The process of submitting your loan to a lender and responding to its requests for paperwork can be time-consuming and frustrating. Don’t worry, I’ll do everything I can to help. But, we’ll need to work together to make sure the lender gets what it needs at every step in the process described below.
Congratulations! A seller has accepted your offer, and you’re now in contract to buy a home.
Once your offer is accepted time is “of the essence,” as we say in real estate.
You’ll receive a purchase contract signed by the seller, which commits you to closing within a specified time frame. A 30-day close of escrow is standard. But in a multiple-offer situation, you may commit to a quicker closing to make your bid more attractive.
Whatever the timeframe, you’re now contractually obligated to meet it. Because we’ve done all the work upfront, we’ll be ready to hit the ground running.
After your offer has been accepted, you’ll need to make an initial deposit – which normally comes to 3 percent of the purchase price and serves as a good-faith gesture that you plan to move forward — into an escrow account at a title company.
Your contract may also include contingencies for financing and an appraisal. This means you’ll need to let the seller know the lender has approved your loan and signed off on your appraisal by a certain date prior to your close of escrow. Contingency timelines, as they’re known, can be as short as seven days, or as long as 21 days, with a 30-day close of escrow.
Notifying the seller that your loan has been approved and your appraisal signed off releases your contingencies. Importantly, if you take those steps and then later choose to back out of the deal, the seller may have the option to keep some or all of your initial deposit in the escrow account.
It’s my responsibility to advise you when to release your contingencies, and I will do so only when we’re certain it’s the right time. I’ll discuss this in more detail as I go through the steps in the loan process.
Interest Rate Locked
While you were shopping for a property, I kept you updated on interest rates. Now that you are in contract to buy a property, we can lock in an interest rate for your loan. This ensures your rate won’t change even if rates increase before the closing. Rates change daily and different lenders may have better deals on different days. I’ll make sure I find the best rate available when you need it by comparing rates among dozens of lenders.
Because interest-rate locks are tied to a property address, it’s only possible to lock in a rate after a seller has accepted your offer. Without a specified property, the lender doesn’t know the type of financing or the loan amount you need, which means the rate cannot yet be determined. In addition, the amount of time the rate needs to be locked corresponds to the closing time stipulated in your contract.
Interest rates can be locked in for 15, 30, 45, or 60 days, with some lenders offering locks for up to 90 days. If you’ve committed to a 30-day close of escrow, you’ll want to lock your interest rate for that same time period. And since the 30 days doesn’t start until your offer is accepted, it makes no sense to lock the rate in beforehand.
Interest-rate locks are like insurance policies – the lender guarantees you will get a specific rate, but only for a certain amount of time. While there is no upfront cost to lock in a rate, the longer you lock in the rate, the higher it will be. That’s because there’s more risk to the lender that rates will move higher over a longer period of time.
Most people choose to lock in a rate immediately after their offer is accepted because, when buying a home, you don’t have the luxury of waiting for the lowest rate. Instead, you’ll need to go with the best rate available in the current market.
Title and Escrow
A title company will handle title insurance and escrow services for your purchase, with an escrow officer at the title company serving as the point person for both. As soon as you’re in contract, your real estate agent will open an escrow account at a title company. In conjunction with opening escrow, the title company will generate a preliminary report for your property.
Title insurance protects you from any valid claims of ownership or liens that could come to light after you take possession of your new home. Before issuing insurance, the title company will search public records and prepare a preliminary title report for the property you are buying. The report includes a legal description of the property, a list of current owners, and details covering all liens and restrictions recorded against the property.
Title companies examine this report closely to identify any issues that must be resolved. For example, if a loan is recorded against the property that isn’t the responsibility of the current owners, it will be removed.
Once all issues have been rectified, the title company issues an insurance policy to both you and the lender. This protects you from potential claims that the title company may have missed during its search of public records. If a claim does arise, the title insurance policy pays what’s owed to the various parties.
In addition to providing insurance, the title company will administer the escrow for your purchase. Your new escrow account will take in and disperse funds for your purchase.
The escrow account is where you put your initial good-faith deposit, as well as your down payment and closing costs. It’s also where the lender deposits funds for your loan.
