RF_07 Instructor Materials PDF

7 The Financing Process Learning Objectives After completing this lesson, students should be able to… Explain the benefits of preapproval Perform the steps in the prequalification process Understand loan costs, such as origination f...

7 The Financing Process Learning Objectives After completing this lesson, students should be able to… Explain the benefits of preapproval Perform the steps in the prequalification process Understand loan costs, such as origination fees and discount points Discuss the purpose and the requirements of the Truth in Lending Act Describe the steps in the loan application process Understand the reasoning behind the underwriting process Explain the purpose of and the procedures used in the closing process Suggested Lesson Plan 1. Give students Exercise 7.1 to review the previous chapter, “Basic Features of a Residen- tial Loan.” 2. Provide a brief overview of Chapter 7, “The Financing Process,” and review the learning objectives for the chapter. 3. Present lesson content: Shopping for a Loan – Assessing the buyer’s financial circumstances EXERCISE 7.2 Preapproval © 2018 Rockwell Publishing  Financing Residential Real Estate Instructor Materials – Choosing a lender – Loan costs EXERCISE 7.3 Comparing loan costs – Evaluating financing options Applying for a Loan – Loan application form – Disclosure statements – Locking in the interest rate Application Processing – Underwriting decision Closing the Loan – Closing agent – Steps in the closing process EXERCISE 7.4 Application and closing 4. End lesson with Chapter 7 Quiz. Chapter 7 Outline: The Financing Process I. Shopping for a Loan A. Loan consumers should comparison shop for a loan, assessing their own needs and finances as well as comparing rates and fees B. Preapproval 1. Preapproval: formal process performed by a lender, which results in a preap- proval letter stating a maximum loan amount based on the buyer’s income and net worth 2. Benefits of preapproval: can make a buyer’s offer more appealing to a seller, and streamlines the closing process EXERCISE 7.2 Preapproval C. Choosing a lender 1. Buyers should research lenders by comparing interest rates and fees 2. May also rely on referrals to find a reputable and competent lender 3. Should be concerned with a lender’s expertise and efficiency as well as interest rates and fees 2  Chapter 7: The Financing Process D. Loan costs 1. Loan fees: usually stated in terms of “points,” where a point is one percentage point of the loan amount 2. Origination fee: a one-time service fee charged by the lender to cover administra- tive expenses associated with making the loan 3. Discount points: an additional charge imposed by a lender to increase the lender’s upfront yield on the loan 4. A lender usually charges a lower interest rate in exchange for a buyer paying discount points 5. A seller may pay discount points on a buyer’s behalf in order to “buy down” the buyer’s interest rate 6. Other fees: a lender may charge additional fees for application, underwriting, or document preparation 7. Mortgage brokers charge a fee; the amount should be disclosed in the loan esti- mate and closing disclosure E. Comparing loan costs 1. The Truth in Lending Act (TILA) is a federal consumer protection statute that requires lenders to make certain disclosures to help borrowers understand the true cost of the credit they’re considering 2. TILA generally requires disclosure of the annual percentage rate (APR), which is the relationship of the finance charge to the loan amount, expressed as an annual percentage EXERCISE 7.3 Comparing loan costs F. Evaluating financing options 1. Home buyers need to weigh considerations other than the loan costs, such as financial priorities, how long they will live in the house, and other investment op- portunities 2. Home buyer counseling programs offer assistance in deciding what financing op- tion is most appropriate II. Applying for a Loan A. Loan interview and application 1. Buyers will provide information to the loan originator that will be the basis for the loan approval or preapproval; buyers may also need to pay certain expenses, such as a loan application fee 2. The data provided on the application will include information about the ap- plicants’ employment, income, current monthly housing expense, assets, and liabilities 3  Financing Residential Real Estate Instructor Materials