We're in Escrow!
The seller has accepted your offer and you now have a signed contract! It's time to begin the loan process. Below is an estimated timeline with milestones that we'll cover during each phase of the loan process.
Discuss Loan Options
A conforming mortgage “conforms” to Fannie Mae (Fannie) and Freddie Mac (Freddie) underwriting guidelines and is therefore eligible for purchase by Fannie and Freddie. Fannie and Freddie are the quasi-governmental organizations set up to create a secondary market for mortgages (outside of banks alone). The majority of all mortgages obtained in the United States are conforming. Conforming loans must comply with the loan limits in your county. For most areas in California, the loan limits range from $417,000 to $625,500. In the Bay Area and other high end coastal locales, the county loan limits are usually $625,500. Below are some key aspects of conforming financing.
A “jumbo mortgage” is a loan that exceeds a particular county’s loan limits (see “Conforming” above). Jumbo mortgages usually have stricter underwriting guidelines because they are not backed by Fannie Mae or Freddie Mac, but are instead held by banks or private funds. Stricter guidelines include tighter debt ratio requirements, larger down payment and reserve requirements, and tighter credit standards. You can purchase a primary residence, investment property, or a second home with a jumbo loan.
Federal Housing Administration (FHA) mortgages are insured by the FHA and they offer more flexible down payment and underwriting guidelines. They are not just for first time homebuyers, but are available for all borrowers who qualify – for both purchases and refinances.
Veterans Administration (VA) mortgages are guaranteed by the VA with very flexible underwriting and down payment guidelines for veterans and their spouses only.
First / Second Combo
First/second combos are mortgages that fund concurrently or at the same time. The first mortgage is typically at a loan-to-value of 80% or less, and the second mortgage accounts for the loan-to-value portion above 80%. These loans allow buyers to avoid mortgage insurance requirements as well as jumbo loan restrictions. For example, a 90% loan-to-value purchase of a $700,000 home can be structured as a $560,000 first mortgage and a $70,000 second mortgage. Because the first mortgage is at 80% loan-to-value, mortgage insurance is not required.
Rate/ Term Refinance
A rate and term refinance is the refinancing of an existing mortgage to lower the interest rate or change the term of the loan (from a 7/1 ARM to a 30 Year fixed, for example) without increasing the loan amount. A key consideration with a rate and term refinance is the amount of closing costs and how fast borrowers can recoup the closing costs with the savings from a lower mortgage payment. A rule of thumb is that a refinances makes economic sense if the closing costs can be recouped in four years or less. If a refinance is offered at “no cost” to the borrower, the “recoup analysis” is unnecessary.
Cash Out Refinance
A cash-out loan is the refinancing of an existing mortgage into a larger mortgage that not only changes the interest and the terms of the loan, but also advances cash to the borrower. Borrowers obtain cash-out mortgage primarily for home-improvements and debt consolidations. Loan-to-value restrictions and credit standards are tighter for cash-out loans and interest rates are higher. Borrowers need to be certain they have sufficient equity before pursuing a cash out refinance.
Request Good Faith Estimate (GFE)
An estimate of closing costs that is given to you within three days after loan application is made. Common fees that you may see on your GFE are:
- Appraisal Fee
- Credit Report fee
- Loan Origination charge (which includes Processing and Underwriting fees)
- Title Services & Lender’s Title Insurance fees
- Owner’s Title Insurance
- Recording charges
- Wire transfer fee
- Prepaid Mortgage Interest
- Property Taxes
- Prorated Taxes
- Homeowners Insurance reserves
- County Property Tax reserves
Begin Down payment fund liquidation
Funds should be liquid and verifiable by week 2.
- 401K providers can take weeks to complete a loan, so initate these immediately.
- Investment acconts may take 3-5 business days to liquidate assets
- Only wires and cashier's checks are accepted at closing and any fund transfers must be documented.
- Funds should be wired directly to title. Some institutions will only wire to accounts in the account holder's name, so funds will need to be transfered to a different account.
- Some accounts like CapitalOne 360 do not offer wire or cashier's checks, so funds will need to be transfered to a different account.
- Fraud is on the rise, so always call the title company to verify wire instructions.