An escrow officer will facilitate the flow of funds and paperwork by acting as an independent third party who receives instructions from all parties in the transaction. The officer is also responsible for making sure you sign your loan documents and other paperwork correctly. I’ll provide more information about this below.
When purchasing a property, you’re required to pay loan-related closing costs to three different entities: the lender, the appraiser, and the title company. Here’s an explainer on those costs:
All lenders charge a flat processing fee independent of the loan size. That fee can total between $750 and $1,500, with most coming in around $1,000. It covers the lender’s costs for the underwriting process required to approve your loan.
Some lenders also charge an additional fee for “flood certification,” the process of determining whether your property sits in a flood zone. The fee is nominal, usually about $20. However, if the lender determines your property is in a flood zone, you will be required to purchase flood insurance, which will be an additional expense you’ll need to cover in the process of purchasing your home.
You may also need to pay a tax service fee, which some lenders charge for third-party monitoring of your tax payments. This fee of $60 to $80 ensures you pay your property taxes on time.
Because lender fees come out of closing costs, you won’t need to cover them if the sale doesn’t go through. There are no upfront costs.
Appraisal fees vary depending on property type and cost. For single-family homes or condominiums, the price should be around $500. Fees will be higher for more expensive or complex properties, or for two- to four-unit buildings.
Your appraiser isn’t an employee of the lender, and therefore must receive payment when the appraisal is ordered. For that reason, I’ll need your credit card information when I order your appraisal.
Title and Escrow Fees
Title and escrow fees account for the bulk of your purchase’s closing costs. As with lender fees, title and escrow fees are paid in conjunction with your closing — and you won’t need to worry about them if the deal doesn’t move forward.
The title company will charge you an escrow fee and various administrative expenses related to document processing, delivery, and recording. You will also need to pay a notary fee to compensate the person who notarizes signatures on your loan documents.
The title insurance policies you buy for yourself and the lender will amount to the heftiest fees. Since title and escrow fees vary according to purchase price, I’ll need to contact the title company to get a quote specific to your purchase.
Here’s an example of closing costs based on a $750,000 purchase with a $600,000 loan amount.
A Loan Estimate, or LE, is a form that provides you with basic information about the terms and costs of the mortgage we’ve agreed upon for your purchase. Among other things, the LE will include the closing costs I’ve described above.
I am required to provide you with a LE within three days of receiving your complete loan application. However, in order for your application to be considered complete, it must include a specific property address. For this reason, the three-day timeline doesn’t start until the date your offer was accepted.
The LE will show your loan amount, interest rate, duration, and monthly payment. In addition, it will provide information about the terms of your loan, including if your rate will adjust and, if so, how and when the adjustments will be calculated. The form also indicates whether your interest rate is locked and, if so, for how long.
The LE will also show you the estimated closing costs for your loan, as well as other crucial items such as property insurance and inspections performed during your due diligence.
Lastly, the LE will show all possible prepaid costs: fees due at closing but not categorized as closing costs since they are “recurring,” meaning they will continue after your loan closes.
The most common prepaid expense is interest. Mortgages are paid in arrears, which means when you make a payment on the first of the month it covers the month that just passed. However, your first payment of interest to the lender will be when your purchase closes and will cover the rest of the month. For this reason, it is considered to have been “prepaid”.
This is the only time you’ll pay interest to the lender in advance, versus at the beginning of the month for the month that just passed. By doing so, the lender will put you on a first-of-the-month schedule for your payments. For example, if you close on the 15th, you’ll owe the lender another 15 or 16 days of interest for the rest of the month.
You can see an example of a LE form here.
At this point, we’ll review the LE together to make sure you understand everything. You’ll then need to sign the LE.
Until you’ve signed the forms, you don’t pay any fees related to the closing of your loan with one exception: a fee for a credit report, which we’ll have taken care of during the preapproval process.
Loan Submission and Underwriting
I’ll already have your loan application and supporting paperwork, but they will probably need an update. Lenders always want to see your most recent paychecks and asset statements. Once all the documents are current, we’ll be ready to start the process of submitting your loan to a lender.
