This is Charles McShan Real Estate Broker for Century 21 Universal. You are on my Blog post site located at cmacakachicagolandrealtor.com.This is Part 3 of Steps to Home Ownership in the Chicagoland Area. This Part was supposed to be about with the Appraisal portion of buying a home. Actually, the Appraisal is the part of the Loan Origination and Underwriting process. I realized that I should have talked about the Loan Process in greater detail before the Home Inspection. If the loan does not go thru there will be the Home Inspection but it will be for nothing, the deal will die literally in its tracks. So I will correct that right oversight right now, let’s go back to the day 1.
You the buyer has decided on buying a home. You do not know how much of a property you can afford to buy. So you go to either a Mortgage officer or a Loan Officer. You go there to get prequalified by the Lender. The Lender gathers all your information regarding your credit, income, job history and how much down payment you have. Let’s say you prequalified for $350.000 the Lender will give you the buyer the Prequalifying letter or others call it a preapproval letter and the Realtor will also get a copy. This tells the Realtor how much money the buyer will get from the lender so the Realtor now knows the price range and he/she should not go too far over that price range.
Now from here, the journey starts, you and your Realtor will look for a home and if all goes well you will find that home for your price range. During this time frame, You have hired a Real Estate Attorney to represent your interests. In some parts of the country, this is not a requirement but in the Chicagoland area as I mentioned in part 1 of this series it is strongly advisable that you do hire a lawyer. If all goes well, you will soon find a home that meets the majority of your requirements. You and the Seller will come to a meeting of the minds, You both sign and sign and execute a Real Estate for the sale of the property.
From here 3 things happen quickly 1: Your Real Estate Attorney receives a copy of the contract. This is when the Attorney Review kicks in. What is the Attorney Review period? Remember in part 1 of this Blog I stress that in Chicago you really need the service of a Real Estate Lawyer. A Real Estate Broker is prohibited by law from providing legal advice or making any changes in the Real Estate contract. The contract generally allows a time frame from 5 to 7 Business days for the lawyer to look at the contract and make any legal changes to it if necessary. If the purchase is a Condo then you the buyer will receive important Condo documents. Also, the lawyer will make adjustments to the contract that deals with any repairs or credits the seller agree to after the Home Inspection 2: Speaking of Home Inspection it is normally done within this Attorney review. If by chance all the Home Inspectors are busy during this time frame your lawyer can talk to the Seller’s lawyer and together they will agree to extra time so the Home Inspector can inspect the property 3: The Real Estate Broker also Faxes or the emails the executed contract back to your lender.
The loan Process moves to the next step
Your lender then starts the costly task of originating and the home loan for you. This is a very important task because the Lender has to decide if you will do what you say you will do an that is to make good on your promise to repay back Thousands of Dollars on the loan you the buyer are requesting. The next step in the process will be for the Lender to give all of your documents to a Loan Underwriter. Who is a Loan Underwriter? The Loan Underwriter is a person you will never meet or talk to but that person, not the Lender, will be the one who will make the decision if you get a loan or not. Since the Housing crash of 2008, the underwriting process is as strict as it has ever been. The Underwriters job is to go deep into your personal life to see if you qualify for a home loan.
I have met a small minority of people who have said to me.”My private and financial is my business and no one else’s. I will my Lender on certain pieces of my financial history and nothing more.” Those people have a right to their privacy and if they want to buy a home they must pay cash for it. To purchase a home thru a Mortgage Lender, that Lender will have to research you, your credit history and they will research all your sources of Income. Your financial life will become an open door. They will also verify your income, your debt to income ratio,.They will check your Bank account and see where your down payment is coming from. Any collections/ red flags on your credit report will be taken care right away or there will be no loan.
