Acquiring your loan Loan Do's & Don'ts The financing process Escrow Contingencies
Types of Loans
Loans can have a fixed interest rate or a variable interest rate. Fixed rate loans have the same principal and interest payments during the loan term. Variable rate loans can have any one of a number of "indexes" and "margins" which determine how and when the rate and payment amount change. If you apply for a variable rate loan, also known as an adjustable rate mortgage ("ARM"), a disclosure and booklet required by the Truth in Lending Act will further describe the ARM.
Most loans can be repaid over a term of 30 years or less. Most loans have equal monthly payments. The amounts can change from time to time on an ARM, depending on changes in the interest rate. Some loans have short terms and a large final payment called a "balloon." You should shop for the type of home mortgage loan terms that best suit your needs.
Interest Rate, "Points" & Other Fees
Often the price of a home mortgage loan is stated in terms of an interest rate, points, and other fees. A "point" is a fee that equals 1 percent of the loan amount. Points are usually paid to the lender, mortgage broker, or both, at the settlement or upon the completion of the escrow. Often, you can pay fewer points in exchange for a higher interest rate, or more points for a lower rate. Ask your lender or mortgage broker about points and other fees.
A document called the Truth in Lending Disclosure Statement will show you the "Annual Percentage Rate" ("APR") and other payment information for the loan you have applied for. The APR takes into account not only the interest rate, but also the points, mortgage broker fees and certain other fees that you have to pay. Ask for the APR before you apply to help you shop for the loan that is best for you. Also ask if your loan will have a charge or a fee for paying all or part of the loan before payment is due ("prepayment penalty"). You may be able to negotiate the terms of the prepayment penalty.
Conventional, fixed-rate mortgages
This traditional, "tried and true," mortgage option is a loan with a constant interest rate and level, and equal payments over a set period of time-most commonly, 30 years. The biggest advantage of fixed-rate loans is predictability; they are particularly suited to people with steady incomes.
At some point, you may want to refinance your loan, or pay it off early to eliminate thousands of dollars in interest. If lower rates dictate that the time is right to refinance, it's a good idea to compare savings on lower rates to the costs of incurring a new mortgage-such as prepayment penalties and loan origination costs and points.
Adjustable-rate mortgages (ARMs)
As the name implies, the interest rate on an adjustable-rate mortgage changes throughout the term to reflect current interest rates. ARMs are most popular when rates are relatively high and appear to be dropping, and when the difference between the ARM and the fixed-rate is greater than 2 to 3 percent. Different lenders offer variations in the front end of their ARM plans, such as points, or discounted initial rates.
To make a useful comparison of an ARM rate, consider the index upon which the rate is based, the margin or spread between that index and the rate paid, and the intervals at which the rate and payments are adjusted.
Tip: Always look at the index plus the margin when comparing ARMs. The larger the margin, the less likely the rate will go down, even if the interest rates drop.
Federal government programs
Federal Housing Administration (FHA) insured loans: Lenders offer FHA mortgages on new or existing single-family homes for as little as 3% down. FHA mortgages are also assumable. Sometimes a premium is required when the mortgage is assumed, then refunded when the note is paid off. Down payments are usually low.
Veterans Administration (VA) guaranteed loans
The Veterans Administration guarantees lenders against loss if a property is foreclosed due to default. These assumable loans are available to eligible veterans, and may be used to buy, refinance, construct or repair a house. If the VA property appraisal is less than the sale price, the borrower pays the difference as a down payment.
Farmers Home Administration (FmHA) loans
The government makes these loans available to persons of moderate to very low income in rural or non-metropolitan areas.
Comparing Loan Costs
Comparing APRs may be an effective way to shop for a loan. However, you must compare similar loan products for the same loan amount. For example, compare two 30-year fixed rate loans for $100,000. Loan A with an APR of 8.35% is less costly than Loan B with an APR of 8.65% over the loan term. However, before you decide on a loan, you should consider the up-front cash you will be required to pay for each of the two loans, as well.
