Hello Everyone, 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. The appraisal is 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 no home inspection; the deal will die literally in its tracks. So I will correct that proper oversight right now, we will go back to the beginning, tie everything together, and quickly move to the appraisal.
Article Guide
Step 1
You, the buyer have 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. There you 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 all goes well you will get a preapproval letter for a predetermined price to purchase a home. From there, we have already covered the process in the preceding posts. You get a real estate broker, you search for a home, you find the house, you make an offer if it is accepted you do the home inspection as part of the five-day attorney review. Now we talked about hiring a real estate attorney, but we did not go into detail about theFive day attorney review peri. Let’s do it now.
You and the home seller both sign and sign and execute a Real Estate for the sale of the property. From here, three things happen quickly 1: Your Real Estate Attorney receives a copy of the contract. This time frame is when the Attorney Review kicks in. The agreement generally allows a time frame from 5 to 7 Business days for your lawyer to look at the contract and make legal changes to it if necessary. If the purchase is a Condo, then you, the buyer will receive important documents about the Condomiuom form of ownership. It is also here, as I said in part two of this post if the home inspection reveals primary structural or other ways of damage, the price of the home can be lowered thru negotiations. If this hurdle can be overcome, then we can proceed to the creation of the loan.
How is a Loan created and what documents are originated from it?
Now the process goes back to the lender.Your lender then starts the costly task of originating the home loan for you. The lender has to decide if you will do what you say you will do, and that is to make good on your promise to repay Thousands of Dollars on the loan you the buyer are requesting. This step requires 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 decide 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 underwriter’s 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. Then you are in the wrong place. The underwriter will examine every inch of your economic life, so if you do not want them in your business, then pay cash for your home. If you can’t pay for some money, you will pay the game by their rules. They will also verify your income and your debt to income ratio. They will check your Bank account and see where your down payment is coming from. Any collections or red flags on your credit report should have been taken care of before you started looking for a home. 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 and bought new furniture for the home on their credit card. That put their credit in a negative situation and 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 with 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 and 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 charges 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 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 to make sure that there are no liens, claims, unpaid tax judgments, or unpaid HOA dues on the property.
The Title!
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 the 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
Wow! It took a long time to get to this step, but here we are—the last obstacle. If we can clear this, then we are at the finish line. So what is the purpose of the Home Appraisal? A home appraisal is an unbiased estimate of the actual 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 and 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. Their job is to look at the condition of the home, which is permanently part or attached to the house. They also take into 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, foul odors, etc. If you want to get your home sold as a seller, your home should be like it was when you first put it on the market. 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. Damaged front doors, and garage doors, fix them, paint them. Appraisers usually 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. Now only three things can happen with this deal.
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 not to 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. It is right here that a deal can collaspe.If the house is priced right or the owner and buyer agree to the lower appraisal price the process will continue to the loan origination stage.
Who actually determines if you get an approved Loan?
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 lock 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 time. Lying only hurts you. Be proactive and call your loan officer frequently, And remember many loan applications do not pass on the first try. If the underwriter needs something to be corrected, they will kick 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 qualify still.
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.“Yes, the final step will be the closing process. So, in conclusion, with this blog post, we learned about the complete loan process. The final decision of whether your loan request is approved or denied does not rest upon the loan officer you are in close contact with, 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 complicated. Ask your Loan Officer as many questions as need be for you to be satisfied with how the process works. In the final step, the closing process is also complicated. We will cover that last 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. We are located at 7300 N.Western Ave. Take care until the next time.
Charles McShan
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