Send Earnest Money Deposit
The funds should come from a bank account that we previously verified (using an un-verified account can cause a delay). You'll need to provide a statement of transaction history that shows the following:
- All transactions since the last statement date
- Earnest money deposit clearing the account
- Ending balance
- Account number, last 4 digits of account number, customer name
- Screenshots are generally not permitted. Instead print the pages with the URL displayed, scan and email to me.
Shop for HOMEOWNER'S INSURANCE
Homeowner insurance policies can always be changed after closing, so do not worry about picking the perfect insurance policy. Once you've decided, make sure the following are true
- Name on policy matches the name that will appear on your title Specify full name with middle name, with middle initial only, etc.
- Property address matches address on loan documents
- Effective date is at least 3 days prior to escrow close date
- I will provide the Mortgagee
Fixed Rate vs. ARM
While the vast majority of borrowers choose 30 year fixed rate mortgages, there are other options available. These include 15 year fixed rate mortgages and 5, 7 and 10 year Adjustable Rate Mortgages (ARMs). Most 5, 7, and 10 year ARMs are amortized over 30 years and are actually “fixed” for their initial fixed periods and only become adjustable after their fixed periods end. Borrowers should only consider an ARM if the spread between the 30 year fixed rate and the ARM is significant and if they know their time-horizon (how long they intend to stay in home) is short. 15 year fixed rate mortgages offer lower interest rates (approximately 1/2 %) than 30 year mortgages, but borrowers need to be certain they will be able to afford the higher the payment that comes with the much shorter term. We often encourage borrowers to obtain 30 year fixed rate mortgages irrespective of circumstances for the safety and the flexibility.
Buy down rate with discount points
One point is one percent (1%) of the loan amount. The concept of a discount point is that you pay a fee up front to discount the rate over time. Charging discount points enables the lender to offer a lower interest rate on the mortgage. The lender provides a range of pricing available at various discount fee charges.
Locking my rate
A rate lock fixes a borrower's interest rate and point options for a specific period of time. If a lock expires prior to the borrower's closing the borrower receives the market inerest rate or the original interest rate, whichever is higher. The benefit of locking in is that there is certainty in the final interest rate and protects the borrower against dramatic rises in interest rates.
Once a loan file has been prepared with all required documents, chosen loan program and rate lock preferences have been established, an appraisal will be ordered. The lender will choose an appraiser to evaluate your home and you'll pay the appraiser's fee, typically $500 or $600.
Click here for a copy of the Appraisal Authorization Form and the appraiser will contact you directly to schedule.
Upon receipt of your appraisal report, the loan file is ready to submit to an underwriter for approval. The appraisal report typically takes 3-4 business days to come back.
Decide on Escrow or Impound account
As a borrower, you have the option to set-up an impound account, which means that you pay one-twelfth of your property taxes every month along with your regular mortgage payment. Then, when the taxes are due, your lender sends a check to your County Tax Collector.
Underwriter issues Conditional Approval
Conditions are items the underwriter must review and approve prior to clearing any loan to close. The underwriter will review your loan and issue a Conditional Approval with a list of conditions that must be satisfied.
Types of Conditions
Letters of Explanation (LOE)
These can literally be one sentence at times, and they tend to 1) document the obvious and 2) really annoy. Make sure you hand-sign and date them.
- Two years federal/state/business tax returns
- Social Security /Disability Award Letter - proof of continuance of Disability VA: DD214. COE, disability letter if applicable.
- End of year paystubs for the past two years (W2, overtime, part-time, bonuses, etc.)
- LOE For every credit report inquiry
- LOE for all derogatory credit: collections, late payments, post-bankruptcy derog's.
- LOE for all job changes, gaps in employment, inequities between paystubs and deposits, inequities between
- W2s and Verifications of Employment (VOEs)
- Bankruptcy discharge (all pages)
- Check copies as proof of receiving child or spousal support (must be Court Ordered)
- Divorce Decree, all pages, if applicable
- For pregnancy leave we need a letter, and a copy of the leave from your employer, and proof you went back to work.
- Line 31 of Schedule C, or full business returns
- K-1 and Articles of Incorporation
- Proof of when you started the business, if you shifted from S/E to a W2 job, or vice versa in the past two years
- HUD1 from previous short sales or foreclosures
- Check copies for any rent payments from the past year.