That is the main reason when you are home shopping your collection report should have all green flags. Every dollar you have will be scrutinized. I have seen deals collapse because the Buyer against good advice went out an bought new furniture for the home on their credit card. That put their credit in a negative situation an guess what?. They had new furniture but no new home to put it in. So as James Brown once said Please, Please, Please, listen to your broker. If you have to buy something, pay cash or put it in the layaway. Do not use your credit card or buy a car or go on vacation until after you have the keys to your home in your hand and that will be at the closing.<
The Mortgage Application
The Underwriter will send you a Mortgage application which could be very extensive. Here they will learn anything about you. Your Lender will give you forms to run your credit history. They will also require tax returns for 1 to 2 years back. They will also want Pay stubs, W-2 Statements for around a couple of years along your recent Bank Statements. If you meet the qualifications they will send you a letter of preapproval. Your preapproval will be for a specific amount of money. Your Loan rate will be locked at a level that takes the current interest rates into account along with the borrower’s credit risk. The lower your credit risk, the lower your locked rate will likely be.
The Loan Estimate
The next step is to use the lock rate to create a loan estimate which in it’s the simplest form is what you can expect to pay for your Mortgage and your closing fees. The loan estimate includes the I.D. number of the loan, the type of rate, the terms for the loan(15 years,30 years with the loan’s Principal, monthly interest, Principal payment, and any penalties if applicable.interest rates,), the purpose of the loan and the rate lock duration. The next step is the projected payments this is when you add up all your payments which include insurance and taxes and the way these taxes and Insurance will get paid. The underwriter will have copies of the insurance policy included in the loan file.
Someone might ask the question, Will this Loan Estimate hurt my credit score? This is what Experian the Credit company has to say on this subject. “Receiving a loan estimate does not affect your credit score. When you receive a loan estimate, the lender has yet to approve your application. All the loan estimate provides are the terms that the lender will offer if you move forward with the loan. If you decide to proceed, then the lender will ask you for additional information, which can include pulling your credit report.” The report continues by saying “In general most credit scores are not impacted by multiple inquiries when shopping for loans within a short period of time such as 30 days. These can be seen as a single inquiry an will have little impact on your credit score.”
How accurate is a Loan Estimate? Let me quote Experian again.” A loan estimate from a lender is typically accurate because if it is not it could end up costing them the Lender money. Fees, especially the ones levied by the lender will generally be correct. In certain cases, there can be additional fees or changes that can be divided between the buyer and seller. Those fees can include loan fees, paid in advance fees, reserves or escrow paid to third parties, title changes, and government charges. They also say that 58% of home buyers received a revised estimate prior to closing on a home due to changes in initial fee estimates which included Closing costs, Insurance costs, Taxes, Title, Mortgage/monthly costs, Escrow, Appraisal fees, Utilities, and Broker Fees.”
Other Additional Steps that need to be Implemented The next step in this process is the Comparison of how much you the buyer will likely pay out in Principal and Interest for the next 5 years. By doing this comparison you the buyer can compare this loan with other Lender’s loans. such as if the Loan can be assumed or transferred to another buyer without changing the terms.If the Lender can transfer your loan to a service company and the prices in penalties you will pay if you are late with your payment. There are also other Considerations now as those steps are being processed the Underwriter has also ordered a Survey of the property to verify the Legal Property lines so there will be no dispute over the Property lines. The title company will perform a search on the home title so make sure that there are no liens, claims, unpaid taxes judgments, or unpaid HOA dues on the property.
The next step is for the Title. What is a Title? Here is the legal definition of the word Title. “The Title is the legal documentation that includes the specifics about the property that you are purchasing and who owns it in a form of a deed. A Title company is a company involved in examing and insuring title claims for real estate purposes. The Title company will also buy an insurance policy on the title to guarantee the title is clear and free so that it can be legally transferred to the new owner. The title company will also buy an insurance policy on the tile to guarantee the title is clear and free so that it can be legally transferred to the new owner.
The Appraisal Process of Homeownership Also included in this process if it hasn’t been done already is the Home Appraisal process. So what is the purpose of the Home Appraisal? A home Appraisal is an unbiased estimate of the true or fair market value of what a home is worth. All lenders eventually during the Mortgage process will order an appraisal, that appraisal is an objective way to assess the home’s market value and ensure that the amount of money requested by the borrower is appropriate. The appraisal can include recent sales information for similar properties, the current condition of the property, the location of the property. Last but not least, the surrounding neighborhood can impact the property’s value. The appraisal is conducted by licensed professionals who are trained to determine the value of a home without bias in the state they are licensed in. Their job is to look at the condition of what is permanently part or attached to the house. They also take into the account the Home’s age, square footage, the number of bedrooms, baths, lot size, location, view as well as what they can visually see.
