PRE-APPROVAL ∙ OFFER ∙ UNDER CONTRACT ∙ SETTLEMENT ∙ FAQ ∙ GLOSSARY

Before searching for your new home, you are encouraged to review your financial situation and create a budget. The first step in this process is the Pre-Approval. Your mortgage lender will require certain documents in order to qualify you for your loan and to provide a “Pre-Approval”.

Two most recent pay-stubs
W-2 forms for the past two years
Federal Tax Returns for the past two years
Two most recent bank statements
Any long-term debt information (credit card balances, auto loans, school loans, etc.)

In order to expedite the approval process, you should have as much of this information available before contacting a lender. Without it, they won’t be able to provide accurate estimates and eventually, your Pre-Approval Letter.

Given the competitive nature of our market, you will want to present the best possible financial picture to the property sellers. A complete and thorough Pre-Approval Letter from a local lender is an important component.

Learn more about mortgages and interest rates from our friends Scott Silverstein with Caliber Home Loans

Pre-Approval

Offer

Once you have found the home that is best for you, it is time to consider an offer. As your buyer’s agent, we will help you assess the home’s true market value, the seller’s motivation, the cost of necessary upgrades, and other factors that might influence your offer.

Things to consider when determining to offer:

How long the house has been on the market? If it has been on the market a long time, the sellers might be willing to accept a lower price.
How does the house compare with others in the neighborhood?
Is the house in need of major repairs or substantial updates?
How old is the roof and other major systems? How many more years are expected to their useful life and/or functionality?
Where have home prices gone recently in the selected market?

A competitive market analysis (CMA) will be prepared for you by your agent and will include comparable properties that are either under-contract or have sold within the last few months.

Along with your offer, you will have to provide a Pre-Approval Letter from your lender and an Earnest Money Deposit (EMD) that shows your “good faith” in purchasing the property. In today’s market, it is customary to provide a 3%-5% earnest money deposit. The Earnest Money Deposit check should be made payable to the settlement company that will be performing your closing. In most cases, your EMD is applied to your down payment amount and credited towards your purchase.

As your Realtor®, we will work with the listing agent in negotiating the other terms of the contract. The most common negotiation points include: sale price, seller’s credit, closing date, inspections, etc. Once the contract has been negotiated completely and both parties agree to all terms, the document is officially “ratified”, becoming a legally binding purchase contract, and you will begin the steps toward closing.

Under Contract

The home inspection is a critical process and should be performed as soon as possible after ratification. We will gladly provide recommendations for professional home inspection companies that specialize in your type of property.

// Ratification

// Loan Processing

Upon reaching written mutually agreeable terms between the buyer and the seller the contract is considered “Ratified”. Your agent will send you a PDF electronic copy of the ratified contract as well as a hard copy for your records.

The information you provided your lender up to this point was required to provide the pre-approval. Additional information will be required by your lender to begin the Formal Loan Application Process. Your agent will provide your lender a copy of the Ratified Contract and you are encouraged to contact the lender immediately to begin the formal application. This information is provided to the Loan Processor who packages the information together and delivers to the Underwriter. Please keep in mind that until the Underwriter signs off on the loan, the loan is not completely approved. Additionally, it is not uncommon for the Underwriter to request additional information along the way. Examples of this might include statements from savings accounts showing deposits, withdraws from 401K accounts, etc. Do not panic if the underwriter requests the information. They are simply reviewing the information to ensure the marketability of the underlying mortgage.

Your lender will order the appraisal for the property (if required). In most cases, the appraiser will contact the listing agent to schedule a time to tour the property. This is the opportunity for the listing agent to provide comparable data, additional information about the property or surrounding neighborhood, and answer any questions the appraiser might have. Appraisals are generally returned to your lender within one week from the appraisal date. Your agent will follow-up with your lender to ensure a timely appraisal. Please refer to the appraisal section of the Regional Sales Contract for detailed information on the contractual relationship surrounding the appraisal.

// Home Inspection

// Homeowner’s Insurance

It is very likely you will be required to have a 1-year homeowner’s insurance policy effective prior to closing on your home. Please contact the settlement attorney for more detailed information on your insurance requirements. He or she might require information from the insurance provider to process the settlement efficiently.