B. Disclosure statements 1. The lender will provide a loan estimate form, which discloses the overall cost of the loan, including annual percentage rate and closing costs C. Locking in the interest rate 1. Buyers may lock in interest rate on the application date, rather than running the risk of interest rates going up between the application date and the closing date 2. A lender may charge a lock-in fee III. Application Processing A. Underwriting decision 1. An underwriter will evaluate the loan application and decide whether to approve it, reject it, or approve it subject to conditions 2. Generally, if the buyer and property are approved, the lender issues a loan com- mitment letter IV. Closing the Loan A. Closing agent or escrow agent holds money and documents on behalf of the buyer and the seller until the transaction is ready to close B. Steps in closing process 1. Clearing and insuring title: the lender will want to ensure that the property is free of encumbrances that could interfere with its security interest 2. Inspections: the lender may require the property to be inspected, to make sure that the property is adequate collateral 3. Impound account: part of the buyer’s monthly payments will be deposited into an impound account; property taxes and insurance will be paid out of the account 4. Interim interest: because mortgage interest is paid in arrears, but no payment is due in the month following closing, a buyer will need to pay interest upfront for the partial first month’s interest 5. Closing disclosure: a closing disclosure form will be prepared for both parties, listing all charges and credits EXERCISE 7.4 Application and closing 4  Chapter 7: The Financing Process Exercises EXERCISE 7.1 Review exercise To review Chapter 6, “Basic Features of a Residential Loan,” read the following ques- tions aloud to students and have them jot their answers down on a piece of paper; discuss the answers together. 1. Compare a 15-year loan to a 30-year loan for the same amount. Which would be better for a young couple with a moderate income wanting to afford as much house as possible? Which loan might suit an older, financially established couple who is downsizing and wishes to avoid spending the children’s potential inheritance on unnecessary interest? 2. A home is selling for $405,000, and its appraised value is $400,000. If the buyer obtains a $360,000 loan, what’s the loan-to-value ratio? Compared to that LTV, would a 95% LTV be considered less risky or more risky for the lender? 3. Who usually pays for mortgage insurance, and what is the insurance for? Answers: 1. A 15-year loan has larger payments, and the total interest paid is much less. It also typically has a lower interest rate. A 30-year loan would be better for the young couple, while a 15-year loan would be a good choice for the older couple. 2. The loan-to-value ratio would be 90%, since the LTV is based on the appraised value or sales price, whichever is less. $360,000 ÷ $400,000 =.90. A 95% loan is riskier than a 90% loan; the higher the LTV, the smaller the downpayment and the greater the risk. 3. The borrower ordinarily pays for mortgage insurance, which protects the lender against loss in the event of default and foreclosure. If the borrower defaults and the net foreclosure sale proceeds (after paying off liens and foreclosure costs) don’t cover the amount still owed, the mortgage insurer will reimburse the lender for part or all of the shortfall. 5  Financing Residential Real Estate Instructor Materials EXERCISE 7.2 Preapproval Discussion Questions: 1. What is preapproval? 2. What are the advantages of preapproval over prequalification? Answers: 1. Preapproval is a lender’s commitment to loan up to a specified amount, as long as the buyer chooses a property that the lender will consider good collateral. To be preapproved, prospective borrowers must provide income and asset information. 