Owning a home is a dream of many Millennials throughout the United States. However, with the ever increasing cost of education and ballooning student debt, homeownership often begins with seeking a substantial mortgage.
When it comes to mortgage, making uninformed financial decisions can not significantly harm our financial future, it can even lead to bankruptcy and foreclosure of our homes.
While the world of mortgage may seem mystical and daunting at first, mortgage-focused information and products are readily available on the Internet. It empowers us to become familiar with basics of how mortgage works, well before we apply for one. With this motivation, we will publish a series of articles helping prospective homebuyers navigate the entire mortgage process.
First, lets learn the basics. Broadly, the mortgage process involves:
- Loan Application
- Home Inspection
- Home Appraisal
- Home Insurance
- Title Search
- Rate Lock-in
- Mortgage Terms Review
- Closing Costs Payment
- Review Closing Documents
With the help of mortgage brokers or lenders, home buyers fills in a Uniform Residential Loan Application, which specifies the following pieces of information required for reviewing the mortgage application: the type of mortgage, terms of loan, property information, purpose of loan, borrower/co-borrower information, employment information, monthly income and combined housing expense information, assets & liabilities; details of transactions; and certain required and optional disclosures. Once the loan application is received by the lender, the subsequent steps in the process outlined above ensues.
If any element of the loan application was inadequately filled, the lender may ask clarifying questions to complete all the required fields in the mortgage application.
Home inspections are non-invasive examinations of structural conditions of a home. The inspection may include any combination of mechanical, structural, electrical, plumbing, or other essential systems or portions of the home, as identified and agreed, prior to or during the inspection process.
As home inspections are based on visual observations, they only reveal material defects observed on the day of the inspection and not all material problems that have existed in the past. They help home buyers in identifying material defects in a property that can potentially have an unreasonable risk to residents. Notably, home inspection is different from home appraisal as a home inspector determines the condition of it’s structure, whereas an appraiser determines the value of the property(see below).
A home appraisal is an unbiased professional valuation of a home’s fair market value. Lenders order an appraisal during mortgage application to ensure that the loan amount requested by the borrower is based on home’s fair market value. A fair estimate of home’s value is important because in the event of a borrower’s default, the lender may need to foreclose and sell the property in the market.
Mortgage lenders typically require that home buyers purchases home insurance in order to protect the lender if the home is destroyed. Certain perils may or may not be covered as a part of the home insurance policy, including fire, lightning, windstorm or hail, explosion, smoke, vandalism, aircraft or vehicle collision, riot or civil commotion. Notably, flood insurance and other calamities are often not included in home insurance plan, and its important to give due attention to whether buying flood insurance or other will be valuable.
A home’s title search is the process of retrieving documents evidencing events in the history of that home’s sale. The goal of title search is to ensure that the person selling the home has the right to sell it and that the home buyer is getting all property rights.
In the rate lock-in step, the borrower locks in the mortgage interest rate with the lender. This step happens no later than 10 days prior to the mortgage closing date.
Mortgage Terms Review
The borrower reviews the terms of the mortgage presented by the lender, to ensure all terms and documents concerning the mortgage are in order. This step happens once the home inspection, home appraisal and title search are completed with no discrepancies observed and the mortgage is approved by the lender. If there are any issues observed during the title search/home inspection/home appraisal, they need to be resolved before the mortgage gets approved.
Once the mortgage is approved and the borrower has reviewed mortgage terms, the borrower will need to deposit the down payment with the lender, which is usually done via wire transfer or cashier’s checks.
Closing Costs Payment
Closing costs are the fees associated with home purchase that are paid by home buyers at the closing of the mortgage transaction. Note that Closing refers to the point in time when the property’s title is transferred from the seller to home buyer.
Closing costs usually have a multitude of fees and they are incurred by either the buyer or seller, so its important to get fully familiar with them beforehand and identify which. They may include:
Attorney Fees; Title Service Costs; Recording Cost; Document/Transaction Stamps or Taxes; Survey Fee; Brokerage Commissions; Mortgage Application Fees; Points; Appraisal Fees; Inspection Fees; Home Warranties; Private Mortgage Insurance; Pre-paid Homeowner’s Property Insurance; Pro-rata property taxes; Pro-rata property taxes; Pro-rata Homeowner Association Dues and others.
Review Closing Documents
In the review step, homeowners review all the documents associated with closing and fulfill homeownership.
In the forthcoming STEM Lending blog posts, we will dive deeper into these steps and the gotchas that you need to watch out for. Please feel free to reach out to email@example.com or contact us via stemlending.com/contact-us if you have any questions.
Wishing you a happy home buying experience!
– STEM Lending Team
For further information, see these references:
- Mortgage Loan
- Home Insurance
- Your Step-by-Step Mortgage Guide: From Application to Closing – Freddie Mac