Another effective shopping technique is to compare identical loans with different up-front points and other fees. For example, if you are offered two 30-year fixed rate loans for $100,000 and at 8%, the monthly payments are the same, but the up-front costs are different:
Loan A - 2 points ($2,000) and lender required costs of $1800 = $3800 in costs.
Loan B - 2 1/4 points ($2250) and lender required costs of $1200 = $3450 in costs.
A comparison of the up-front costs shows Loan B requires $350 less in up-front cash than Loan A. However, your individual situation (how long you plan to stay in your house) and your tax situation (points can usually be deducted for the tax year that you purchase a house) may effect your choice of loans.
Lender-Required Settlement Costs
Your lender may require you to obtain certain settlement services, such as a new survey, mortgage insurance or title insurance. It may also order and charge you for other settlement-related services, such as the appraisal or credit report. A lender may also charge other fees, such as fees for loan processing, document preparation, underwriting, flood certification or an application fee. You may wish to ask for an estimate of fees and settlement costs before choosing a lender. Some lenders offer "no cost" or "no point" loans but normally cover these fees or costs by charging a higher interest rate.
Lock-ins
"Locking in" your rate or points at the time of application or during the processing of your loan will keep the rate and/or points from changing until settlement or closing of the escrow process. Ask your lender if there is a fee to lock-in the rate, and whether the fee reduces the amount you have to pay for points. Find out how long the lock-in is good, what happens if it expires, and whether the lock-in fee is refundable if your application is rejected.
Tax and Insurance Payments
Your monthly mortgage payment will be used to repay the money you borrowed, plus interest. Part of your monthly payment may be deposited into an "escrow account" (also known as a "reserve" or "impound" account) so your lender or servicer can pay your real estate taxes, property insurance, mortgage insurance and/or flood insurance. Ask your lender or mortgage broker if you will be required to set up an escrow or impound account for taxes and insurance payments.
Transfer of Your Loan
While you may start the loan process with a lender or mortgage broker, you could find that after settlement another company is collecting the payments on your loan. Collecting loan payments is often known as "servicing" the loan. Your lender or broker will disclose whether it expects to service your loan or to transfer the servicing to someone else.
Mortgage Insurance
Private mortgage insurance and government mortgage insurance protect the lender against default, and enable the lender to make a loan that the lender considers a higher risk. Lenders often require mortgage insurance for loans where the down payment is less than 20% of the sales price. You may be billed monthly, annually, by an initial lump sum, or some combination of all of these for your mortgage insurance premium. Ask your lender if mortgage insurance is required, and, if so, how much it will cost. Mortgage insurance should not be confused with mortgage life, credit life, or disability insurance, which are designed to pay off a mortgage in the event of the borrower's death or disability.
You may also be offered "lender paid" mortgage insurance ("LPMI"). Under LPMI plans, the lender purchases the mortgage insurance and pays the premiums to the insurer. The lender will increase your interest rate to pay for the premiums -- but LPMI may reduce your settlement costs. You cannot cancel LPMI or government mortgage insurance during the life of your loan. However, it may be possible to cancel private mortgage insurance at some point, such as when your loan balance is reduced to a certain amount. Before you commit to paying for mortgage insurance, ask about the specific requirements for cancellation.
Flood Hazard Areas
Most lenders will not lend you money to buy a home in a flood hazard area unless you pay for flood insurance. Some government loan programs will not allow you to purchase a home that is located in a flood hazard area. Your lender may charge you a fee to check for flood hazards. You should be notified if flood insurance is required. If a change in flood insurance maps brings your home within a flood hazard area after your loan is made, your lender or servicer may require you to buy flood insurance at that time.
Do:
- Tell the loan officer everything; disclose all potential problems with regard to credit, employment, and source of funds.
- Disclose all income and debts.
- Disclose all sources of funds.
- Ask questions.