2. Preapproval can be valuable in negotiations with a seller, because it shows that the buyer already has the necessary financing lined up. It also speeds up the closing process and removes some of the uncertainty from it. Prequalification, on the other hand, is merely an informal process (performed by a real estate agent or using an online calculator) designed to help a buyer determine an appropriate price range for her new home. It does not involve a lender and therefore isn’t considered a reliable indicator that the buyer will be able to obtain necessary financing. EXERCISE 7.3 Comparing loan costs Activity: Ask students to look at websites or newspaper ads for several lenders who are offering 30-year fixed-rate conventional loans in your area. Which lender has the best quoted interest rate? Which has the best APR? Is it the same lender? For each lender, how much is the difference between the quoted interest rate and the APR? How much are the origination fee and the discount points in each case? 6  Chapter 7: The Financing Process EXERCISE 7.4 Application and closing Fill in the blanks with the correct term. (Not all of the terms will be used.) October 1 Commitment letter November 1 Closing disclosure Lock in Prequalification Impound account Discount points Buydown 1. A loan application is denied on September 1. Federal law requires the lender to give the applicant a statement explaining why the loan was denied by _________________. 2. If both the buyer and the property have met the lender’s qualifying standards, the lender may issue a/an _________________. 3. A lender often requires a borrower to make deposits into a/an _________________ account, to ensure that property taxes and hazard insurance are paid on time. 4. A loan closes September 15. The borrower’s first mortgage payment will be due on _________________. 5. A loan applicant has to decide whether or not to _________________ the interest rate until closing. 6. When a transaction is finally ready to close, the escrow agent will prepare a/an _________________. Answers: 1. October 1 2. Commitment letter 3. Impound account 4. November 1 5. Lock in 6. Closing disclosure 7  Financing Residential Real Estate Instructor Materials Chapter 7 Quiz 1. A buyer sits down with a lender, completes 5. Which of the following items would not be a loan application, and submits supporting included in a borrower’s finance charge? documentation. The lender evaluates the ap- A. Buyer-paid discount points plication and states that it will lend the buyer B. Mortgage broker’s fee up to a specified amount. This describes: C. Origination fee A. preallocation D. Title insurance fee B. preapproval C. predetermination 6. Which of the following types of loans would D. prequalification not help buyers purchase the most expensive house they possibly can? 2. All of the following are true statements about A. 15-year loan choosing a lender, except: B. 40-year loan A. Internet research on lenders should be fol- C. 97% LTV loan lowed up by talking to loan officers D. Secondary financing B. Referrals are an excellent way to find a good lender 7. In a buydown, the: C. The buyer’s own bank may have special financing offers for existing customers A. lender charges a percentage of the loan D. The lender with the lowest interest rate is amount to cover administrative costs always the best choice B. lender will charge the borrower an addi- tional fee for underwriting services C. lender will forego all loan costs in exchange 3. A lender charges a fee of 1% of the loan amount for charging a higher interest rate to cover its expenses in issuing the loan and D. seller will pay discount points to lower the other overhead costs. This is known as: buyer’s interest rate A. a buydown B. an annual percentage rate 8. Which of the following costs is included in a C. an origination fee borrower’s finance charge? D. discount points A. Appraisal fee B. Buyer-paid discount points 4. Which of the following is true regarding the C. Credit report fees Truth in Lending Act? D. Seller-paid discount points A. It prohibits discrimination in lending based on race, color, religion, or sex 9. Which of the following is not asked on a Uni- B. It provides subsidies for low-income home form Residential Loan Application? buyers C. It requires lenders to notify applicants of A. Borrower’s credit score reasons why their application was denied B. Borrower’s employment information D. It requires lenders to disclose a loan’s an- C. Borrower’s marital status nual percentage rate D. Sources of borrower’s income 8  Chapter 7: The Financing Process 10. Which of the following is not considered a li- 15. The interest paid at closing for the period be- ability for an applicant? tween the closing date and the end of the month A. Alimony payments in which closing occurs is known as: B. Life insurance policy A. interest in arrears C. Revolving credit line B. interim