Our preferred Homeowner’s Insurance point of contact is Alex Stewart with Firefly Agency.

// Settlement Company

We will discuss your options regarding a settlement company. The settlement companies that we recommend are experienced and professional organizations that are trusted names in the industry. The settlement attorney’s job is to make sure the ratified contract is carried out to the letter on the day of settlement. As such, he or she “represents the contract” rather than any of the participants. The settlement attorney also makes sure the property has changed hands properly during previous transactions and that there are no outstanding liens on the property that might inadvertently convey to you – the purchaser. All the forms you will sign at settlement (and there are many of them) are issued by either the lending institution or a governmental body and typically cannot be changed.

// Title Insurance

Title insurance is protection for both owners and lenders against financial loss from defects in title to real property and from the invalidity or unenforceability of mortgage liens. Title insurance is highly recommended (and often times required) and is purchased through the settlement company. Title insurance is basically a special type of insurance policy that protects the LENDER against things that might have happened in the past – rather than something that might occur in the future. In essence, an extensive search of public records is performed by the title company to validate who held title to the property in the past. The lender requires this information to ensure there are no liens, judgments, or easements on the property.

Title insurance also guards against hidden risks or unknown factors that could affect you as the new owner – such as unknown heirs, forged deeds or wills, misinterpreted wills, or defects in recording previous title. Title insurance also covers the cost of the title search, and legal fees that might result from a dispute over past property ownership.

// Pre-Settlement Walk-Through

Prior to settlement (usually the day of or the day before) we will conduct your pre-settlement walk-through to ensure that the property is in substantially the same condition as when you signed the contract to purchase. You will also confirm that any repairs stipulated under the terms of the contract have been completed. If any items are outstanding we will inform the listing agent immediately to resolve any issues prior to settlement.

// Utilities

// Closing Funds

// Settlement

// Types of Ownership

It is recommended that you contact the utility providers and transfer utilities into your name effective the day of settlement. Pursuant to the Regional Sales Contract, the utilities should remain on in the seller’s name through the date of settlement.

The funds required to close will be provided to you on your Good Faith Estimate by the lender and an exact amount will be provided on your Closing Disclosure. The Closing Disclosure is the required government document that discloses all costs and fees associated with the transaction. Your closing funds will need to be in the form of a CASHIERS or CERTIFIED CHECK payable to the settlement company. Should the amount of closing funds change at settlement, the settlement company will generally accept a personal check up to $1,000.

The big day is here and you will officially become a homeowner! Remember to bring the following items with you to the settlement:

Drivers License for Identification
Cashier’s Check for “Cash to Close”
A list of any questions from your Closing Disclosure review

Before settlement, the closing company will ask how you would like to take ownership of the property. Below are the four types of ownership options:

Sole Ownership – Only one person owns the property.
Tenants in Common – Two or more persons have an undivided ownership in the property. The percentage of ownership need not be equal; each party has a right to sell his interest, and upon the death of any of the owners that owner’s interest in the property goes to the deceased heirs.
Joint Tenants – Ownership taken by two or more persons at the same time in equal percentages with an undivided right to possession. If one owner dies, his or her interest goes to the remaining owner.
Tenants by the Entirety – Owners are married and together they hold title to the property with a right of survivorship. Upon the death of either, the survivor takes sole ownership to the exclusion of the deceased spouse’s heirs.

Please contact your selected settlement company for more information of the Types of Ownership. Additionally, please consult a tax professional if taxable implications of the property are of concern.

Settlement

The real estate closing is the meeting at which the sale is finalized and you assume official ownership of your new home. Money is exchanged and forms (many forms!) are signed. By the end of the meeting, the property is yours!

Most closings are actually two separate closings: 1) closing on the purchase of real estate and 2) closing on the mortgage loan that you are taking out to make the purchase.

