The
Loan Process
Your loan officer or agent will provide you with
current financing information, including specifics
regarding the types of loans available (fixed or
adjustable interest rates), terms and conditions,
interest rates and financing costs, government regulations,
and lender/borrower obligations and requirements.
Once you have selected your loan, the lender will
ask you to begin the qualification process by completing
a loan application, which will require personal
and financial information. You also may be asked
to make an application deposit which may be credited
to you upon completion of the loan process.
What is involved in the qualification process?
The lender will begin the process by completing an
estimate statement of fees and costs to determine
the loan amount and by verifying the information provided
on the application concerning your credit history,
employment status and financial situation. You may
also be requested to provide copies of recent federal
income tax filings and paycheck stubs, so you should
have them readily available.
Having established preliminary qualification, the
lender orders a title search, property appraisal and
credit report. Usually, the borrower pays for the
credit report and property appraisal, which is used
to determine the value of the property and, ultimately,
the amount a lender is willing to lend.
The lender will require title insurance to assure
the priority of the new loan. The insurance is provided
by the title company after the title search is completed
and is generally paid for by the borrower as a part
of the final closing costs. If you already have a
loan on your property, you must continue to make your
mortgage payments promptly during the entire new loan
process.
Why do you need a title search?
The title search will disclose the current condition
of the title, according to public records. The lender
will be interested in how and in whom title is vested,
any special conditions or restrictions affecting the
use of the property and existence of voluntary liens
(existing loans) and/or involuntary liens (liens and
judgments). The search will also show the current
status of taxes and assessments and the conditions
under which title insurance will be issued.
With the title search, financial and personal qualification
and property appraisal completed, the lender will
prepare loan documents to be executed by the borrower
upon loan approval.
What are loan documents?
Loan documents will include the formalization of the
terms and conditions of the loan, a promissory note
and deed of trust and various state and federal disclosure
documents. They also provide a breakdown of the financial
accounting of the loan, including fees and charges.
What’s the difference between a mortgage
and deed of trust?
Although we commonly hear the term mortgage used to
describe real estate financing, technically speaking,
Californians almost exclusively secure real estate
loans with a deed of trust. A major difference between
a deed of trust and a mortgage instrument is that
the deed of trust requires a “Trustee”
to act as a neutral third party for the Trustor (borrower)
and Beneficiary (lender). For your information, the
deed of trust secures the promissory note. It contains
the general conditions of the loan and is recorded
to become a matter of public record.
The Escrow Process
Escrow is an independent “stakeholder”
account that is the depository for all funds, instructions
and documents pertaining to the loan. In California,
escrow services are usually performed by title companies
or independent escrow companies.
What
information will you have to provide?
Because many people have the same name, you may be
asked to complete a confidential statement of identity
as part of the necessary paperwork. The required information
will include your social security number, date of
birth, and previous and present addresses.
Your lender will also require evidence of fire/hazard
insurance, which you should arrange through your casualty
insurance agent. The lender may require up to 12 months
of paid premiums from you at close of escrow.
When the loan is approved, what’s next?
When your loan is approved, you will be asked to sign
the loan documents and escrow instructions in the
presence of a notary public. The escrow instructions
specify the disposition of your loan funds.
After all the necessary documents have been signed,
your lender will complete a final review of the loan
documents and conditions for closing. Upon final loan
approval, the lender will send the loan funds to escrow.
The loan conditions may require a three-business-day
revision period before the loan is funded. Escrow
will record the deed of trust, disburse the funds,
provide both parties with a final financial accounting
in the form of a settlement statement, and close the
escrow.
Identification
Please bring either your valid driver’s license
or passport with you to the title company. This is
needed so that your identity can be verified by a
notary public. It’s routine, but a necessary
step for your protection.
Deciding How to Hold Title
If you are in the process of deciding how
to hold title to your new home, you will need to make
this decision prior to your escrow appointment. Title
to property can be held in a variety of ways including
(but not limited to) community property, joint tenancy
and tenancy in common. We suggest you consult a lawyer,
tax consultant or other qualified professional before
you decide.