interest D. Student loan C. prorated interest D. temporary interest 11. If an applicant decides to lock in an interest rate, this prevents what from happening? A. An increase in the loan’s interest rate be- tween the application and the closing date B. Negative amortization C. Periodic adjustments in the loan’s interest rate over the loan term D. Use of a prepayment penalty if the borrower repays the loan early 12. Which of the following does not in any sense commit a lender to making a loan? A. Commitment letter B. Automated underwriting process C. Preapproval letter D. Prequalification letter 13. What is the role of an escrow agent? A. To decide whether or not to approve the loan application B. To hold money and documents on behalf of the buyer and seller until the transaction is ready to close C. To provide counseling to first-time home buyers D. To search the chain of title to make sure that title is marketable 14. Which of the following is not a step in the clos- ing process? A. Insuring title B. Obtaining a credit report C. Obtaining an inspection D. Preparing a closing disclosure 9  Financing Residential Real Estate Instructor Materials Answer Key 1. B. Preapproval is a formal process in 7. D. In a buydown, the seller pays discount which a buyer receives a loan commit- points on the buyer’s behalf. This ment from a lender. Prequalification, serves to lower the interest rate and by contrast, is an informal process make it easier for the buyer to qualify. which gives a buyer an idea of an ap- propriate price range. 8. B. The finance charge includes interest, as well as the origination fee, buyer-paid 2. D. While interest rates and loan costs are discount points, mortgage broker’s fee, often the deciding factor, it may be un- and mortgage insurance. wise to choose a lender with the lowest rates if it has a reputation for sloppy or 9. A. The Uniform Residential Loan Ap- careless service. plication asks about the borrower’s employment information, marital sta- 3. C. The lender’s origination fee covers tus, and income sources. Credit scores costs associated with making the loan. will be obtained directly from the credit scoring agencies. 4. D. The Truth in Lending Act requires lenders to make several disclosures, 10. B. A life insurance policy would be con- most importantly regarding a loan’s sidered an asset for an applicant, not a annual percentage rate. liability. 5. D. Costs paid by the buyer that aren’t paid 11. A. If an interest rate is locked in, it will be to the lender but to third parties aren’t guaranteed for a certain period (usually included in the finance charge. This through closing). If it is not locked in, includes title insurance fees, appraisal the rate will fluctuate according to mar- fees, and credit report fees. ket rates up until the day of closing. 6. A. A long loan term (such as 40 years), a 12. D. A prequalification letter does not com- high loan-to-value ratio, and an adjust- mit the lender to making a loan. A able interest rate are all loan features preapproval letter states that the lender that might enable buyers to qualify will loan up to a specified amount of for a larger loan amount. In contrast, a money toward purchase of a home that 15-year loan would reduce their buy- meets the lender’s standards. ing power, since they’d qualify for a smaller loan amount with a 15-year term than they would with a standard 30-year term. 10  Chapter 7: The Financing Process 13. B. An escrow agent’s primary role is to act as a third party holding money and documents for the buyer and seller. 14. B. The lender will obtain a credit report prior to approving a loan application. Title insurance, inspection, and the closing disclosure are all steps in the closing process. 15. B. Interim interest (also called prepaid in- terest) is paid at closing for the period between the closing date and the end of the month in which closing occurs. 