Documents you can expect to see at closing include:

Closing Disclosure – What was once two forms, the Truth in Lending Statement and the HUD-1, has become a combined document. The Closing Disclosure Form (CD) discloses to the borrower an estimate of the annual cost of the loan AND the total cost of the loan over the full term – including all costs and fees associated with obtaining the loan. It also outlines all charges being assessed to both the buyer and the seller.
Mortgage Note – The note is simply your agreement to repay the borrowed funds to your lender. The note will include the terms and conditions as well as the manner of repayment options.
Deed of Trust – The Deed of Trust is the legal security instrument that establishes the lenders lien on the property for the amount of the loan. It also secures the home as collateral for the repayment of the loan.
Loan Commitment Letter – This letter from your lender will confirm the terms of the loan, interest rate, and length of the loan. It will also note any other requirements such as hazard insurance, survey, or termite inspection.
Loan Application – Your lender will typically require you to sign a printed copy of your loan application that you previously provided during the loan application process. You will verify that the information is correct and that there are no major changes to your employment, income, debts, etc.
Name Affidavit – This document includes any other names you are known by that may have been included on your credit report or other loan processing documents
Flood Insurance – The Flood Insurance document will indicate whether or not your property is located in a possible flood zone. If is it, the lender may require you to carry a flood insurance policy on the property.
Tax Authorization – Your lender might require you to sign written instructions to the Tax Authority instructing them to bill your lender for future tax payments.
Termite Inspection – If a termite inspection was required or performed as part of your contract, you will likely sign a copy of the termite inspection report at settlement.
W-9 – This IRS form is completed and submitted to the IRS so you can make mortgage interest deductions come tax season.

After your settlement, the closing company will finalize and record documents by completing the following: record the deed or deed of trust in the land records at the courthouse, audit the disbursement instructions, disburse proceeds, issue the title insurance policy, send signed loan documents to the lender, pay off the seller’s lender, and obtain record of release of the Seller’s Deed of Trust.

FAQ

Q: How are real estate agents paid?

A: Real estate agents (and the brokers with whom they are licensed) are usually paid a commission. A commission is a fee, often calculated as a percentage of a home’s sale price, paid to a real estate broker. The broker then divides this fee, sharing it with the real estate agent and cooperating broker/agent (if any) in the transaction. An agent skilled in marketing, negotiating, and in closing the transaction often can make you more money than the fees you pay them. By law, there is NO set commission schedule for real estate transactions. Typically, the agent commission IS PAID BY THE SELLER.

Q: How are buyer’s agents compensated?

A: It used to be that seller-only agency was “customary” in residential real estate. The real estate commission was thought to be paid by the home’s seller, deducted from the home sale proceeds at the time of closing. Real estate agents and brokers represented the interests of the property’s seller; the buyer was unrepresented in the transaction – and usually not even aware that this was the case!

This “conventional wisdom” changed across most of America, during the 1990s: without buyers, nothing sells. The real estate commission is derived from the proceeds of the home sale, and is really paid by both buyer and seller. Both parties are entitled to an “agency relationship,” and the representation it entails.

With the advent of buyer agency, homebuyers are now able to be fully represented by a real estate agent in the purchase of property. In most states, it’s rare that buyers would pay their agent/broker directly for services in finding and purchasing a home. If a broker does charge buyers a direct fee, it should be outlined in an exclusive agency agreement that the buyer signs when engaging the broker.

When a buyer is represented by a real estate agent, she/he comes to terms on which services the buyer-client is seeking, and the manner in which the agent will be compensated for providing those services. In most cases, a fee or commission is still derived from the seller’s proceeds of sale, and shared between the seller’s (listing) and buyer’s (selling) agents and brokers.

Q: What typically goes into an agreement for buyer representation?

A. Like any contract, a buyer representation agreement needs beginning and ending dates, acknowledgement of your willingness to be represented by the company and its agent, and what (if anything) you will pay for real estate-related services.

Q: What is an Agency Disclosure?

A. An Agency Disclosure is a state-required document, disclosing to you as a principal in a real estate transaction (in this case, the buyer) whom the agent(s) in that transaction represent. A state’s Agency Disclosure simply notifies you of that state’s agency laws; it does not obligate you to work with any particular agent or broker.

Q: How are buyer’s agents compensated?

A. It used to be that seller-only agency was “customary” in residential real estate. The real estate commission was paid by the home’s seller and deducted from the proceeds at the time of closing. Real estate agents (and the brokers with whom they were licensed) represented the interests of the property’s seller. The buyer, however, was unrepresented in the transaction – and usually not even aware that this was the case!
With the advent of buyer agency, this need no longer be the case. Home buyers are now able to be fully represented by a real estate agent in the purchase of property.

