The Home Buying Process
Purchasing a home is a process that requires planning and structure. In order to properly prepare a plan to purchase a home a home buyer needs to understand the process.
Step 1: Decision to purchase a home.
As simple as it seems, the first step in the home buying process is making the decision to purchase a home. Whether you are a first time home buyer or thinking of selling your home and moving up, you must make the definitive decision to purchase a home.
Step 2: Obtain a Pre-Qualification/ Pre-Approval:
Unless you are going to pay cash, the key to purchasing a home is being able to obtain financing. You might very well make a lot of money and have a good FICO score but there is a lot more to obtaining a loan. Lenders rely heavily on underwriting your financial situation in order to assess the risk involved with lending you money. Lenders will look at everything including, but not limited to, your FICO score, bank statements, revolving monthly debt obligations on your credit report, income, tax returns, etc. However, when pre-qualifying or pre-approving home buyers, lenders will typically only perform a general review of your financial situation leaving the in-depth underwriting until you have identified a property and are officially in escrow. A Pre-Qualification is when a lender takes general information, manually reviews it, and then issues a letter stating that upon review of your situation you appear to be a good candidate for obtaining a home loan. A Pre-Approval is a more in depth process. The lender will obtain most of your information and input the information into either Desktop Underwriter (“DU”) or Loan Prospector (“LP”). DU & LP are automated underwriters that review the information input by the loan originator and issues an approval that states based upon the information input into the system, the home buyer is pre-approved for a loan up to a stated amount. Between the two, pre-approvals are stronger indications of your ability to obtain financing and will carry more weight with sellers thus making your offers stronger.
Step 3: Find a House:
The next step is to find a house. As a home buyer you should find a real estate professional that can help you best find and obtain a home. Although this step can be the most fun part of the entire process, it can also be one of the most frustrating. The goal is to find the house that you want and then get the seller to accept your offer. Providing your real estate representative a strong financial package to go along with your offer will give you the best chance of getting your offer accepted.
Step 4: Open Escrow:
Once your offer is accepted Escrow will be opened and the terms of the purchase contract will be set in motion. Once Escrow is opened, your lender will immediately begin formally underwriting your loan application.
Step 5: Conditional Approval:
Obtaining the conditional approval is perhaps one of the most stressful parts of the loan process. Your loan application and supporting documents are thoroughly reviewed by the lender’s underwriters. The underwriter’s job is to verify all of the information that you have submitted to them. The underwriter will review bank statements, tax returns and income documentation as well as thoroughly review your entire credit report. The underwriter might request additional information or question things discovered during the review. The key to this step is to not get frustrated or take things personally. The underwriter’s job is to make sure that you are not a credit risk to the lender. You must stay calm and provide your lender with whatever information that is requested. Once the underwriter has completed the review the underwriter will issue a conditional approval. A conditional approval is an approval subject to further clarifications or tasks. Once the conditional approval is issued, your loan officer will go over it with you to let you know which of the “conditions” relate to you and which conditions relate to administrative issues.
Step 6: Order Appraisal:
Lenders require that the value of the house be assessed by an independent 3rd party called an appraiser. The purpose of the appraisal is to establish whether or not the purchase price of the house you are buying is in line with the fair market prices of other similarly located homes. Lenders want to make sure that you are not overpaying for the house because this directly affects their risk. Simply put, they do not want to lend money for a house that is not worth what the buyer offered to pay. Sometimes buyers will be encouraged to order the appraisal as soon as escrow is opened. A wiser approach might be to wait until the conditional approval is issued. Appraisals cost money and the buyer is typically financially responsible for the cost of the appraisal, whether they eventually obtain a loan approval or not. So it is best to wait until the conditional approval is issued before forking out the money for an appraisal.
Step 7: Real Estate Inspections and Review of Disclosures:
Real Estate inspections and reviewing disclosures are performed simultaneously to the loan procurement process. During this step the buyer and seller might agree on a credit for repairing issues related to the home. It is very important that any negotiated credit is communicated both to the escrow officer and to your lender.
Step 8: Appraisal Review and Quality Control:
Once the lender receives the appraisal the lender will perform an in-house review of the appraisal to make sure that it is in line with the lender’s assessment of value. Additionally, once all of the conditions from your approval are received by the lender the lender will conduct another review as well as a “Quality Control” (“QC”) review of your file. It is possible that the QC underwriter could request additional conditions. Do not get frustrated, this is all part of the process.
Step 9: Order Docs:
Once QC has signed off on the file your lender will submit a document order request. The document order request is a formal written request for the legal paperwork that will set forth the terms of your loan.
Step 10: Sign Docs:
The doc signing process is one of the most exciting steps in the home buying process because it signifies that you are very close to closing on your new home. However, the doc signing process can also be intimidating. Loan documents are very extensive and can be challenging even for more sophisticated buyers to discern. Never sign something you do not understand. Never be pressured to sign with promises that someone will explain things to you later. Bottom line; do not be pressured in any way. Buying a home is a monumental commitment. You need to make sure that you are comfortable with what you are obligating yourself to prior to signing. Remember, notaries are not loan officers or representatives of your lender. They do not have any specific knowledge related to your loan nor should they be attempting to offer you advice or interpretations. Notaries are there simply to verify your identity and to ensure that the loan documents are signed properly.
Step 11: Final Doc Review:
Once you have signed documents lenders will typically take a day to perform a final review of the signed loan docs to make sure that they were signed properly.
Step 12: Funding:
Once the lender has reviewed the signed loan docs and determined that everything is in line with the lenders policies and procedures, the lender will fund the transaction by sending the money to escrow to be distributed according to the terms and conditions of the contract.
Step 13: Recording:
Once the funds have been set up to be distributed by escrow the title company will record the new grant deed and you will become the legal owner of the property.