11  Financing Residential Real Estate Instructor Materials PowerPoint Thumbnails Use the following thumbnails of our PowerPoint presentation to make your lecture notes. Financing Residential Real Estate Lesson 7: The Financing Process © 2018 Rockwell Publishing Introduction This lesson will cover: ⚫ shopping for a loan ⚫ applying for a loan ⚫ application processing ⚫ closing © 2018 Rockwell Publishing Shopping for Loan For home buyers, shopping for mortgage loan involves: ⚫ assessing wants, needs, finances ⚫ choosing lender ⚫ comparing rates, fees ⚫ evaluating financing options © 2018 Rockwell Publishing 12  Chapter 7: The Financing Process Shopping for Loan Assessing buyer’s position To establish price range before house hunting begins, buyers should find out what financing they qualify for. © 2018 Rockwell Publishing Assessing Buyer’s Position Preapproval Preapproval: ⚫ formal process performed by mortgage broker or lender For preapproval, buyer must: ⚫ complete loan application ⚫ provide documentation of income, assets, debts, credit history © 2018 Rockwell Publishing Assessing Buyer’s Position Preapproval Lender gives buyer preapproval letter, agreeing to loan up to specified amount. ⚫ Valid only for limited period. Advantages of preapproval: ⚫ tool in negotiations with sellers ⚫ streamlines closing process © 2018 Rockwell Publishing 13  Financing Residential Real Estate Instructor Materials Assessing Buyer’s Position Prequalification Prequalification: ⚫ informal process performed by real estate agent or using online mortgage calculator ⚫ provides rough estimate of maximum loan amount ⚫ rarely done anymore © 2018 Rockwell Publishing Choosing Lender Identifying potential lenders Several ways to find lender: ⚫ research ⚫ referrals ⚫ mortgage broker ⚫ buyer’s bank © 2018 Rockwell Publishing Choosing Lender Research Involves reviewing print, online, other media advertisements. ⚫ Followed up with phone calls. ⚫ Talk to loan officers. Newspaper may have mortgage comparison chart. © 2018 Rockwell Publishing 14  Chapter 7: The Financing Process Choosing Lender Referrals Referral often best way to find good lender. ⚫ Ask family, friends, co-workers. ⚫ Talk to real estate agents. ⚫ Agents should not accept referral fees. © 2018 Rockwell Publishing Choosing Lender Mortgage broker Mortgage broker specializes in bringing buyers and lenders together. ⚫ Presents buyers with options offered by multiple lenders. ⚫ Research still necessary to find good broker. © 2018 Rockwell Publishing Choosing Lender Buyer’s bank Banks sometimes offer special financing to established customers. ⚫ One location for handling all financial matters. © 2018 Rockwell Publishing 15  Financing Residential Real Estate Instructor Materials Choosing Lender Interviewing prospective lenders Buyers should talk to 3 or 4 lenders before submitting application. ⚫ Ask each lender for written estimate of loan costs, closing costs. ⚫ Good loan originator puts buyers at ease, explains process thoroughly. © 2018 Rockwell Publishing Choosing Lender Interviewing prospective lenders Buyers should also consider lender’s reputation. ⚫ Expertise, efficiency, stability, honesty. ⚫ Get references from mortgage broker's recent customers. ⚫ Look for customer satisfaction information online. © 2018 Rockwell Publishing Summary Preapproval & Choosing Lender Preapproval Preapproval letter PITI Loan originator Loan officer Mortgage broker Referral Estimate of costs © 2018 Rockwell Publishing 16  Chapter 7: The Financing Process Loan Costs Primary consideration for most buyers in choosing lender is how much loan will cost. ⚫ In addition to interest rate, cost of loan may include: ⚫ loan origination fee ⚫ discount points ⚫ miscellaneous charges ⚫ mortgage broker’s fee © 2018 Rockwell Publishing Loan Costs Points Point: percentage point. ⚫ 1 point = 1% of loan amount. ⚫ Some lenders use “points” to refer to origination fee and discount points together. ⚫ Others use “points” to refer only to discount points. © 2018 Rockwell Publishing Loan Costs Loan origination fee Origination fee: pays lender’s expenses, such as staff compensation, cost of facilities, other overhead. ⚫ Charged in almost every mortgage transaction. ⚫ Typically around 1% of loan amount. ⚫ Usually paid by borrower. © 2018 Rockwell Publishing 17  Financing Residential Real Estate Instructor Materials Loan Costs Discount points Lump sum paid at closing to increase lender’s upfront yield (profit) on loan. ⚫ In exchange for upfront payment, lender charges lower interest rate. ⚫ May save borrower money in long run, depending on how long loan in place. © 2018 Rockwell Publishing Loan Costs Discount points Discount points charged can vary depending on market conditions and other factors. ⚫ Might charge 4 to 6 points for 1% interest rate reduction. © 2018 Rockwell Publishing Loan Costs Discount points May be paid by buyer or seller. Buydown: paying