The buyer and real estate agent come to terms on which services the buyer-client is seeking, and the manner in which the agent will be compensated for providing those services. In most cases, a fee or commission is derived from the sellers proceeds of sale and shared between the seller’s (listing) and buyer’s (selling) agents.

Q: Should I buy first … or sell first?

A. The answer to this question lies squarely with you. Do you need the equity that’s built up in your present home to complete the purchase of your new home? If so, you either need to sell first or consider a bridge loan or house sale contingency. We strongly suggest that you engage a real estate agent with whom you can enter a trusting relationship. Then discuss this question with him or her, touching on every aspect of what it may mean for your particular situation.

Q: I’m thinking about buying a home. Where do I start?

A. The first step in the plan for potential homebuyers is a credit check. It’s best to keep an eye on your credit reports so you can spot any mistakes and dispute them. Also, avoid running up high credit card bills in the months prior to buying a home.

These two things will help you in the next phase of your game plan, pre-approval on a mortgage. A full-service real estate broker will be able to help you with this portion of the plan. Pre-approval includes analyzing your income, assets and present debt to estimate how much house you can afford. This means the lender has committed to loaning you the money subject to the house you choose to buy. Being pre-approved for a loan will make you attractive to sellers because the contract won’t be tied up with financial issues.

After you know how much you can spend, you are in the homestretch. This is the time for you to become familiar with neighborhoods and the features of a home. Educate yourself by visiting local real estate Web sites and viewing the inventory of listings. This is also the time for you to decide what you want and need in a home.

Q: Why do I need an agent to help me find a home with all of the technology and advertising available?

A. The Internet and newspaper ads are good places to start researching what the current housing market is like. You can also find information to help answer many of your financing questions. Once you have looked at what’s available to you it’s time to get a professional involved. You might spend hours scanning newspaper ads and home magazines, driving through neighborhoods looking for “for sale” signs or phoning on individual listings, and still miss the opportunity to see some of the best homes available.

Q: What should I consider when I start to look for a home?

A. First, put together a list of features and benefits you want in a home. Think of such things as pricing, location, size and amenities. If you can’t get a home at the price you want with all the features you are looking for, figure out what features are most important to you and rank them in priority so you know what you’re willing to give-and-take. Would you rather have a large kitchen and smaller bedrooms? Also consider your needs in the future. Maybe now is the time to buy a larger home rather than expanding a smaller home in the future. Your Realtor can also help you compare the price of homes with the features you are looking for or suggest alternate uses of space.

Q: How do I choose between renting or buying?

A. Owning a home offers tax benefits as well as the freedom to make decisions about your home. Homeowners, unlike renters, can secure a fixed-rate loan and lock in their monthly payments and make investment plans knowing these expenses won’t change substantially. However, rent can go up each year without the renter’s input. Renters are at the whim of their landlord, while homeowners are in control of their property when it comes to decisions, such as whether they allow pets, any decorating or improvements that are permanent.

Q: As a buyer, do I have the right to obtain past information about the property I am interested in purchasing?

A. Yes. Sellers are required to disclose all known defects associated with the property. With the help of your Realtor, you can find out what has happened to the property in the past. You should make careful observations, examine the property and request or otherwise obtain any records important to you. These requests should be in writing. If you decide to put an offer on a home, it is important to have a professional inspection completed before closing.

Q: If I am thinking about buying a newly-constructed house, why do I need an agent?

A. Building a home often requires hours of research and decision-making. You must first decide what area you want to build in and which builder you want to work with. After these initial decisions, you still have many choices of floor plans, building materials and fixtures. Personalization and freedom of choice are some of the benefits of building a home, but they can also be very stressful. An agent will guide you through the entire home building process and help you along the way should you need it. You’ll still get to make the choices on your own, but your agent will be there to help, keeping your best interests in mind. Also, buyer representation comes at no cost to you.

ADJUSTABLE RATE MORTGAGE (ARM): The interest rate on this type of mortgage is adjusted up or down depending on a specified financial index.

