Making An Offer
In order to even begin the home buying process, you’ll want to know what you’re able to afford by working with a lender that can help you get a pre-approval. Pre-approvals are preliminary evaluations of potential borrowers by a lender to determine the buying power of a prospective homeowner. In order to obtain a pre-approval, your lender will need to review your financial documents to determine a budget that best fits your situation. This budget is based on a number of things including creditworthiness, your debt-to-income ratio, as well as how much money you have left over after all bills, including this new mortgage, are paid. This budget, known as residual income is one the most important factors for a lender to consider when determining a service member’s approval amount.
Pre-approvals are crucial when going home shopping so you know what you can afford before you even begin the process. They help you prove to the potential seller that you are committed to buying a house and are able to make a serious offer.
What to Consider When Making an Offer
When you’ve found the house of your dreams there are a few important things to understand and determine before you make an offer. Working with a real estate agent can prove very beneficial at this point because they can help you make a calculated offer that is in line with the market and can negotiate with the seller / seller’s real estate agent to help you get the best deal.
Your real estate agent will help you strategize before you approach the seller on all the specifics of the offer. This includes the price you’re willing to offer, what contingencies you want (if any), and how much earnest money you plan to deposit. A common misconception in the real estate industry is that the price a home is listed for is the price a buyer has to pay. Instead, the listing price is the price that the seller likely hopes to receive for their property and is often determined by comparable homes in the area and the market trends.
As a buyer, you can also use these factors to determine what you are willing to pay. It’s important to note that this is the first step of the offer process, and the seller may come back with a counter or deny your offer entirely, so you’ll want to ensure what you offer is fair and includes stipulations you feel comfortable with. Some examples of contingencies you can add are:
- Home Inspection
These give you as the buyer some peace of mind that you can walk away from a sale should any issues come up throughout the process from the offer to closing in relation to the contingencies you state up front.
What is Earnest Money?
Earnest money, also known as a good faith deposit, is essentially a deposit that you submit in good faith up front showing that you mean business. This is not at all required, but if you’re able and serious about the home, this could help make your offer even more attractive. Typically, earnest money is between 1% - 5% of the total home price and will be held in an escrow account and applied at closing to your down payment or closing costs.
Offer Letters and Negotiations
After you’ve determined what you’re willing to offer, it’s time to submit an offer package, which is much easier to do with the help of a real estate agent. The seller can then decide to either accept it, reject it, or counteroffer. If the seller counters, the ball is back in your court and you can decide what to do next. Often the counter includes an increase in price from what you initially offered, or a shortened home buying timeline. It is your job now to decide if this counter offer is worth accepting. If it is not, then you can in turn counter back, and the process continues back and forth until a resolution (or none at all) is found.
After an offer has been accepted, either during the first go-around or after some back and forth negotiations, you should be ready to proceed to the next part of the homebuying journey, known as “escrow”. Escrow is a general industry term that means that a tentative agreement between buyer and seller has been finalized and because of that, an escrow account is opened. Escrow accounts can be thought of as a joint bank account between buyer and seller where all fees, loans, and monies will pass through during the “escrow” timeline.
Processing & Underwriting
The first step a lender takes once an offer has been accepted is to submit the loan to processing. This is when the loan officer recollects and verifies all the necessary documents in order to prepare the loan for underwriting. Assets, income, and employment documents all go through a preliminary review during processing and this is also where your lender will order a variety of services needed to learn more about the home and close on the loan. These services included a title inspection to verify that no one else has rights to the property, a home appraisal to determine the value and quality of the home, and various other services needed to learn more about you as a prospective buyer.
The next step, after a processor does their preliminary evaluation, is to underwrite the loan. While the term “underwriting” is used often throughout the home buying journey, very few people, especially those who aren’t working directly with home loans, truly understand how it works. Underwriting is the process through which a lender or bank reviews the financial risk of a loan for a fee. Underwriters are tasked with assessing the degree of risk that lender or bank will face with the loan so they can set fair and reasonable terms. The risks associated with your particular situation generally determine your interest rate, length of mortgage available, and which monthly expenses are included with your home loan.
What Underwriters Look At
In order for underwriters to verify that the borrower is able to (and will likely) make payments, they will need to look at their credit history, employment records, financial records, and value of any collateral offered. Borrowers that can prove they don’t have a history of late payments, and have enough income now and in the future to manage payments are generally considered a satisfactory risk for lenders. Underwriting is a necessary step that helps lenders and banks determine that borrowers will be able to make payments for the duration of the loan and thus has specific requirements set forth by the lender and the VA.
Documents Borrowers Need to Provide
Underwriters will need to obtain very specific documents and verifications in order to complete the underwriting process and approve a loan. These documents include:
- Credit report to ensure the borrower has a good credit score and no red flags on past credit like bankruptcy or other financial issues.
- Employment verification to show how much income borrowers have now, and any anticipated additional income as laid out in employment agreements. Documents to help with this include:
- W-2’s from the last two years.