- Bring a cashier's check to the closing. Personal checks are not usually accepted.
- Disclose alimony and child support.
Don't:
- Incur additional debt while loan is in progress.
- Apply for new credit during the application process.
- Change employment while loan is in process.
- Transfer funds between depositories without keeping detailed records.
- Make any large purchases during the loan process.
- Procrastinate providing information when requested.
- Complete the loan application.
This is the most important step. The information can be gathered in person or over the phone. Now is the time to disclose all material financial data, and discuss financing options available. The quality of this meeting is essential to a smooth loan approval. An application fee may be required by the lender. - Order supporting documentation
Immediately following the application, supporting documentation is ordered. This includes credit reports, verifications of deposits, income, and mortgages. Certain other documents will be requested: W-2's, pay stubs, bank statements, etc. The lending institution requests an appraisal of the home, a credit report and verification of employment and assets, such as bank accounts. While awaiting the return of the verifications, both realtor and borrower will receive weekly progress updates. - Loan cost estimate
The lender will provide a booklet containing specific loan information and a good faith estimate of closing and related costs. An estimate of your loan costs, in the form of an Initial Truth in Lending Disclosure Statement (Reg Z), is issued. - Lender evaluation
The lender evaluates the application, along with supporting documentation. - Loan approval
Pop a cork! The loan is approved. All parties are notified. Any further conditions required by the lender are handled at this time. - Loan documents
The lender will draw loan documents and send them to the Title Company or Closing Attorney for final signatures. - Closing
Sign closing documents. The signed documents are returned to the lender. After review, the loan is funded (funds sent from the lender to the Title Company or Closing Attorney or Closing Attorney). - Funding
The lender disburses the funds to the settlement or closing agent. Seller is paid, and title to the home is yours. - Recording
Appropriate documents are recorded at the county recorder's office.
What is Escrow?
An escrow is an arrangement in which a disinterested third party, called an escrow holder, holds legal documents and funds on behalf of a buyer and seller, and distributes them according to the buyer's and seller's instructions.
People buying and selling real estate often open an escrow for their protection and convenience. The buyer can instruct the escrow holder to disburse the purchase price only upon the satisfaction of certain prerequisites and conditions. The seller can instruct the escrow holder to retain possession of the deed to the buyer until the seller's requirements, including receipt of the purchase price, are met. Both rely on the escrow holder to carry out faithfully their mutually consistent instructions relating to the transaction and to advise them if any of their instructions are not mutually consistent or cannot be carried out.
The escrow process was developed to help facilitate the sale or purchase of your home. The escrow holder accomplishes this by:
- Acting as the impartial stake-holder, or depository of documents and funds
- Processing and coordinating the flow of documents and funds
- Keeping all parties informed of progress on the escrow
- Responding to the lender's requirements
- Securing a title insurance policy
- Obtaining approvals of reports and documents from the parties as required
- Prorating and adjusting insurance, taxes, rents, etc.
- Recording the deed and loan documents
- Maintaining security and accountability of monies owed and owing.
UNDERSTANDING ESCROW
By Nancy Closson, President, Westland Escrow
Once an agreement between you and the seller has been finalized, escrow is ready to be opened. Escrow essentially allows for a disinterested third party (escrow holder) to keep all valuables and documents in trust until certain conditions are fulfilled.
Why You Need An Escrow: As the buyer, you want the assurance that no funds will change hands until all of the instructions in the transaction have been followed. This may include completion of all inspections and any repairs that were agreed upon.
How Escrow Works: The escrow holder is obligated to safeguard the funds and/or documents while they are in their possession, and to disburse funds and/or convey title only when all provisions of the escrow have been complied with.
These provisions are written in the escrow instructions, which are drafted from the provisions agreed upon in the purchase agreements by the parties involved in the transaction.