AGENT: Acts on behalf of another, representing that person’s interests and serving as an intermediary

AMORTIZATION: Used in describing paying off the loan balance – A method of equalizing the monthly mortgage payments over the life of the loan, even though the proration of principal to interest changes over time. Generally, in the beginning of the loan term the portion of principal repayment is very small and interest repayment is very high. Typically, that relationship is reversed at the end of the mortgage term

ANNUAL PERCENTAGE RATE (APR): The actual finance charge for a loan, including the points and loan fees in addition to the stated interest rate

APPRAISAL: An experts judgment of the value of a property

ASSUMPTION MORTGAGE: Loan type where the Buyer assumes liability for an existing mortgage note held by the Seller. This is usually subject to the lender’s approval.

ASSESSED VALUE: The value placed on a property by a municipality for tax purposes. The assessed value can vary greatly from the appraised or market value

BALLOON PAYMENT: A large principal payment due all at once at the end of some loan terms

BROKER: A real estate professional who has a higher level of training than a real estate agent. The Principal Broker generally is the legal

representative of the office

CAP: The limit on how much an interest rate can change in an Adjustable Rate Mortgage (ARM)

CLOSING DISCLOSURE: What was once two forms, the Truth in Lending Statement and the HUD-1, has become a combined document. The

Closing Disclosure Form (CD) discloses to the borrower an estimate of the annual cost of the loan AND the total cost of the loan over the full term – including all costs and fees associated with obtaining the loan. It also outlines all charges being assessed to both the buyer and the seller.

COMMISSION: A fee, usually a percentage of the transaction, paid to a broker for services performed

CONDOMINIUM: A type of real estate ownership where the owner has title to a specific unit and shared interest in common areas

CONTRACT: A binding legal agreement between two or more parties that delineates the conditions for the exchange of value (Example: Money exchanged for title to a property)

CONVERSION CLAUSE: A provision that allows converting an ARM to a fixed-rate loan after a specified interval

DEED: A legal document that formally conveys ownership of property from Seller to Buyer

ESCROW: A fund or account held by a third-party until conditions of a contract are met

FANNIE MAE AND FREDDIE MAC: Privately owned corporations created by Congress that buy mortgage notes from local lenders and are responsible for the guidelines a majority of lenders use to qualify borrowers

FINANCE CHARGE: The total cost, including all fees, points, and interest payments a borrower pays to obtain credit

FIXED RATE MORTGAGE: Interest rates on this mortgage type remain the same over the life of the loan term

FIXTURE: A recognizable entity (kitchen cabinet, toilet, light) that is permanently attached to property and belongs to the property when it is sold

HAZARD INSURANCE: Compensates for damage from specified hazards such as fire and wind

HOME INSPECTION REPORT: Prepared by a qualified inspector, this report evaluates a properties mechanical , electrical, and plumbing systems

INTEREST: The cost of borrowing money – usually expressed and a percentage over time

LIEN: A secondary claim on property until a debt is satisfied

LISTING AGREEMENT: A contract whereby an owner engages a real estate agent for a specified period to sell property, for which the agent receives a commission

MARKET VALUE: The price that is established by present economic conditions, location, and general trends

MARKET PRICE: The actual price at which a property sold

MORTGAGE: Security claim by a lender against property until the debt is paid

MRIS: A system that provides to its members detailed information about properties for sale

NEGATIVE AMORTIZATION: A method of calculating fixed monthly payments in combination with a variable interest rate. When monthly payments are not enough to cover interest costs, unpaid interest is added to the principal balance

ORIGINATION FEE: An application fee for a processing the mortgage loan

PITI: Principal, Interest, Taxes, and Insurance. The sum becomes the basis for monthly mortgage payments

POINT: One percent of the loan principal. It is charged typically in addition to interest and fees

PREPAYMENT PENALTY: A fee paid by a borrower who pays off the loan before it is due

PREQUALIFICATION: Information estimate of how much financing a potential borrower might expect to obtain. The prequalification is done

before you begin looking at properties

PRINCIPAL: Amount of money borrowed for which interest is charged

PRORATE: Divide or assess proportionately. For example, real estate taxes will be prorated on your Closing Disclosure through the day of settlement

SETTLEMENT: All financial transactions required to complete contract performance / obligations

TITLE: The document that indicates ownership of a specific property

TITLE INSURANCE: Insurance policy that protects against loss from defects in title. Title insurance is paid for an effective as of settlement

TITLE SEARCH: Detailed examination of the entire Title document history to make sure there are no encumbrances

Glossary