Process

Contracts for purchasing a home commonly include a contingency clause. The clause specifies certain requirements and conditions that must be met for the buyer to proceed with the sale. Contingencies allow the buyer to walk away from an agreement without penalty. The standard contingency is one that states the buyer is not bound to the contract if you fail to obtain approval for financing by a certain date. If you cannot gain approval and fail to meet the previously agreed upon timeframes, you will typically forfeit your earnest money deposit. Once all contingencies are removed, you are in effect saying that you understand and accept the property in its current condition and are going to close escrow.

The notion that an excess of credit inquiries from mortgage lenders will lower your score is a common misconception. FICO, a scoring model required by Fannie Mae and Freddie Mac, there is logic in place that protects consumers’ credit scores from any negative impact caused by multiple inquiries as a result of rate shopping. Inquiries for mortgage loans that are less than 30 days old are ignored and have no impact. Inquiries older than 30 days are looked at, but multiple inquiries from mortgage lenders made within 45 days of one another are treated as one inquiry.

A home appraisal is a monetary valuation of the property. The reason for an appraisal is to ensure that the collateral value (the home) justifies the loan amount the bank is lending to you. The appraiser’s job is to be unbiased and completely independent of the transaction, while at the same time being realistic and practical. The appraiser’s valuation is his or her professional opinion of what the property is worth.

Supplemental taxes are reassessments of the secured property as of the first day of the month following an ownership change or the completion of new construction. In most cases, this reassessment results in one or sometimes two supplemental property tax bills in addition to the annual secured property tax bill. This typically is a buyer’s responsibility and is not included in the impound account (if one was chosen upon the set up of the new loan). When you receive a supplemental tax bill, you must contact your lender to determine who will pay the bill since these are not sent to the lender.

After the mortgage meltdown, the mortgage industry tightened restrictions in order to minimize the amount of home loan defaults. Being prepared and producing quick documentation up front is the best way to avoid unnecessary stress or financing delays.

Also known as an escrow account, the impound account is an account that is set up by your new lender with your home loan that will pay your property taxes and/or homeowners insurance for you by collecting 1/12^th of the annual property taxes and/or insurance along with your mortgage payment each month. The amounts collected are not a cost of doing the loan. It is your money that will be used solely to pay your property taxes and/or insurance.

Federal regulation requires lenders to review the account annually to ensure that the correct amount of money is being collected. If too much money is accumulating in the account, the excess funds are legally required to be refunded. If too little is being collected, also known as an escrow shortage, the lender will bill you for the amount needed to satisfy the shortfall.

Impounds are required on FHA loans, VA loans, and USDA loans. For conventional loans, impounds are generally required if less than 20% is put down (10% in CA). If you initially set up an escrow account, you may be able to get it removed later down the line by contacting your service provider.

Advantage(s):

Through the collection of these housing expenses gradually throughout the year, this helps avoid the sticker shock when these sometime large and infrequent (typically once or twice a year) bills become due. Assurance money to pay those bills will be there when the bill(s) come due. Your mortgage servicer will manage this account and pay the bills on your behalf.

Disdvantage(s):

Unable to collect interest on money held in the impound account. Decrease the amount of money you can put in an emergency fund since the lender keeps a little extra in your impound account, in order to ensure the extra cushion needed in order to keep making the insurance and tax payments if you stop making your monthly mortgage payments. If you have the option of “waiving” impounds, you will typically pay a fee of .125% of the loan amount at closing or opt to take a slightly higher mortgage rate.

The interest rate is the cost you will pay each year to borrower the money, expressed as a percentage rate. The APR (Annual Percentage Rate) is a calculation based on standardized federal regulations. It provides a more complete picture by taking the interest rate as a starting point and accounting for the fees required to finance the mortgage loan. Expresses the actually yearly cost over the term of the loan.

The Department of Housing and Urban Development states that the lender has 30 calendar days to return these unused funds to you.

To be pre-approved for a mortgage means that a bank or lender has investigated your credit history based upon information you have provided to render a credit decision. You will typically fill out a loan application, provide income documentation, asset documentation and other documents related to your financial history and then have the bank or lender determine how much money they are willing to loan you.

Being pre-approved is sometimes confused with pre-qualified. Receiving pre-qualified is for informational purposes only. This doesn’t mean that the bank will loan you that amount, but just gives you an idea of how much you can borrower.

To be cross qualified means that the listing agent will require the buyer to submit a second mortgage loan application to a lender of the seller’s choosing. Typically the listing agent is trying to protect the seller’s interests by ensuring the buyer has a strong probability of being able to obtain a loan. This allows for a “second set of eyes” to validate the pre-qualification letter submitted to the buyers lender. While a buyer can never be forced to use a particular lender, it is in the seller’s best interest to have offers, with loans, cross qualified.