The escrow officer will endeavor to expedite the timely closing by keeping all parties informed, handling documents and paying all bills as authorized, responding to authorized requests from the principals, closing escrow after the terms and conditions are met, distributing funds in accordance with the instructions and providing a written closing statement of all the charges and credits to your account.
Your Responsibilities During Escrow: Your most important role during this time is to read and understand your escrow instructions. Be sure to ask your escrow officer to explain anything you don't understand, and make sure any legal questions are directed to your attorney.
In order to expedite the closing of escrow you should respond quickly to any correspondence and ensure any funds requested are delivered in the required form - cashiers checks or wired funds are preferable since escrow can only close on cleared funds and most other methods of funds transfer take more time to clear.
When escrow closes you will receive all your paperwork within a few days. As the new owner, you will receive your recorded deed directly from the County Recorder's office.
Processing the Escrow
- Open escrow
- Review and forward preliminary title report to client and their lender
- Coordinate loan processing with loan officer
- Provide access and info (comparable sales) for appraiser
- As needed, order Pest Control, Roof,
- Property, Geological, etc, inspections
- Arrange access for inspectors
- Review all reports, forwarding them to the client (with interpretations, when needed).
- Order and schedule all repair work
- Review and forward all completion notices to client
- Order and review loan documents
- Review client's escrow instructions with escrow officer
- Schedule and conduct buyer's Walkthrough inspection
- Arrange client-escrow officer sign-off meeting
- Coordinate close of escrow and possession
- Arrange for transfer of the keys to the property
And handle any and all problems that arise along the way!
WHAT EACH PARTY DOES IN ESCROW
The Seller:
- Deposits the executed deed to the buyer with the escrow holder.
- Deposits evidence of pest inspection and any required repair work.
- Deposits other required documents such as tax receipts, addresses of mortgage holders, insurance policies, equipment warranties or home warranty contracts, etc.
The Buyer:
- Deposits the funds required, in addition to any borrowed funds, to pay the purchase price with the escrow holder.
- Deposits funds sufficient for home and title insurance.
- Arranges for any borrowed funds to be delivered to the escrow holder.
- Deposits any deed of trust or mortgages necessary to secure loans.
- Approves any inspection reports, the Preliminary Report for title insurance, etc., called for by the purchase and sale agreements.
- Fulfills any other conditions specified in the escrow instructions.
The Lender:
- Deposits proceeds of the loan to the purchaser.
- Directs the escrow holder on the conditions under which the loan funds may be used.
The Escrow Holder:
- Opens the order for title insurance.
- Obtains approvals from the buyer on the Preliminary Report, pest and other inspections.
- Receives funds from the buyer and/or any lender.
- Prorates insurance, taxes, rents, etc.
- Disburses funds for title insurance, recording fees, real estate commissions, lien clearance, etc.
- Prepares a final statement for each party, indicating amounts to be disbursed for services and any further amounts necessary to close escrow.
- Records deed and loan documents, delivers the deed to the buyer, loan documents to the lender and funds to the seller, closing the escrow.
Closing the Escrow
Once all the terms and conditions of the instructions of both parties have been fulfilled, and all closing conditions satisfied, the escrow is closed and the safe and accurate transfer of property and money has been accomplished.
Division of Charges
The method of dividing the charges for the services performed through escrow or as a result of escrow varies from place to place. The fees and service charges to be divided might include, for example:
- The title insurance policy premium
- Escrow fee
- Any transfer taxes
- Recordation fees
- Costs in connection with any loan being obtained.
Unless there is some special agreement between the buyer and seller as to how these charges are to be paid, local custom will generally be followed in drafting the instructions to the escrow holder as to how they are to be divided.
The Contingency Period is the time allowed by your Purchase Agreement to obtain financing, perform inspections, and satisfy any other contingencies to which your purchase is subject. Typical contingencies include:
- Approval of the Seller's Transfer or Property Disclosure Statement
- Approval of the Preliminary Title Report
- Loan approval, including an appraisal of the property
- Physical inspections of the property
- Pest inspection and certification