Sunday, November 12, 2006

The Loan Process

The Loan Process
by John Occhi, REALTOR

As a Hemet, CA Realtor, I thought I would write today about a topic that I am not an expert in nor do I ever want to be referred to as an expert. It is the real estate loan process. The reason I am spending some time on this topic is because it is so critical to buying real estate, and what I am an expert in is helping buyers buy Hemet real estate.

So, let’s take a look at the process, from the eyes of a Realtor.

First, let me get this out of the way and make some people VERY MAD at me. I can not say that everyone who falls into this category is the same, but I can tell you from my personal experience that this is a universal truth. Yes, I know there are good guys and gals out there, I just have never been fortunate to do business with one, though.

I am talking about the Hybrid – The individual who does both Real Estate and loans. In theory, it sounds great, an opportunity to pick up a 2nd commission on a transaction. Seems like there is nothing wrong with that!

My problem is that both the Real Estate and Mortgage industry are so complex and so specialized that I find it nearly impossible to comprehend how someone can do both jobs well. I guess I think too highly of myself as a Realtor and the professionalism that I spend my time perfecting my skills that I could never imagine taking on so much more work and responsibility and expect that I could continue to do as good a job as I do and hold myself to the same high standards. I know a mortgage professional’s job is complex and very specialized.

It seems that every transaction I have had significant problems with there has been a hybrid on the other side of the deal.

So, let’s talk about the loan process.

When a buyer comes tome first, after asking some preliminary questions to figure out if I can help or not, I need to know how much home they can afford. This breaks down to how much down payment do they have and how much money can they borrow.

Yes, I know how to go through the steps to come up with some preliminary information on my own, but the buyer needs to know there are other professionals involved, so the sooner I can get someone else doing their job, the les responsibility (liability) I have to assume.

As a Hemet Real Estate agent, I find it important to have an association with a lender that I can pick up the phone at any reasonable time and have him speak with my buyer. I believe by developing a good working relationship with a lender then I will know and trust the information he gives me, each and every time. Unlike some in my field, I do not want to have a lot of smoke blown at me, from a lender who will try some sort of kinky deal. (Kinky in this case is not sexual; it is off beat – bizarre, different, a stretch or sometimes called ‘creative financing’.) There is a time and place for creative financing – but in today’s market of higher interest rates and an over supply of houses, I believe it is asking for trouble and best to be avoided by novices in real estate.

I might as well make a plug here, I have such a go to guy. Joey Aszterbaum of Altura Credit Union/Patrion Mortgage is the mortgage lender that I count on. He is a straight shooter and tells it like it is. If anything, Joey will err on the conservative side, not over-extending someone which more often than not puts a kink in a deal and builds up false hope. Joey has a great website, http://www.joeyloans.com/ and he can be reached at 951.571.5751.

A common fallacy in the market today is that working with more than one lender will negatively affect your credit. This is not true. Although I do not have the specific details at my fingertips right now, I can tell you that the law was changed in the last few years. The new change protects the consumer when shopping for a car loan and a mortgage. Consumers could not properly shop for a loan if every time their credit was run, they lost points off of their credit score. So, it was agreed that the consumer could have as many inquiries as they want from as many car dealers in a certain time period (I think it is 45 days) and it only counts as one inquiry. The same rule applies to mortgage loans.

Now that I have given an endorsement, let me also say that I believe when you are shopping for money that you should do just that – shop. Like the TV commercial recommends, let lenders compete for your business (please don’t ever go to a website and start the process – talk to your rep long before you give up one bit of personal information). So, even if a Hemet Real Estate buyer comes to me with a pre-approved loan, I always highly recommend that they let Joey see what kind of magic he can perform.

Pre-Qualified vs. Pre-Approved

Pre-Qualified is the simple process of the mortgage broker spending about 10 to20 minutes (typically over the phone) and based on the information that the Hemet Real Estate buyer provides, the lender will make a decision to move forward, or not.