discount points to “buy down” buyer’s interest rate. When buyer pays points, buyer pays lender in cash at closing. ⚫ When seller pays points, amount withheld from loan, deducted from seller’s proceeds. © 2018 Rockwell Publishing 18  Chapter 7: The Financing Process Loan Costs Miscellaneous fees Lenders often charge borrowers other fees, such as: ⚫ application fee ⚫ document preparation fee ⚫ underwriting fee © 2018 Rockwell Publishing Loan Costs Mortgage broker’s compensation Buyers working with mortgage broker usually charged mortgage broker’s fee. ⚫ Fee may be one or two percent, but generally won’t make loan more expensive. ⚫ Broker gets loan at wholesale price, marks it up to retail price, keeps overage as fee. © 2018 Rockwell Publishing Comparing Cost of Loans Truth in Lending Act Various fees charged in addition to interest make it hard to compare loans offered by different lenders. Truth in Lending Act (TILA): federal consumer protection law requiring lenders to disclose loan costs in using loan estimate form. © 2018 Rockwell Publishing 19  Financing Residential Real Estate Instructor Materials Truth in Lending Act Annual percentage rate APR most important TILA disclosure. ⚫ APR expresses relationship between amount financed and finance charge as a percentage. ⚫ To determine which of two loans is more expensive, compare APRs, not just interest rates. © 2018 Rockwell Publishing Truth in Lending Act Finance charge Finance charge is another key TILA disclosure. It includes: ⚫ interest ⚫ origination fee ⚫ discount points (paid by buyer) ⚫ mortgage broker’s fee ⚫ finder’s fee ⚫ service fee ⚫ mortgage insurance/guaranty fees © 2018 Rockwell Publishing Truth in Lending Act Finance charge Does NOT include: ⚫ title insurance costs ⚫ credit report charges ⚫ appraisal fee ⚫ discount points paid by seller © 2018 Rockwell Publishing 20  Chapter 7: The Financing Process Loan Costs No-fee or low-fee loans Some lenders offer no-fee loans or low-fee loans. ⚫ No major loan fees (origination fee, points). ⚫ Only financing charge is interest. ⚫ Interest rate often much higher. ⚫ Helpful for buyers with little cash for closing. © 2018 Rockwell Publishing Evaluating Financing Options Home buyer counseling First-time buyers may benefit from home buyer counseling before deciding what financing option is best for them. © 2018 Rockwell Publishing Evaluating Financing Options Home buyer counseling Department of Housing and Urban Development (HUD) administers Housing Counseling Assistance Program. ⚫ Open to anyone looking for home or applying for mortgage. ⚫ Also for renters and people who already own home. © 2018 Rockwell Publishing 21  Financing Residential Real Estate Instructor Materials Evaluating Financing Options Home buyer counseling Program intended to educate people about home ownership responsibilities: ⚫ making mortgage/rent payments ⚫ maintaining home ⚫ avoiding foreclosure/eviction Counselor may prepare action plan to help buyer achieve goals. © 2018 Rockwell Publishing Summary Loan Costs & Financing Options Origination fee Discount points Buydown Mortgage broker’s fee Truth in Lending Act APR Finance charge No-fee or low-fee loan Home buyer counseling © 2018 Rockwell Publishing Applying for Loan Loan interview After buyers have chosen lender, next step is to apply for loan. ⚫ Loan interview: buyers talk with loan originator. ⚫ Originator helps buyers: ⚫ choose best financing option ⚫ prepare application © 2018 Rockwell Publishing 22  Chapter 7: The Financing Process Loan Interview Prequalifying during interview During loan interview, originator may enter information into automated underwriting system. ⚫ System provides preliminary evaluation of what buyers are likely to qualify for. ⚫ Does not guarantee preapproval. © 2018 Rockwell Publishing Loan Interview Deposit Loan originator may require deposit to cover certain expenses: ⚫ application fee ⚫ credit report fee ⚫ other preliminary charges © 2018 Rockwell Publishing Loan Interview Contract and closing date If buyers have already signed purchase agreement, loan originator reviews contract. ⚫ Main concerns: ⚫ terms of financing contingency ⚫ closing date © 2018 Rockwell Publishing 23  Financing Residential Real Estate Instructor Materials Loan Application Form Type and terms of loan First section of form asks about: ⚫ type of loan ⚫ loan amount ⚫ loan term ⚫ interest rate © 2018 Rockwell Publishing Loan