Real Estate 103 – The Loan Process (Alabama Version)

Reach your home ownership goal by being prepared!

The process of obtaining a mortgage can be scary if you do not know what to expect. Your lender will be a great resource and should be available to answer any specific questions relating to your transaction, but we wanted to give you an overview of the loan process so you can be prepared on what questions you might need to ask. This will not be every single thing relating to mortgages, but it will give you a good foundation to work off of. First, we will discuss the various types of mortgages (aka "loans").

Conventional
"A conventional loan is any mortgage loan that is not insured or guaranteed by the government (such as under Federal Housing Administration, Department of Veterans Affairs, or Department of Agriculture loan programs). Conventional loans can be conforming or non-conforming." 1

Conventional loans can be as little as 3% down payment for first time buyers, and goes up from there. If you put 20% down with a conventional mortgage, you will not have to pay any private mortgage insurance (PMI) in addition to your regular interest/principal payment.

USDA
"The Rural Housing Service (RHS) offers mortgage programs that can help low- to moderate-income rural residents purchase, construct, and repair homes. The RHS both lends directly to qualified borrowers and guarantees loans that meet RHS program requirements made by approved lenders. The RHS is part of the U.S. Department of Agriculture (USDA)." 2

USDA loans are designed to help residents in rural areas qualify for a mortgage and not have to pay a down payment. Closing costs and prepaids still have to be paid - This is separate from a down payment. There are income limits based on areas and the home's address must qualify for the USDA loan. You can search addresses on this map to see if they qualify.

VA
"The Department of Veterans Affairs (VA) offers loan programs to help servicemembers, veterans, and their their families buy homes. The VA does not make loans, but rather sets the rules for who may qualify, arranges the terms under which mortgages may be offered, and guarantees any loan made under the program. Some VA loans are available with no down payment." 3

VA loans are specialized programs to help veterans and their families buy a home. There is no down payment required typically, but there are VA funding fees that are required. You may be eligible for no funding fee if you meant certain criteria, so be sure to check with your lender.

FHA
"The Federal Housing Administration (FHA) administers a program of loan insurance to expand homeownership opportunities. FHA provides mortgage insurance to FHA-approved lenders to protect these lenders against losses if the homeowner defaults on the loan. The cost of the mortgage insurance is passed along to the homeowner. The standards for qualifying for these loans are generally more flexible than for conventional loans. The FHA is part of the United States Department of Housing and Urban Development (HUD)." 4

FHA loans are very common. These require 3.5% down payments typically and also have PMI in addition to principal and interest in your monthly payment. There is an option to pay the PMI up front, so check your lender.

Regardless of your loan type, there are many things you need to keep in mind. We will also cover a few loan specific cases below.

Your earnest money will be applied at closing and is not an additional charge. If you do not have to bring any money to closing, you will be refunded and see a breakdown of the refund on your closing disclosure. Your lender has to track this, so please ensure the deposit is done in accordance to the contract terms in a timely fashion so there are no loan delays caused. This also needs to be from an account ok'd by your lender.

Anything you do financially during the process, even before writing any offers, double check with your lender.

Keep in mind they see bank statements. If you have and PayPal, CashApp, Venmo, ApplePay, etc. or large cash deposits into your account, that might cause a red flag in underwriting. They want to ensure your funds are from verified and legal sources. They do not log into your accounts for these apps, but if it shows on your bank statements, they may ask for your statements of those apps and explanations of what the charges/deposits from those items are.

Disclose everything your lender asks. The underwriters probably already have a way to verify what you're telling them or the documents you're sending them are true, so be sure to be completely honest and up front about your situation(s) from the go.

If you're buying a remodeled home, FHA has an "anti-flip" rule. The current owner must have a recorded deed with the county that is at least 91 days prior to you ever even writing an offer. If you write an offer prior to these 91 days, underwriting will likely kick it out.

There are down payment assistance loans, local bank loans, ARM loans, in-house loans, balloon notes, portfolio loans, and the list goes on. If you tell your lender and agent what your situation is, they will work to find the best product out there for you.

If you plan to borrow money for down payment or closing cost funds, be sure to tell your lender up front. There is specific paperwork required for this process. DO NOT JUST TRANSFER OR DEPOSIT FUNDS FOR THIS REASON WITHOUT CONSULTING WITH YOUR LENDER. This is a process called gifting funds.

Let's talk appraisals.

Appraisals are different than home inspections. Appraisals will likely be required by your lender if you are obtaining a mortgage to purchase the property. The appraiser will be looking for anything which the guidelines of the loan state must be fixed for your loan to go through. So, the appraiser may require some repairs, but is not as thorough as an inspector. The appraiser typically DOES NOT go into attics, under houses, on roofs, or check everything that a home inspector does. The appraiser completes a report for the lending institution proving value based on comparable properties that have sold in the area, typically within the last 12 months, and typically is subject to minor repairs (if any). Just because the home inspection finds certain things you think should be repaired does NOT mean the appraiser will show the same items. Loans have specific guidelines when it comes to repairs. THE APPRAISAL AMOUNT ON THE TAX RECORDS IS NOT A TRUE INDICATION OF ACTUAL VALUE.