After the Close
If the funds from the new loan are being used to pay
off an existing loan, the old lender is required by
law to issue a full reconveyance (release) of their
loan. As soon as the deed of reconveyance removing
the previous deed of trust is received, it must be
recorded and the original will be returned to you.
This may take several weeks. However, you need not
be concerned by this delay since it is normal.
Issuance of Lender’s Title Policy
A policy of title insurance will be issued to the
lender insuring the priority of its loan and all other
conditions set forth in the loan documents.
The lender may retain this loan in its own portfolio
or may sell the loan to either a private or public
agency, such as the Federal National Mortgage Association.
In either case, you will receive specific instructions
as to when and where your loan payments are to be
made.
Disbursement of Funds Held in Escrow
In some cases the escrow agent will be instructed
to hold funds in escrow to pay off obligations which
may not be completed until after the close. An example
might be a set-aside of funds to correct a structural
problem, remodeling or termite repair work. Upon completion
of the project, the escrow agent, having received
proper documentation and releases, will disburse the
reserved funds.
Conclusion
This guide has taken you through the three phases
of mortgage financing—The Loan Process, The
Escrow Process and After the Close. Rest assured
that the industry professionals with whom you will
be working will successfully guide you to a satisfactory
conclusion in the financing of your home.
The following is a brief list of the best sources
for assistance for certain common questions:
1. Details of your new loan Lender
- Loan Officer or Loan Agent
2. Hazard/Fire insurance - Insurance
Agent
3. Loan requirements and financial
matters - Lender, Loan Officer or Loan Agent
4. Escrow instructions - Title
company, Escrow Officer or Escrow Assistant
5. How to take title or ownership
- Lawyer or Tax Consultant
6. Questions regarding property
tax impounds - Lender
Loan
Program Highlights
Some of the most commonly used loan programs are
as follows. Consult your Loan Officer for further
details.
Fixed Rate Loan
A loan which has an interest rate that remains constant
throughout the life of the loan.
Buydown
A fixed rate loan in which the interest rate and payment
are reduced for a specific period of time by paying
the interest in advance. (The buyer or seller can
pay for the buydown).
Balloon Loan
A fixed loan that is amortized over a 30-year period
but becomes due and payable at the end of a shorter
term (i.e., 5, 6, 7 or 10 years). Some of these loans
have an option to be extended with a new rate or rolled
into another type of loan. Usually, the rates of these
loans are lower than a regular 30-year fixed rate
loan.
Graduated Payment Mortgage (GPM
A fixed rate loan which has payments starting lower
than the payments on a standard fixed rate loan, then
increasing by a predetermined amount each year for
a specific number of years (usually 5).
Adjustable Rate Mortgage (ARM)
A loan, which has an interest that can change, either
upward or downward, at specified periods during the
life of the loan. The change in the interest is usually
tied to a financial index over which the lender has
no control.
FHA Loan
FHA loans are available as a fixed rate, ARM, GPM
or buydown. They are loans that are insured by the
Federal Housing Administration and offer low down
payments and lower income requirements. There is a
maximum FHA loan limit that varies from region to
region.
VA Loan
Fixed loans are available with, no down payment requirements,
to eligible Veterans, In-service Veterans and certain
other Reservists and National Guard members. VA loans
are guaranteed by the Veterans Administration. The
maximum VA loan is currently $203,000 with no down
payment. A VA GPM loan is also available with a minimal
down payment. (ARM loans are not presently available)
Community Homebuyer’s Program
A fixed rate loan with a low (3% to 5%) down payment,
no cash reserve requirement and lower income requirements.
Subject to borrowers meeting maximum income limits
and completion of a course of homeownership.
Mortgage Credit Certificate MCC Program
A first time homebuyer’s program subject to
purchase price, income limits and availability of
funds. The MCC is actually a special tax credit and
can be used with almost any loan program. The amount
of the tax credit is used as additional income to
qualify the borrower(s). This program has very limited
funds.
