From Application to Settlement, Know What to Expect
I believe the concept of Murphy’s Law – if something can go wrong, it will go wrong – was created around the time of the first real estate settlement. I do not mean to make light of one of the most trying and stressful events any of us will encounter. However, it seems that no matter the planning and care put into making things go smoothly, somehow a wrench will always get thrown into the works. Even with the most seasoned of real estate investors, there always seem to be last minute demands for paperwork, unwanted delays, or some other unexpected surprise.
So what is it about real estate settlements that are so enigmatic? It helps to understand all the moving parts that are involved in getting a mortgage to know where issues can – and most often will – arise at settlement.
Pre-Application: This may be one of the most important times in the entire process as expectations are established between you and your mortgage banker. It is not uncommon to ask for interest rates, payment scenarios, or even a Good Faith Estimate (GFE) before submitting an application. However, the information provided to you will be based on any discussions you have had with your loan officer but not a fully underwritten loan. Even so, you would be surprised how many people with “excellent credit” fail to mention the fact they were late on this payment or that one – which most likely will negatively affect their credit score and their interest rate.
One thought on the GFE – this is an estimate. Your lender can identify the fees, if any, associated with doing the loan with his bank; however, everything else is an estimate of third party fees or estimates of taxes, insurance, existing loan payoffs, prepaid items (that will change depending on what day you settle), to name a few. Instead of a lender generated GFE, ask the designated settlement company for a pre-HUD1. Although not carved in stone, it is a more accurate estimate of closing costs especially from third parties.
Application: Honesty is the best policy and it could not be more true than for the information you provide on your application. It is important to be as thorough as possible on your application and provide your mortgage banker with as much information up front. If you leave required information off of the application, you will eventually need to provide it (see processing and underwriting below), but this will only delay getting your to settlement. The last thing you want to do is surprise your banker with undisclosed information or have it turn up in the ‘11th hour’.
Processing: This is the behind the scenes part of the application process you do not see, but it is an essential part of getting your loan approved. Information about your work history, income, credit history, previous addresses, among other areas needs to be verified or “validated” in order to get your loan approved. The loan processor assigned to your file is responsible for checking to make sure this information is true and accurate. For example, if you have a three month gap in employment for whatever reason, it will need to be documented appropriately.
A common hold up in processing is the transfer of funds between accounts. If you are buying a home and are putting money down, the bank needs to see where that money is coming from. If you transfer money from one account to another, you will have to provide the “paper trail” explaining the large deposit and where the money came from. Seems simple but this can often cause unnecessary headaches.
Appraisal: If you have ever been pre-approved for a loan, you will see that it is always “subject to a satisfactory appraisal”. And whether you are buying or refinancing, some kind of appraisal needs to be done on the ‘subject’ property. It is this appraised value that underpins the entire transaction. However, appraisals are most often provided by third party vendors – not your bank or lender. Make sure the appraisal is ordered as soon as possible and make sure someone – you or your Realtor – is available to let the appraiser in to see the property once it is scheduled. By delaying the appraisal or not providing timely access to your home to the appraiser can create the most significant delays for closing.
Appraisals can make or break deals. If you tell your mortgage banker that your house is worth $400,000, but the appraisal comes back anywhere below that – even by a $1 – the whole nature of your transaction can change or even fall through. In a market where values are stabilizing, providing a fair estimate upfront can be the most helpful step to get your loan to close. Speaking of closing, it is common to receive a copy of your appraisal at closing. Be sure to ask for yours then.
Underwriting: This is where your application, credit profile, validated information, and appraisal all come together so your loan can be approved. These days it is not uncommon for banks to use “electronic” or “desktop” underwriting systems. Whether electronically or manually underwritten, the information in your file is evaluated relative to the guidelines for the loan you requested. Here your loan can get the coveted approval; however, any approval will be subject to certain conditions. These conditions come down to the validation of the information provided on your application – which takes us full circle to the processing piece of the loan. This is why accuracy on the application is so important. Remember you are getting approved based on the information you have provided – as it applies to specific parameters of the loan you discussed with your loan officer.
Title: While your bank is working on getting your loan approved, the title company is simultaneously working on preparing the title work for your property. They are looking to see that the title is “clear” or that no one else has a legal right to the property, taxes have been paid, there are no judgments, or liens. You can imagine houses in and around a city with a history as rich as Washington DC have some remarkable title issues. It also is amazing to see that some title companies will uncover issues that other companies have overlooked in the past. So even refinancing your own home, when you think your title is clear, can turn out to be an eye opening experience.
From before you even submit an application, the stage is set for a successful or frustrating settlement experience. Getting to settlement is rarely a perfect process and there are many working parts and many third parties involved. Working closely with a knowledgeable mortgage banker and Realtor who you trust is critical to helping to make the process go as smoothly and painlessly as possible. There also has to be a shared commitment to getting you to close which requires open and honest communication. But, we can not forget Murphy’s Law. So having some patience may be the most important element to a successful real estate closing.
Copyright FELA, Inc. 2009