- Proof that home is certifiable.
Important tips for Conditions
- We need all pages, including any blank pages.
- If you extended 2015, send the extension, and 2013 and 2014 returns
- We need all pages, including any blank pages.
- Every large deposit over $3000 that cannot be connected to some form of income must be documented with an LOE + a copy of the check and deposit slip.
- Depending on the number of accounts, we may be able to disregard some of the smaller ones.
Most home purchase contracts contain contingencies. Once contingencies are written into a purchase contract, the contract must also specify how a contingency will be satisfied, released or removed from the contract. After a buyer has released all the contingencies in the contract, the buyer is obligated to move forward with the purchase.
Final Approval (Clear to Close)
Once all of the conditions have been satisfied the underwriter will issue a clear to close. Once a loan is cleared to close we will contact you to review closing costs and confirm closing details.
Aknowledge Closing DISCLOSURE (CD)
A CD provides final details about the mortgage loan you have selected. It includes the loan terms, your projected monthly payments, and how much you will pay in fees and other costs to get your mortgage (closing costs). You will be sent the Closing Disclosure (CD) for review and you can sign your loan documents after acknowledging receipt of the CD and the 3-day waiting period has passed so please open this email as soon as you receive it.
How you hold your title ensures that your interest in your property goes where you want it to go at your death. Please seek professional counsel from an attorney and/or CPA to determine legal and tax consequences of how title is vested.
The Closing Process
- LOAN DOCUMENTS ARE ORDERED: As soon as we get all of your Loan Conditions signed off by the underwriter, we will order loan documents. It can take from 1 to 2 days to get loan documents drawn by the Doc Drawer after all conditions are signed off. Once loan documents are drawn the Doc Drawer emails them to the Escrow officer.
- ESCROW PREPARES LOAN DOCUMENTS OR “SIGNING PACKAGE”: Escrow will prepare all the documents for you to sign, the “Signing Package”. This is a very involved process that requires them to collect and prepare all necessary documents, and to calculate out interest, property taxes, hazard insurance to the day, all fees, commissions, remaining down payment funds, etc.
- BORROWER SIGNS LOAN DOCUMENTS: Once the “Signing Package” is prepared, the Escrow officer is ready to have you sign all of the loan documents. This, too, will take some time, as there are so many forms to sign in today’s lending environment. You will probably sign at the Title/Escrow Company. If going to the Title Company is too inconvenient, we can arrange to have a mobile notary go to you. In order to keep the process moving forward as quickly as possible, it is important to try to sign the loan documents early enough in the day to allow Escrow to have time to get the Funding Package into a Fed Ex or overnight drop-off before the cut-off time. This often means signing no later than 3 PM or so.
- BORROWER WIRES FUNDS TO ESCROW: Escrow will typically have you wire your remaining funds to escrow after you sign. The escrow officer will give you the exact amount of remaining funds or “cash to close” that needs to be wired. You can also provide your funds to close in the form of a cashier’s check, but you cannot send your funds via ACH transfer, personal check or cash. Please verify wire instructions verbally with the escrow office before initiating the wire. Also keep in mind that we must source your funds to close, and so we may need you to send additional bank statements or updated transaction histories once you send your funds.
- ESCROW PREPARES “FUNDING PACKAGE” TO SEND BACK TO FUNDER: After you sign all of your loan documents, the Escrow officer will prepare a “Funding Package” to overnight back to the Funder.
- FUNDER REVIEWS FUNDING PACKAGE AND FUNDS LOAN: When the Funder receives the Funding Package, she will thoroughly review it to ensure ALL of the funding conditions are met. This can take from one to two days depending on how backed up the Funder is. Once a Funder agrees to “Fund a Loan”, they wire all loan proceeds to escrow.
- ESCROW RECORDS DAY AFTER LOAN FUNDS (or the same day in some counties): When escrow receives the wire, they “release” the deed of trust (the mortgage) and the grant deed (putting your name on title) to record at the County Recorder’s Office the next day (or the same day). “Recording” means that you are on public record as the “owner of the house.” You get your keys once Escrow gets confirmation that the recording is done. This is usually about mid-day, but varies from county to county.