- Pay stubs from the last 30-60 days prior to applying.
- Account information including statements from all bank accounts such as checking, savings, and retirement accounts.
- Any additional income or liability information like dividends, overtime, pension, child support, etc.
- Certificate of Eligibility (also known as COE and document specifically needed for VA Loans only) in order to identify a few critical factors specific to veterans and service members. First, the amount of available entitlement for the veteran or military member is determined, then the status of exempt/non-exempt from the funding fee is confirmed and finally the amount of VA monthly service-connected disability compensation is checked.
If all of these documents are checked and approved, underwriters can issue a “clear to close'' which means borrowers are ready to go to the final stage of the process, closing.
Appraisals & Inspections
While the lenders and underwriters are busy processing the loan, there are a few other steps that need to take place before heading to the closing table. This includes a home inspection, home appraisal, and pest or termite inspection as necessary. Home inspections generally occur when there’s a sale of a home, rather than when there’s a refinance. The buyer will hire a certified home inspector of their choice who comes and looks closely at every aspect of the home. From the roof to the basement, home inspectors check everything in the structure and provide a full visual report. The goal of an inspection is to determine if there are any health, safety or major technical issues with the property.
Home appraisals on the other hand are a review of the property’s fair market value and a check against the VA or lenders requirements for the quality of the home. These typically happen within a week after the home inspection is final. It makes the most sense to wait until everyone involved in this loan has agreed upon a price, repairs and any credits. This is one of the final steps in the process, as now it’s time to determine the fair market value.
Process of Home Appraisals
If you are buying a home using the VA Home Loan, you will need to have a VA-approved appraiser evaluate the property as the VA has stringent requirements regarding homes guaranteed by the government. Fees associated with appraisals are to be paid by the buyer and the appointment will be set up by the lender and selling agent after the offer has been accepted.
Once your lender orders the appraisal, the appraiser will contact those living in the property or the selling agent to schedule a time for a walk through. They will then conduct a full walk through and assessment of the property and determine the value. If the appraisal determines the property is at or above the contract price, everything will continue as planned. As mentioned above, sometimes there is a hiccup in the process due to the appraisal value. If the price comes in below the contract price, you might experience a delay in the transaction. Either way, your lender will be a great asset, communicating with you along the way, so you can feel confident going into closing.
Process of Home Inspections
Home inspection reports are incredibly detailed as the inspector is doing a full analysis of the property condition. While inspectors review the home in full, there are very specific things they look for on a checklist that helps generate a report. These include structural elements like walls, ceilings, floors, foundation, and roof. In addition to examining the structure of the home, they look carefully at systems and appliances. The main ones inspected include the heating system, air conditioner, plumbing and electric system. If the home has a basement and/or attic the inspector will also spend a great deal of time reviewing these.
Home inspectors look at hundreds of variables that determine the condition of a property. While they can look at the home on the surface, there are a few things that the blind eye can’t determine. In addition to a home inspection, a buyer may opt to bring in a plumber or sewer specialist to inspect the home's inner pipes. It’s important to know what flaws the home holds both visibly and under the surface before finalizing a sale.
Closing on your home
After you’ve had an offer accepted, gone through the full approval process and all inspections and are ready to go, your lender will clear you for closing. Your closing date will be set far in advance but might vary slightly during the process.
The closing process is pretty straight-forward and when you finish signing the final loan documents, you’ll receive the keys to your new home. Closing happens during both a new property purchase and refinance and for the most part the process is the same. We’re here to help you understand the closing process including what to expect and prepare so you’re set for success.
When Closing Happens
Closing typically happens four to six weeks after you initially start the loan process. If you’re purchasing a home, closing is the final day in the process where everyone meets to sign documents and make the transaction official. It’s important to note that sometimes closing is also referred to as “settlement”. If you’re refinancing a home, there are less people involved in the closing process, but it is still your final step in completing the loan.
What to Expect at Closing
Since closing is the final step in the process, most of the paperwork and required documents will already be submitted. When you attend closing there may be a few things to bring that your lender will inform you of ahead of time. Some of these items may include your driver’s license or ID, any paperwork you signed throughout the process, and your checkbook for any final money due at closing. You can review your loan estimates and closing disclosure to verify any cash-to-close (C2C).
Wet signatures are important to the loan process and you can expect to sign a lot of documents at closing. While there are many different papers to sign, there are a few to pay close attention to. A deed of trust or mortgage, the promissory note and a closing disclosure. The deed of trust or mortgage puts a lien on your property as collateral for the loan. Your promissory note is a legal agreement to pay the lender. This document will include key information like when you will make payments and how to make those payments. A closing disclosure is a list of your final credits and charges including closing costs and final purchase price.
Once you finish signing all the documents during closing your work is done. Your closing agent will provide you with a full packet of copies for your reference and you’re good to go. If you’re purchasing a new property you may even be able to move in as soon as the appointment is over. Keep an eye out on the mail for information on how to make your first payment on this new loan. If there are any overages in payment or escrow due to a refinance you may even receive money back.