For the Seller, Their Broker will inform them of the date and time of the Appraiser’s Inspection. The Appraiser will not be looking for dirty dishes or unmade beds. They will be looking for plaster cracks, broken railings, water stained walls, stained carpets, unpolish floors, bad odors, etc. If you really want to get your home sold as a seller your home should be like it was when you first put it on the Market. In fact, your Your home should be in showroom condition from the time you put it on the Market until the closing date. The Appraiser will check your curb/ exterior appeal. You got weeds in the lawn, Bad shrubbery brown spots? Eliminate the problems. Bad front doors, garage doors, fix them, paint them. They normally operate and price things in $500.00 increments, So as a Seller you can do much to show that your home is worth every penny you claim it to be. But on the other hand, things do happen. The Appraisal can come in low. When that happens you as a Buyer will have a problem. The Lender will only agree to finance an amount equal to the appraised value. This means that this deal can only go 3 ways.
1: The Buyer and the Seller will have to agree to a purchase price equal to the appraised value.
2: You the Buyer will have to put down an extra Down payment to make up the difference. Loan companies strongly advise you to not do this.
3: The Seller gets angry there is no meeting of the minds and the deal collapses.
The Seller has the right to appeal the decision. Some times it works, they show proof of something and the appraisal might get adjusted. Those are all the steps for a Home Loan to process.
So! Next Question. How long is the underwriting process? If you have an FHA loan their Underwriting is more complex and it can take anywhere to a few days to weeks to complete. Some loan companies say that they close on a loan in 30 days some say with the New regulations they can now close in 45 days so to make sure there will be no delays make sure you give your Loan officer everything they ask for right away. Be upfront and honest all the times. Lying only hurts you. Be proactive and call your loan officer frequently And remember many a loan applications do not pass on the first try. If the underwriter needs something to be corrected, they will kick it the file back to the Loan officer and the Loan officer will contact you. The Underwriting could be done either automated using a computer where data is put it and the computer will either approve or deny based on the inputted data. The other way is Manual Underwriting where a human puts in the data and other facts are considered. This works for FHA loans where the person has bad credit but by doing it manually they will be able to still qualify.
Now there will always be roadblocks and obstacles that will have to be overcome. But in the end, if all goes right with the Attorney Review, Home Inspection, the Appraisal, Survey and everything else falls into place, The loan is created. The Underwriter gives the Orginal Loan officer the file back and the official word is that” we are clear to close” the final step will the closing process.
So in conclusion with this blog post, we learned the complete loan process. Whether you have a Mortgage Broker or a Loan Officer the final decision of whether your loan request is approved or denied does not rest upon them but on someone, you never see or talk to, the Loan Underwriter. So with that thought in mind prepare for Home Ownership by clearing up your credit ahead of time maybe a year or so in advance. Eliminate all collections on your credit report. If your bills are overwhelming you please, do not do a Bankruptcy. Bankruptcies are deal killers. If it is hard for a person to rent an apartment in the Chicagoland area due to a Bankruptcy on their record, it will be next to impossible to get a home loan. So if you have major Bill problems and you are thinking about doing a Bankruptcy, try to settle your debt for pennies on the dollar with the Bill Collector. As you can see the loan process is very complex. Ask your Loan Officer as many questions as need be for you to be satisfied with how the process works. The final step, the closing process is also complex. We will cover that final subject in the concluding blog post in this series of Steps to Home Ownership in the Chicagoland area. If you are located in the Chicagoland area and you need help contacting a Loan Officer feel free to contact me. My office of Century 21 Universal is located in the Heart of the West Ridge area of Chicago Ill at 7300 N.Western Ave. Take care until the next time.
Charles McShan Click here for your free Download gift