Application Form Property information and purpose Second section asks for: ⚫ property address/legal description ⚫ purpose of loan (purchase, construction, refinancing) ⚫ how buyer will take title ⚫ source of downpayment © 2018 Rockwell Publishing Loan Application Form Borrower/co-borrower information Third section asks about applicant(s): ⚫ name ⚫ social security number ⚫ date of birth ⚫ years of schooling ⚫ marital status ⚫ dependents (number, age) © 2018 Rockwell Publishing 24  Chapter 7: The Financing Process Loan Application Form Employment information Each applicant must also provide: ⚫ name and address of employer ⚫ number of years at job ⚫ position held ⚫ type of business © 2018 Rockwell Publishing Loan Application Form Income and monthly housing expense This section asks about: ⚫ primary employment income ⚫ overtime, bonuses, or commissions ⚫ other sources of income ⚫ current rent or mortgage payment © 2018 Rockwell Publishing Loan Application Form Assets and liabilities Assets may include: ⚫ good faith deposit ⚫ money in bank ⚫ investments Liabilities may include: ⚫ car loan ⚫ credit cards ⚫ alimony/child support © 2018 Rockwell Publishing 25  Financing Residential Real Estate Instructor Materials Loan Application Form Details of transaction Application also asks for information about transaction, including: ⚫ purchase price ⚫ cost of land ⚫ prepaid expenses ⚫ closing costs © 2018 Rockwell Publishing Loan Application Form Declarations Applicants must answer questions about: ⚫ outstanding judgments, lawsuits ⚫ bankruptcies ⚫ foreclosures or deeds in lieu ⚫ alimony/child support ⚫ citizenship © 2018 Rockwell Publishing Loan Application Form Declarations Applicants also must state: ⚫ whether any portion of downpayment was borrowed ⚫ whether property is to be primary residence ⚫ any other property owned in last three years © 2018 Rockwell Publishing 26  Chapter 7: The Financing Process Applying for Loan Federal disclosure requirements Federal law requires mortgage brokers and lenders to disclose on loan estimate form: ⚫ APR and total interest as a percentage ⚫ estimates of all closing costs ⚫ whether lender will service loan or transfer servicing Must also provide booklet with information on closing. © 2018 Rockwell Publishing Applying for Loan Federal disclosure requirements Lenders must provide all disclosures within 3 business days after application submitted. ⚫ Disclosures not required if application rejected before 3-day deadline. ⚫ If any costs change, new disclosures must be made before closing. © 2018 Rockwell Publishing Applying for Loan Locking interest rate Sharp increase in rates might increase monthly payment so buyers no longer qualify. Should ask lender about lock-in. ⚫ Lock-in: lender guarantees certain interest rate for specified period. ⚫ Float: interest rate will move up or down with market interest rates until closing. © 2018 Rockwell Publishing 27  Financing Residential Real Estate Instructor Materials Applying for Loan Locking interest rate Lock-in period should extend beyond expected loan processing time. Lock-in is matter of contract between lender and borrower; terms should be in writing. © 2018 Rockwell Publishing Summary Applying for Loan Uniform Residential Loan Application Good faith estimate of closing costs Rate lock-in Float © 2018 Rockwell Publishing Application Processing After application form filled out: ⚫ verification forms sent to employers, banks ⚫ credit reports, credit scores obtained ⚫ if purchase agreement exists: ⚫ appraisal ordered ⚫ title report ordered © 2018 Rockwell Publishing 28  Chapter 7: The Financing Process Application Processing After verification forms returned and reports received, loan processor puts together loan package and sends it to underwriting department. © 2018 Rockwell Publishing Underwriting Decision Underwriter reviews loan package, applies appropriate qualifying standards to buyers. ⚫ Automated underwriting system usually used. ⚫ Loan is either: ⚫ approved ⚫ rejected ⚫ approved subject to conditions © 2018 Rockwell Publishing Underwriting Decision Commitment letter If underwriter approves loan, lender issues letter that commits lender to making loan. ⚫ Does impose conditions. ⚫ Like a preapproval letter, but more detailed. ⚫ Preapproval letter usually issued before borrower finds a property; commitment letter once underwriter has evaluated a particular property. © 2018 