Are down payments considered part of closing costs? What are prepaids? Who pays the real estate agents?

Some loans require down payments which are not considered a closing cost or prepaid item. This is typically a percentage of the purchase price and has a wide range depending on your loan type. For example, standard FHA loans require a 3.5% down payment. USDA loans do not require any down payment, but some properties are not eligible for these loans due to location. Your lender is a great resource for loan information, and not all lenders are the same or provide the same service.

Closing costs are just that, costs associated with the closing itself. These may include lender origination fees, title fees, document prep fees, attorney fees, recording fees, etc. Prepaids are typically mortgage interest, real estate taxes, homeowner’s insurance, hazard insurance, private mortgage insurance, and any special assessments (usually related to real estate taxes). In order to create an escrow account, your lender needs money to place in the account. At closing, you’ll be asked to pay a portion of your taxes and insurance, including private mortgage insurance if applicable, as prepaids for this purpose. Depending on when you close, you may not have a payment due for another 30-45 days which would delay your lender being able to fully set up your account in their system. Including a portion of these items in your closing allows them to have your account ready for future deposits and disbursements before your first payment is made. You may ask the Seller to pay for closing costs and prepaids, but the amount they can pay might be limited depending on your loan type.

I'm prequalified/preapproved, so I'm 100% sure my loan funding is going to go through, right?

If you have been PRE-qualified/approved for a mortgage for your home, you might be assuming you can breathe easy now and just concentrate on packing and preparing for your move. Not yet. While most of your hard work of building a good credit profile and amassing savings for a down payment and closing costs is behind you, it’s important to remember that your lender will recheck your credit just prior to your settlement date and will also verify a few details such as your place of employment to make sure NOTHING HAS CHANGED. That’s the key phrase — “nothing has changed.” You must take care to maintain the same credit profile that led to your loan approval until your mortgage paperwork is completely signed. Avoid the following actions to ensure a smooth settlement:

❌ Don’t apply for new credit: It may seem natural to apply for a credit card at a home improvement store or a furniture store when you are about to become a homeowner, but applying for credit can lower your credit score. Not only will you lose a few points because of a credit inquiry, but if you are approved for new credit, a lender may worry that you will spend up to your new credit limit and then default on your loan.

❌ Don’t close any credit accounts: You may be feeling that this is a good time to get your financial house in order by closing unused credit accounts or transferring your debt to a new credit card with a zero-interest balance transfer offer. While that’s a smart move financially, it’s a bad one for your credit score because you lose points when you have a higher usage of debt compared to your limit on one credit card and to your overall credit availability. Wait until your closing is complete before you make these changes.

❌ Don’t move your money around without a paper trail: Your lender will need the most recent bank statements before you go to settlement, so if you have any unusual deposits you will need to provide complete documentation of where the money came from. If possible, it’s best to move the cash you will need for your home purchase into one account before you apply for a mortgage. If not, make sure you have complete and accurate records readily available.

❌ Don’t increase your debts: In addition to your credit score, your debt-to-income ratio is extremely important to a loan approval. If you take on more debt you could be in danger of going above the maximum acceptable debt-to-income ratio.

❌ Don’t skip a payment or make a late payment: One of the most important elements of your credit score is your history of on-time, in-full payments, so don’t get so caught up in your move that you forget to keep up with paying basic bills.

❌ Don’t buy a car: You may be feeling that a new car would be a nice addition to the driveway of your new home. Resist that feeling. Even if you can easily afford a new car, the depletion of your savings or the addition of a new car loan could derail your mortgage application. Wait until after you have moved to switch to a new car.

❌ Don’t change jobs if you can help it: While a job change could mean a raise or a path to a better future, it could also delay your settlement. Your lender needs to verify employment and will need paystubs to prove your new income before your loan can go to settlement.

❌ Don’t spend your savings: You’ll need cash on hand at the settlement for your down payment and closing costs and your lender may even verify your cash reserves one more time, so make sure the funds stay in place.

In other words, no matter how hard it is at this exciting time, it’s better to do nothing than to do anything.

If I spend money on inspections and appraisals and closing doesn't happen, do I get reimbursed?

There are costs you may potentially incur during the home buying process that may be “out of pocket”, even if the house does not close and you do not purchase the property. Some of these costs may become part of your loan, some may need to be paid prior to close. You will NOT be reimbursed of these costs regardless of the reasoning for the home not closing.

We try to provide you with all the things you need to know, but surprises come up. Please be aware your agent (or lender) does not like to deliver bad news, but things happen that are out of our control at times. Most importantly, try to keep a positive attitude!

Phew, that was a lot to get through... But trust us, you're now much more prepared! You're now ready to move on to Real Estate 104. Continue on if you're ready to keep learning, or keep an eye out for our next email!