You found your dream home and your offer is accepted! Now for the not so fun part – the complex loan closing process. Don’t fret though as we’ll walk you through this process step-by-step. First, we’ll go through the a) loan estimate and how to lock in your rate; then we’ll take you through the b) lender’s process followed by how to c) shop for services & insurance. Finally, we’ll walk you through the d) close date & final steps.
WHAT IS A LOAN ESTIMATE
When you have an address for your potential future home (whether or not you have a contract with the seller yet), you can ask your lender for a Loan Estimate which is basically an official quote. The Loan Estimate is a government mandated universal form that provides you important information including the estimated interest rate, monthly payment and total estimated closing costs. The Loan Estimate also gives you information about the estimated costs of taxes and insurance, how the interest rate and payments may change in the future, and any special features your loan has. Once the request is submitted, the lender is required by law to provide a Loan Estimate within 3 business days of receiving your application. Remember that a Loan Estimate does not guarantee you are approved; rather it is the lender’s way of communicating how their offer to you will likely look assuming the numbers you provided to them are accurate. We recommend you have your advisor / attorney (if you have one) review your Loan Estimate.
WHAT IS NEEDED FROM YOU FOR A LOAN ESTIMATE
1) The lender will need to run your credit (its not uncommon to charge you a small fee around $20 to do this)
2) The lender will require certain documentation; click here for the typical list
WHEN A LOAN ESTIMATE EXPIRES
1) If you did not express interest to proceed with the lender within 10 business days of receiving the Loan Estimate, they may deem your application inactive and cancel your Loan Estimate (note: while conveying your interest to proceed with a Loan Estimate still doesn’t fully commit you to that lender, you may be charged application and appraisal fees at this time that are not refundable)
2) After expressing your intent to move forward, there is usually a 30-60 day period that the terms of the Loan Estimate are good for (the typical timeframe needed to close a loan).
UNDERSTANDING YOUR LOAN ESTIMATE
Click here for a great interactive tool by the Consumer Financial Protection Bureau to walk you through the Loan Estimate.
As your lender works to verify the information in your loan application, you may receive revised Loan Estimates. Compare a revised Loan Estimate to the previous one you received. If you can’t tell what has changed, or if you don’t understand why something changed, ask your loan officer right away. Possible reasons for a revised Loan Estimate are that the home was appraised at less than the sales price, the lender could not document irregular income, you made a change to the loan terms, or you requested a rate lock. It is illegal for your lender to deliberately underestimate costs on your Loan Estimate.
Some lenders lock in the interest rate right when they issue you the Loan Estimate, while others require your consent. Make sure you are aware of what applies to your lender.
Click here for important questions to ask the lender on your rate lock
Click here for common scenarios when buyers consider purchasing extended rate-lock features
Remember you are never committed to a lender until you sign the final closing documents! If you have an issue with your mortgage lender, you can submit a compliant to the Consumer Financial Protection Bureau (CFPB) here or by calling (855) 411-CFPB (2372).
In this short section we’ll take you through what you are will be doing and what the lender will be doing through the process.
WHAT YOU CAN EXPECT THROUGH LENDING PROCESS:
If you are satisfied with the terms listed in your Loan Estimate, it’s time to move forward with your lender. You will likely be asked to provide additional financial information and to submit documents to verify the information you previously reported. If applicable to you, be prepared to submit documentation for income from a non-employment source and documentation for the source of recent large deposits. If some of your down payment funds are a gift, ask your loan officer now whether the gift funds are allowed with the loan you’ve chosen.
Through this process, you should expect:
- Information Requests – Lots of information requests from your lender! Don’t complain at these requests as it is the lender’s required process. You will want to be proactive and responsive to your lender to make your closing timeline (remember that your rate will expire typically in a 30-60 window so you never want to be the bottleneck to slow down the process!). Click here for a list of information typically requested by a lender.
- Multiple Contacts – Expect to work with multiple people associated with your lender since the staff that work on processing and underwriting (approving) your loan will be different than your loan officer or broker.
WHAT YOUR LENDER WILL LEAD:
- Appraisal – The lender is going to order an appraisal of your new home to verify that the house is worth more than you are borrowing. It is common for you to pay for this. Click here to learn more.
- Credit Report – Your lender may pull another copy of your credit report, especially if it has been a while since the original credit pull.
- Flood Determination – Your lender is pulling information to determine if your prospective home is in a flood zone.
Do not make any large purchases on credit or by diluting your cash reserves which can stop you from getting approved in underwriting.
While your lender is processing your loan, there are still several important items you need to do on your end. In this section we will walk you through I) scheduling a home inspection, II) ordering homeowners insurance and III) picking title and closing services.
I. Schedule a Home Inspection
A home inspection is a critical part of the process that is essentially your key line of defense to make sure you are not buying a place that will have problems after closing. If you haven’t done so already, it is very important you hire a reputable home inspector professional to inspect your prospective home in a very thorough manner. All purchase contracts should have a contingency that closing is subject to a satisfactory home inspection.
