STEPS IN THE HOME LOAN PROCESS
Home buyers sometimes get into trouble because they aren’t aware of the sequence of steps involved in financing their purchase. These are qualification, preapproval, approval, rate lock, and funding..
1. Qualification (or pre-qualification, as it is often called) is an opinion that your income, assets and current debts qualify you for a loan of some specified amount. The opinion may come from a lender, but whatever the source, the opinion does not take your credit into account, and no one is committed by it. There is a difference between a “pre-qual” letter and a “pre-approval” letter.
It used to be that real estate agents did a lot of the qualifications, often back-of-the-envelope affairs, so that they would not waste time looking for houses in a price range the buyer could not afford. Increasingly, they asked borrowers to become preapproved by a lender because it is more reliable than a qualification, and lenders are willing to provide it free of charge as a way of bringing in business. Home sellers also have learned to ask potential buyers for a preapproval.
2. Preapproval is a conditional commitment by a lender to make a loan before the identification of a specific property. On a preapproval, unlike a qualification, the lender verifies the information you provide and checks your credit. A preapproval will stipulate a loan amount or monthly payment, but not necessarily the loan type or the price.
The lender’s commitment under a preapproval is always conditional, but rarely are the conditions spelled out. Preapprovals don’t have expiration dates, but some considerable time may elapse before the borrower receiving a preapproval comes back to convert it into an approval.
During that period, things can happen that cause the lender to back out. For example, the borrower’s credit deteriorates or she loses her job. No one can reasonably expect a lender to approve a loan in those circumstances.
Less clear-cut are the effects of adverse market changes, such as the tightening of underwriting requirements, on outstanding preapprovals. If a lender has preapproved a loan and the market changes to where the same loan would not now be approvable, will the lender honor its obligation? In most, if not all, cases, the answer is no.
3. Approval is a commitment by a lender to make a loan. Unlike a preapproval, a specific property (along with its appraised value) is identified, and the loan details are spelled out. These include the type and purpose of the loan, the down payment and type of documentation. It will also include an interest rate, even though a rate is not firmly established until it is locked.
The presumption underlying an approval is that the probability of closure is high – much higher than with a preapproval.
It is not 100%, however, because borrowers sometimes drop out, and sometimes one or more of the conditions that accompany the approval are not met. Approval letters contain checklists of nitty-gritty details that must be completed before the final documents are drawn, and before funds are disbursed. Sometimes, one of these details derails the train.
4. Rate Lock is a commitment by the lender to a specified price – rate and points. Ordinarily, lenders lock at the borrower’s request, and view the borrower as being committed as well, though they don’t always communicate this very well, or at all. Because locking imposes a cost on lenders, some charge a nonrefundable fee, which may be credited back to the borrower at closing.
I recommend that prospective home buyers get preapproved as a way of establishing their good faith to home sellers and agents. Only one preapproval is needed, and it does not commit them to the issuing lender. It is only fair, however, to include that lender among the loan providers you shop when you have a contract to purchase and need a loan. But bear in mind that if you switch to lender B after being preapproved by lender A, you must be approved by B.
It is recommended that when your loan is approved, you lock the price the same day, because that is when you know the price. Holding off because you expect market interest rates to decline is a bad gamble. No one can forecast interest rates.
5. Funding is the point at which all conditions have been satisfied, buyer has signed their loan docs, docs have been returned to escrow and the lender and have passed final funding review. All legal and title issues are clear, and seller has performed their required tasks. At that point the lender will wire the funds to escrow for disbursement to all parties. Escrow will then send the legal documents out for recording. Upon recording confirmation, buyer can get their keys!
To get this process started please call Jeff Smetana at (951) 735-8857 |
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