CHFA California Home Finance Agency
A first-time homebuyer’s program sponsored by
the State of California, subject to purchase price,
income limits and availability of funds. This program
can be in the form of a conventional, FHA or VA loan.
This program offers a low down payment and is lower
than market rates on both fixed and ARM loans.
Closing
Costs
Listed below is an overview of common types of closing
costs you may incur on your loan. Some are one-time
fees while others recur over the life of the loan.
When you apply for your loan, you will receive a
Good Faith Estimate of Settlement Charges and a
booklet explaining these costs in detail.
Appraisal Fee
This is a one-time fee for an “appraisal,”
a statement of property value required on most loans.
Credit Report
This one-time fee covers the cost of the credit report,
which is processed by an independent credit-reporting
agency.
Document Preparation Fee
There may be a separate, one-time fee that covers
preparation of the final loan papers, including the
note and the deed of trust. Often called “Points”,
a loan document fee is a one-time charge used to adjust
the yield on the loan market conditions demand. One
point is equal to 1% of the loan amount.
Loan Origination Fee
This fee covers the lender's administrative costs
in processing the loan. It is a one-time fee and is
generally expressed as a percentage of the loan.
Miscellaneous Title Charges
The Title Company may charge fees for a policy of
title insurance and escrow services, which may include
charges for document preparation, notary fees, recording
fees and a settlement of closing fee. These are all
one-time charges.
Mortgage Insurance (MI) Premium
Depending on the amount of your down payment, you
may be required to pay a fee for mortgage insurance
(which protects the lender against loss due to foreclosure).
You may also be required to place funds into a special
reserve account ( called an impound account) for MI,
which will be held by the lender.
Prepaid Interest
Depending on the day of the month your loan closes,
this charge may vary from a full month of interest
to just a few days of interest. If your loan closes
near the end of the month, you will have to pay only
a few days of interest.
Taxes and Hazard Insurance
Based on the month you close, property taxes will
be prorated between you and the seller. It may also
be required that you pay a full year’s hazard
insurance premium in advance. (Homeowner’s insurance)
In addition, you may be required to place funds into
a special reserve account (impound account) for taxes
and insurance, which is held by the lender.
Title Insurance Fees
There are two title polices - a buyer’s policy,
which protects the new homeowner, and a lender’s
title policy that protects the lender against loss
due to a defect in the title. These are both one-time
fees.
Step 1: The Loan Application
The key to the loan process going smoothly is the
initial interview. At this time, the lender obtains
all pertinent documentation so that unnecessary problems
and delays may be avoided. At this time, the Realtor
opens escrow with the Title Company.
Step 2: Ordering Documentation
Within 24 hours of application, the lender requests
a credit report, an appraisal on the new property,
verifications of employment and funds to close, mortgage
and landlord ratings, a preliminary report and any
other necessary supporting documentation.
Step 3: Awaiting Documentation
Within a week or two, the lender begins to receive
the supporting documentation. As it comes in, the
lender checks for any problems that might arise and
requests any additional items needed.
Step 4: Loan Submission
Once all the necessary documentation has been received,
the loan processor assembles the loan package and
submits it to the underwriter for approval.
Step 5: Loan approval
Loan approval generally takes between 24 and 72 hours.
All parties are notified of the approval and any loan
conditions that must be cleared before the loan can
close. The loan approval is the beginning of the closing
process.
Step 6: Documents are Drawn
Within three days after the loan approval, the loan
documents (including the note and deed of trust) are
prepared and sent to the Title Company. The escrow
officer will make an appointment for the borrowers
to sign the final documents. At this time, the borrowers
are told how much money they will need to bring in
to close the escrow. Payment must be made by a cashier’s
check or wired funds.
Step 7: Funding
Once all parties have signed the loan documents, they
are returned to the lender for review of the package.
If all the forms have been properly executed, a check
is issued to fund the loan.
Step 8: Recordation
Upon receipt of the loan funds, the Title Company
will record the legal documents necessary to transfer
the property into the buyer’s name. At the same
time, the deed of trust is recorded to show the new
loan on the property. Escrow is now officially closed
and the buyer now owns the home.
