect your investment with insurance. Most buyers get a comprehensive homeowner's insurance policy, which provides coverage for fire damage, water damage, personal possessions, personal liability, vandalism, theft, and loss of use of the house. If you are financing your home purchase, your lender will require you to buy at least basic hazard insurance which will pay to rebuild your home even if the cost to rebuild exceeds your policy limit. Older homes and other types of property may not be eligible for this type of insurance, so it's best to talk to your representative fully about insurance options.
You can also opt to purchase cash value coverage or straight replacement cost coverage which is less expensive, but only covers the costs to rebuild your house if it's destroyed.
After the Closing
Once you've bought your home, make sure to keep your papers in order and know your rights as a homebuyer, and file all closing and settlement papers including escrow papers, title report, and your purchase and sale agreement. Also file your loan documents, inspection reports and insurance information.
Of course, one of the best parts about buying a home is the tax break you receive from the government.
- Interest on your mortgage.
- Property Taxes (but water or sewer assessment may not be)
- Some Closing Costs (including home inspections, appraisals or loan application fees)
- Loan points (deductible in the year that you pay them; in a refinance, the points are written off in increments over the term of the loan)
What Is Not Deductible
- Home improvement Expenses
- Homeowner and Co-op dues
- Insurance Expenses
Contact the Internal Revenue Service directly at 1-800-TAX-FORM or log onto the Internal Revenue Service website. Ask your accountant for more information.