If the lender feels the buyer has been honest and forthcoming, the lender will generate a “Pre-Qual” letter which is really not worth much more than the paper it is written on. Typically the lender has not even run a credit report. F I get the information from a lender that I trust and work with on a regular basis, (Joey) than I feel comfortable in pursuing the house hunting process.

If the letter is to vague, or goes against my ‘gut feeling’ I will often defer working with the buyer until either my lender has a shot at the process or they become ‘pre-approved’.

Pre-approval is not done by the commissioned loan broker but by the underwriter. The underwriter is the one responsible for ensuring that all of the criteria of or the loan are met and applied to the deal. The under writer verifies all of the information submitted, such as employment, bank accounts, etc.

When a buyer goes through this process, there is typically no question about them being able to get the money they need as they have been pre-approved. This is like the lender telling the home buyer to go pick out a house for XXX,XXX dollars and the lender will fill in the numbers and sign the check when it is needed.

Buy a House

Now, it is time to go shop for a house in Hemet, You and your Realtor both know how much you can afford and how to structure a deal, taking into account the closing costs, down payment and monthly loan payments.

By arming your Realtor with a strong commitment form a lender, the Realtor will not waste your time or his looking at homes that you may want, but are not qualified to buy.

Once you have shopped and found the Hemet Home for sale that you want to buy, your Realtor will draw up the offer and present it to the seller. The seller may either accept your offer, reject it or may counter-offer with something between what you originally offered and what they had asked in the MLS. Counter offers can go back and forth for several rounds until an agreement is made.

Beware though, sometimes the agreement is that we disagree and negotiations can stop abruptly with any offer that is rejected and then countered. Don’t put yourself in a position of stepping over a dime to pick up a penny.

Once both parties have agreed on the price and terms of the agreement it is known as a “Ratified Contract”. It is based on this ratified contract that the lender will lend the money. A new rule in real estate, starting in 2006 is that the appraiser must now receive a copy of the ratified contract so that the value of the terms can be included in the appraisal.

Select Your Type of Mortgage

This is one of the reasons why it is important for Realtors to do Real estate and lenders to do loans. There are literally hundreds of different loan programs available today. How can someone know all of those loans and know all of the properties in Hemet at the same time. My brain is not that big.

So, discuss your options with your lender. Run the numbers. Know what it will cost in out of pocket funds. How much of the costs will or can be added to the loan? Know if there are pre-payment options. Find out if interest can be paid down by prepaying points. There is a lot of stuff to know here. This article can’t ask every question, what I am trying to do here is explain the process and how it affects everything.

Select a Lender

Now, if you have been working with two (or more) lenders in the preliminary shopping stage, now is the time to call Joey and make your decision. OK, even if it’s not Joey, let who you are working with know they have made the grade. Also please call the one that you are not going to work with and let them know of your decision.

Time to Apply for a Mortgage

Now that you have done all of your due diligence, it is time to put the hard work to the test and apply for the perfect loan for your new Hemet Real Estate.

Depending on the loan you have chosen, you will be generating lots of paperwork. Tax returns, pay stubs, bank statements, letters from employers, and so much more. It seems like every time you meet their requirements, your documents have opened up a new can of worms, raising new questions that must be answered with documents to prove beyond all reasonable doubt that the answer you are providing is true and accurate.

Let me through in a word of caution here. Don’t lie and Don’t cheat. Just about every loan is connected in some way to the federal Government and if your loan ever defaults because you bought more than you were truly qualified for and they find that one altered document, you leave yourself wide open to federal prison time for mortgage fraud. I read industry newsletters in my email everyday where there is always an article or two about someone going to prison for something they did wrong in obtaining a mortgage. You can check out http://www.mortgagefraudblog.com/ for yourself.

Once you have submitted your application and all of the supporting documentation you will participate in a loan interview with the underwriter or their assistant. This is typically done over the phone or in the lenders office.