I’ll need your signatures before I can send your loan to the lender. In addition to signing the loan application and GFE-related forms, you’ll also have to sign several disclosures related to your loan. Of course, we’ll go through them first to ensure you understand everything before signing.
Then it’s time to kick off the underwriting process, which begins as soon as the lender receives your loan application and supporting documents. Once the lender reviews your application for completeness and adherence to lending disclosure rules, it will move to an underwriter who studies everything in detail.
Underwriters look at your credit history, income, and assets to make sure you qualify for the loan. Here they also review property-related paperwork, including the title report provided by the title company, property insurance, and an appraisal.
The property you are purchasing will serve as collateral for the lender’s loan, and an appraisal enables the lender to confirm that the purchase price you’ve agreed to is a fair-market value for the home. It also lets the lender know of any physical issues with the property, which might affect its value.
As soon as you’ve reviewed and signed the loan application and all the disclosures, I’ll order your appraisal. The appraisal will move forward at the same time the lender is reviewing your loan file.
Appraisal Management Companies (AMCs)
The 2008 financial crisis spurred significant changes in appraisal rules. For example, it’s no longer possible to order an appraisal directly from an appraiser. Instead, buyers must order appraisals through a third-party called an Appraisal Management Company, or AMC.
The AMC’s role is to ensure an unbiased professional performs the appraisal, standing between the lender and the appraiser to make certain the appraised value remains objective. In order to shield the appraiser from undue influence, the appraisal order and all communication with the appraiser must go through the AMC website.
Once the lender has reviewed all the documents we’ve provided, it will issue a conditional approval.
A conditional approval lets us know what questions the underwriter has and may include requests for additional documentation. While I’ll need your help with some of the queries, the title company may be able to satisfy others.
Since the clock is ticking for your scheduled close of escrow, it’s imperative we get everything to the lender quickly. I’ll act as the point person to make sure all paperwork requested from the lender from different sources is sent to them in its entirety at one time. Lenders don’t like to receive requested items in a piecemeal fashion.
If the appraisal was completed in time for the underwriter to review it along with everything we’ve provided, the conditional approval will reflect this. The underwriter may sign off at this point or request additional information about specific items in the appraisal from the appraiser.
Any financing or appraisal contingencies in your contract can be lifted with receipt of the lender’s conditional approval. We’ll go over the approval together to make sure we can provide everything requested. If we can, your contingency can then be lifted.
But if uncertainties remain, we’ll send the documents to the lender for review and approval before releasing your contingency. If something requested on the appraisal concerns us, we’ll wait for the appraiser to respond and the underwriter to review and approve it. After that, we can release your contingencies.
Once the lender has agreed to everything, it will issue a final approval. Great news! At this point we can be fairly certain your loan will close without a hitch.
While a few outstanding conditions always remain, they’re generally routine and will be satisfied in conjunction with the closing of your loan. We’ll have taken care of the big items for the lender already.
We’re now ready to order your loan documents from the lender, who will send it directly to the title company.
When it arrives, the escrow officer at the title company will follow the lender’s instructions to prepare an “estimated closing statement ” showing all of your transaction’s debits and credits.
This is where a final accounting of your closing costs appears, with the amount owed to the escrow account shown at the bottom of the statement. This amount represents a net of any deposits you’ve already made and is the sum you must wire to the title company prior to closing.
The costs shown on the estimated closing statement will closely match what you’ve already received from me in the good-faith estimate. We’ll review the statement together to make sure you understand everything reflected.
You’ll then need to go to the title company’s offices to sign the loan documents with an escrow officer, who makes sure everything is done according to the lender’s instructions. He or she will be able to answer any questions you may have, and I’ll be available to help as well.
After signing the paperwork, you can initiate the wiring of your funds to the title company.
Once you’ve signed the documents, the title company returns them to the lender. If everything has been done correctly, and if your funds have been wired to the escrow account, the lender will initiate a wire of its funds for your loan to the title company.
Your purchase can now be recorded in the county where your property is located. This means your name will appear in public records as the owner of the property and the county will keep a record of your loan.
Congratulations! You’re now a homeowner.