Click here for detailed information about the home inspection process and important considerations.
Click here for a list of what is typically covered in a home inspection.
Don’t go cheap on a home inspector! Most of us are not architects or contractors where we can access the quality of a home. It is very important you find a reputable licensed home inspector who does not rush the process.
II. Order Homeowners Insurance
Homeowners insurance is required by your lender to protect your home in the event of disaster (and depending on your home’s location, you may also need flood and / or earthquake insurance). Start shopping early to give yourself time to compare quotes. This is also a great time to ask the insurance carriers you are receiving quotes from about bundling your existing converge (auto, jewelry, umbrella, etc.) into one policy to save money.
Click here for more information and important considerations on homeowner, flood and earthquake insurance.
Click here for more information on the insurance process.
While all insurance brokers will quote the same price from carriers (as they are required to), smaller firms typically do NOT have access to all carriers! Therefore, only work with a top firm that has full access to the full market, allowing them to get you the best and cheapest policy out there for you. Click here for more information on picking your insurance broker.
III. Picking Title & Closing Services
A title company performs several very important functions including verifying the seller actually owns the property free of liens against it, providing title insurance, recording the final paperwork and deed, and providing several closing functions including working with the closing agent (and potentially being the closing agent itself). Your lender is required to give you a list of companies in your area that provide title and closing services.
Click here for more information on key title company functions and the closing agent.
Click here for more information on title costs.
While you may be able to save money by shopping around for vendors in these categories, note that the savings are often not substantial as title and closing service companies price in a tight range of each other. Additionally, online reviews are unfortunately very limited in the title company world but it doesn’t hurt to check.
With the home inspection finished, your insurance and other services lined up, and title search complete, you are now ready to wait for your lender to issue the magic words of “clear to close”. This means the lender is satisfied with all the information you provided and all the required pieces to close the loan are in place. It’s now time to coordinate with all involved parties (lender’s attorney, your attorney, title company, closing agent if there is one, etc.) to plan a closing date and location to get everyone into one room.
Click here for important considerations on choosing a closing date.
Click here for important steps to finish prior to closing (once you set your closing date).
We recommend setting the closing date for the first available day all parties are available. This way in case there is a delay last minute, you are more likely to have time left on your rate lock period before it expires.
Before your closing day, schedule a final walk-through of the property to ensure the condition is as promised.
Click here for more information on the final walk through, including a checklist of some important items to inspect.
We recommend scheduling your final walk through as close to the closing date as possible to avoid any surprises post-closing!
By law, you must receive a copy of your Closing Disclosure three business days prior to closing to review. Similar to the Loan Estimate, this is a standardized government form that lists the final information about your loan. Compare your Closing Disclosure to your most recent Loan Estimate and make sure that the loan terms are what you expected. Note the interest rate can change if it is not actively locked. Look at the table on the top of page three of your Closing Disclosure to see how the closing costs have changed.
Click here for an interactive Closing Disclosure tool from the Consumer Finance Protection Bureau (CFPB).
Click here for more on more information on what costs can increase from the original Loan Estimate.
In addition to the Closing Disclosure, if you don’t already have them, ask for the promissory note, mortgage / security instrument / deed of trust, and deed in advance. Click here for a detailed guide of these forms.
Please also note that sellers are required to deliver certain disclosures about the property to the buyer within a particular time period specified in the purchase contract. It is the sellers’ obligation by law to reveal everything a seller knows about the property, including material facts.
Comparing the APR on the Closing Disclosure and Loan Estimate are an easy way to tell if your costs have increased.
You made it to the final day! Unfortunately the closing date is nothing at all glorious as there are many documents involved in a real estate closing. Be prepared to spend a couple of hours signing loan documents (you will likely be presented with at least 100 pages to sign). Many are required by the lender, some are required by state and federal law, and many others are just duplicates. Regardless of who requires a document, you have the right to take your time and review them to make sure the information on the documents is exactly what you’re expecting. If things look different than what you were told or than what your earlier paperwork said, ask questions. You can always walk away at closing if you are not comfortable with the transaction but you may lose any deposit that you gave the seller or fees you paid to the lender. Know what your contract says and what your choices are before you walk into the closing.
WHAT HAPPENS NEXT?
Once all the paperwork is signed and the lender officially funds the transaction, you are ready to leave! You will officially close when the title company receives confirmation from the Recorder’s Office that the documents have been recorded (note this date will be a few days after you have signed your documents). Your property deed, seller’s reconveyance and deed of trust will record in the public records. Weeks after closing, you will receive the original deed in the mail. The title company will notify your agent when your transaction records and then the property is yours!
Click here for tips before you move in to your new home!
Save all of your final loan and purchase documents in a safe place. Your Closing Disclosure can help you save money at tax time since some of the closing costs you paid may be tax-deductible.
Final Tip: That process wasn’t simple but hopefully we made it more manageable. Now go out and celebrate☺