Once your house is under contract, the loan process gets going. It can be a stressful time to try and keep track of everything while packing up your things and preparing to move. As part of the E5 Homebuyers Guide, here are a few things to know and keep you organized throughout the process:
Earnest Money (EM)
When the contract terms are agreed to, you as the buyer will be required to make a deposit of “good faith” money. This Earnest Money (EM) Deposit is your pledge to perform according to the terms laid out in the contract. If you fail to perform, there are situations where the contract is canceled and the seller keeps your EM. Likewise, there are situations where the seller doesn’t perform, and you get your EM refunded to you. If everything goes according to the terms of the contract, your EM is applied to your down payment and/or closing costs.
The amount you’ll pay for the EM Deposit depends on the policies and limitations in your state, the current real estate market, and what the seller requires. On average, you can expect to pay $500-$1,000 or 1-2% of the total purchase price as EM. In a real estate market where homes aren’t selling quickly, the seller may only require 1% or less for the earnest money deposit. Where demand is high, the seller may ask for a larger deposit, perhaps as much as 2-3%.
Your lender will need to verify the source of the funds for the EM Deposit. The best way to make an EM Deposit is by personal check or a cashier’s check directly from your bank account.
- Cash – If you make your EM Deposit with a cashier’s check or money order from cash, the deposit will NOT be allowed to be used toward your down payment or closing costs and must be refunded to you at closing. This scenario may cause issues when budgeting for your down payment and closing costs, so it should be avoided.
- Gift Funds – If you are relying on gift funds for your EM Deposit, please consult with your loan officer on the procedures for using gift funds.
Formal Loan Application
Negotiations are over and your house is under contract. Your lender officially begins the loan process. The time it takes to complete most loans is 30-45 days. As soon as your lender receives the real estate contract, they will send you a formal loan application. The majority of the loan documents can be signed electronically. If signing electronically is not an option, arrangements can be made to accommodate alternative signing.
Keep in mind, signing the formal loan application is your intent to proceed with the loan terms. It’s also the point when your lender can lock your mortgage interest rate protecting the terms of your loan from market fluctuations. Once the loan officer has received signatures on the application, loan processing begins.
Loan processing is where all the information you provided to your loan officer is verified, including your work history, tax transcripts, homeowner’s insurance, etc. Your loan officer or a loan officer assistant will update you about the process and may request the most-recent document versions, such as paystubs or bank statements. If loan processing finds anything that needs to be explained or added to the file, they will ask you to provide that information.
As soon as your home goes under contract, begin shopping for homeowner’s insurance. You can either pay your insurance separately (restrictions apply depending on the loan program), or have it be included in your monthly payment (in escrow). Discuss these options with your loan officer prior to making a decision. Once you select an insurance company, provide your loan officer the insurance agent’s name and phone number (NOTE: Be sure to accept the quote from the insurance company prior to your lender contacting them). Loan processing will ensure the policy matches the requirements of the lender. The first year of homeowner’s insurance premium will be paid at closing as a part of your closing costs regardless of whether or not the insurance is included in your monthly payment.
Your lender may require an appraisal to receive an unbiased valuation of the home. An appraisal is the estimate of your home’s value done by a licensed professional. To determine their estimated value, the appraiser takes into account the square footage, number of bedrooms and bathrooms, condition of the home and recently sold comparable homes in the neighborhood, among many other factors.
The appraisal is ordered from a third-party certified or licensed contractor. The cost of the appraisal depends on the location and size of the property. Other factors such as rural properties, investment properties, manufactured home, or multi-unit properties can also affect the price. The price is generally between $500-$750, but it can be higher. Typically, it is the buyer’s responsibility to pay for the appraisal, and it is paid for early in the process outside of closing. In addition to inspections and moving costs, consider this cost in your budgeting. The appraisal can take anywhere from a few days to a few weeks to be completed and sent to the lender.
Once the appraisal is complete, your lender will review it. If the appraisal reveals any problems with the home, the lender may require they be fixed before the loan can be approved. If the appraised value is less than the purchase price, the lender will have restrictions on a maximum allowable loan amount. This could affect the terms of the sale and may cause a renegotiation with the seller. You may pay the difference yourself, negotiate with the seller to reduce the purchase price, come up with a compromise with the seller, or cancel the contract.
Title of a home determines who has legal ownership and the rights to use a piece of property. The title company is responsible for making sure that the current title on the house you are buying is legitimate and valid. Once under contract, they perform a title search, which is a thorough examination of all the property records. This ensures the home is legally owned by the seller and that no one else can claim ownership of the property.
Once the title is found to be valid, the title company issues a title report and title insurance policy which protects the lenders and owners against any claims that arise over the ownership of the property. Fees from the title company are calculated into the closing costs of a home.
The title company may also handle the closing of your home. They are responsible for officially putting your name on the title and removing the seller from the title.
If you have any questions or are curious to see what you could qualify to borrow, contact E5 Home Loans. Even if you already have a quote or prequalification, reach out to us for a Second Opinion. E5 Home Loans shops for the best products across many lenders and we don’t charge a bunch of crazy fees.