Rockwell Publishing 29  Financing Residential Real Estate Instructor Materials Underwriting Decision Rejection If loan denied, lender must provide written explanation within 30 days. Buyers may want to: ⚫ apply to different lender ⚫ apply for different type of loan ⚫ wait and take steps to improve finances © 2018 Rockwell Publishing Closing Loan Escrow Last stage of financing process coordinated with closing of property sale. In many areas, closings handled through escrow. ⚫ Escrow: neutral third party holds money and documents for buyer and seller until transaction ready to close. © 2018 Rockwell Publishing Closing Loan Closing agent Closing agent (escrow agent): ⚫ makes sure all requirements are taken care of before closing date ⚫ disburses purchase price, delivers deed when conditions in purchase agreement are satisfied © 2018 Rockwell Publishing 30  Chapter 7: The Financing Process Closing Loan Closing agent Closing agent may be: ⚫ independent escrow agent ⚫ employee of lender ⚫ title company ⚫ lawyer ⚫ real estate broker © 2018 Rockwell Publishing Closing Loan Roundtable closing Alternatively, parties may meet in person to exchange funds and documents in roundtable closing (“passing papers”). No funds are held in escrow, and process is coordinated by third party. © 2018 Rockwell Publishing Closing Loan Steps in closing process ⚫ Clearing and insuring title ⚫ Inspections and repairs ⚫ Loan documents issued and signed ⚫ Funding loan ⚫ Preparing closing disclosure ⚫ Recording documents ⚫ Disbursing funds © 2018 Rockwell Publishing 31  Financing Residential Real Estate Instructor Materials Steps in Closing Process Clearing and insuring title Any liens that would have higher priority than new mortgage or deed of trust must be removed. ⚫ Doesn’t include property tax or special assessment liens. To remove lien: ⚫ seller pays amount owed ⚫ release obtained and recorded © 2018 Rockwell Publishing Steps in Closing Process Clearing and insuring title Lender will require extended coverage title insurance policy to protect its lien priority. ⚫ Usually paid for by buyer. © 2018 Rockwell Publishing Steps in Closing Process Inspections and repairs Lender may require inspections or tests, such as: ⚫ pest control inspection ⚫ soil percolation test ⚫ flood hazard inspection Based on inspection report, lender decides whether to require repairs or other corrective steps. © 2018 Rockwell Publishing 32  Chapter 7: The Financing Process Steps in Closing Process Loan documents and buyer’s funds Once loan has been approved, lender forwards loan documents to closing agent. Buyer: ⚫ deposits funds required for closing into escrow ⚫ signs loan documents © 2018 Rockwell Publishing Steps in Closing Process Impound account Lender often requires buyer to make deposit into impound account at closing. ⚫ Ensures real estate taxes, insurance will be paid on time. ⚫ Portion of buyer’s monthly payment goes into impound account. ⚫ Lender pays taxes and insurance out of account when due. © 2018 Rockwell Publishing Steps in Closing Process Interim interest Buyer will also pay interim interest (prepaid interest) at closing, since: ⚫ buyer’s first payment is not due on first day of month immediately after closing, and ⚫ mortgage interest paid in arrears, after it accrues. © 2018 Rockwell Publishing 33  Financing Residential Real Estate Instructor Materials Steps in Closing Process Funding loan Funding the loan: when lender releases buyer’s loan funds to closing agent. Happens only after: ⚫ buyer signs loan documents, ⚫ lender reverifies buyer’s employment and other information, and ⚫ any other conditions imposed by lender have been satisfied. © 2018 Rockwell Publishing Steps in Closing Process Closing disclosure Closing disclosure form itemizes each party’s charges and credits. Buyer must receive closing disclosure at least three days before closing. © 2018 Rockwell Publishing Steps in Closing Process Final steps ⚫ Closing agent records deed, other documents, disburses funds to parties. ⚫ Title company issues policies. ⚫ Lender gives buyer copy of final loan documents. ⚫ Buyer gives lender copy of hazard insurance policy. © 2018 Rockwell Publishing 34  Chapter 7: The Financing Process Summary Application Processing & Closing Loan package Conditional commitment Preapproval Final commitment Closing agent Escrow Interim interest Impound account Funding loan © 2018 Rockwell Publishing 35