Once the loan package is complete, you will receive a ‘good faith estimate’ which will spell out all of the terms of the loan. This is typically over night delivered (FedEx) to your residence. Familiarize yourself now and avoid problems at signing. You want to make sure you understand all of the terms and conditions and how they affect you. Now is the time to ask questions.

In addition to the good faith estimate, there is a “Truth in Lending Disclosure”, which again summarizes your loan and gives you all of the legalese about the loan and your rights as an American consumer.

While you are reading through these documents, your loan is being submitted for a final review. Now, this may sound silly, and believe me, I do not want to insinuate that you are stupid, but I have got to tell you people do stupid things about now. Whatever is happening in your life – let it be until your loan closes. Do not go out and buy a new car. Don’t decide that now is the time to quit your job to start your new business. Do not file for divorce. Don’t do anything different from what you represented you were doing when you completed the loan paperwork. Just don’t.

Time to Close

The process of buying a home ends with what is commonly referred to a ‘the close of escrow’. In Hemet, California the close is pretty much a non-ceremonious event unlike other parts of the country where ‘the close’ is at the’ closing table and both parties are present, with their attorneys and real estate agents, and money exchanges hands for the keys.

In Hemet, like the rest of Southern California, the close is waiting for a phone call that the loan and deed have ‘recorded’ with the Riverside County Recorder.

Once escrow determines that all of the pieces are complete and ready to go, escrow contacts the lender and “orders doc’s”. these are the actual loan documents and disclosures that the buyer will sign in front of a notary. Typically, once the lender gets this request, they do their final verification of the material facts – employment is verified and credit is often re-ran. Then the lender prepares the actual documents and emails them to escrow. Escrow then prints out enough copies for each party and an appointment is made with the notary to sign the docs. Once signed, escrow will have to ‘package’ the loan papers and return them to the lender.

Now, the lender has to ‘fund’ the loan. This process can take 2 or 3 days typically – sometimes longer, depending on work load and cash flow. Sometimes the lender is using the signed documents to raise the capital to loan, which can take even longer. This is a very tense time for all parties. Both the buyer and seller are looking to move. The seller and the real estate agents are looking to get paid and there are often other parties looking for a payout from escrow. Sometimes bills are paid and other times money is transferred into yet another escrow for the purchase of another piece of property, which in turn creates a domino effect with tensions running high with all of the parties of each domino escrow. I have seen as many as 5 escrows deep stacked up – all depending on one transaction and have heard tales of many more than that.

In the mean time, while everyone is walking on egg shells, there is still more to do. The buyer must conduct a final walk-thru to determine that the home is in basically the same condition as when they purchased it and that any agreed upon repairs have been made. Now is NOT the time to start further negotiations.

Once the loan funds, money is wired into the escrow holders trust account. Then escrow will direct the Title Company to record the deed. Once Escrow has confirmation that the deed has recorded, escrow will disperse funds – typically the next business day.

If all goes well, an escrow will close on time – typically 30 days from the date the purchase contract is ratified. There are times when everything falls into place and an escrow can close early – this is especially true if a buyer has become ‘pre approved’- early in the process and not just ‘pre-qualified’. Often a seller will need the full 30 days and may even require an additional time to get things moved, once they have their money. 3 days is typically granted as a courtesy to the seller, if required – any more time than that and the seller is expected to pay rent based on the buyers costs of a mortgage, insurance, taxes and utilities.

With the right preparation and a calm attitude purchasing your home can be a very enjoyable experience. Just know that there has never been a loan that has gone from beginning to end without at least a minimal amount of stress – so prepare yourself to deal with it. When someone needs something form you – deliver it now, because every day you delay early in the process can have a ripple effect at the close – oftentimes compounding the time – a day delay in producing a document can cause a week delay in the close – don’t ask me why, it just happens and is completely out of my control as your Hemet Real Estate professional.

Now maybe you can see why I leave the loans to the loan professionals and I stick with finding my buyer clients with the best house for their family that they can afford.

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