Appraisals…..

What Do Appraisers Look For When Determining A Property’s Value?

Most people are surprised to learn what appraisers actually look at when determining the value of a real estate property.

A common misconception homeowners generally have is that the value of their home is determined after the appraiser has completed their physical property inspection.

However, the appraiser actually already has a good idea of the property’s value by the time they have scheduled an appointment to stop by the property.

The good news is that you don’t have to worry so much about pushing back an appointment a few days just to “clean things up” in order to help influence the value of your property.

While a clean house will certainly make it easier for the appraiser to notice improvements, the only time you should be concerned about “clutter” is if it is damaging to the dwelling.

The Key Components Addressed In An Appraisal

The Site:

Location, view, topography, lot size, utilities, zoning, external factors, highest and best use, landscaping features…

Design:

Quality of construction, finish work, fixed appliances and any defining features

Condition:

Age, deterioration, renovations, upgrades, added features

Health & Safety:

Structural integrity, code compliance

Size:

Above grade and below grade improvements

Neighborhood:

Is the property conforming to the neighborhood?

Functional Utility:

Is the property functional as built – style and use?

Parking:

Garages, Carports, Shops, etc..

Other:

Curb appeal, lot size, & conforming to the neighborhood are obvious to the appraiser when they drive down into the neighborhood pull up in front of your home.

When entering your home, they are going to look at the overall design, condition, finish work, upgrades, any defining features, functional utility, square footage, number of rooms and health and safety items.

Be sure to have all carbon monoxide and smoke detectors in working condition.

Since the appraisal provides half the weight in any credit decision involving the security of real estate, the appraisal should be done by a qualified, licensed appraiser whom is familiar with your neighborhood, and the type of home you are buying, selling or refinancing.

If you’re interested in what specifically appraisers are looking for, here is a copy of the blank 1040 URAR form that is used by every appraiser in the country.

Related Update on HVCC:

Appraisers hired for a mortgage transaction on a conforming loan are chosen from a pool of qualified appraisers at random. Neither you nor your lender has the flexibility of deciding which appraiser will inspect your home.

This recent change was brought on with the Home Valuation Code of Conduct HVCC, and is effective with conventional loans originated on or after May 1, 2009.

203K Rehab Mortgage Loans

Have you found that “almost perfect” home in the right location that is selling at a reduced price because it needs a little rehab work?

Unfortunately, most mortgage loan programs require homes “in need of work” to be complete before the financing can be secured for the purchase transaction. Whether the property needs a little or a lot of work, most First-Time Home Buyers simply don’t have the up-front cash to invest in a property prior to actually securing the financing.

However, the FHA 203(k) Rehab Loan may be your answer to turning that “fixer-upper” into your dream home.

The FHA 203(k) Rehab Loan is a popular mortgage program designed for buyers that want to finance the cost of home improvements into a new loan.

The financing for this loan will include the purchase price, as well as the improvements you are either required to do to be able to live in the home, or that you want to do, such as upgrade the kitchen, bathroom, etc.

This is also a great loan program for agents trying to sell homes that need repair. Buyers will have an option to complete those repairs and upgrades without a large upfront financial commitment. Think of this as a one-time close construction loan. At closing, the seller receives their money and the rest is put into an escrow account for the buyer to use for rehabbing the property.

Advantages of 203k Rehab Loans:

Savings –

Repairs on a fixer-upper can be expensive, and the 203k Rehab Loan allows borrowers to finance the improvements into the new loan vs having to pay for the upgrades prior to closing.

Low Interest Rates:

Historically, FHA Mortgage Loans have lower than average rates when compared to commercial or conventional financing programs.

Great Property Deals:

Since Rehab Loans are designed for “fixer-uppers,” buyers can qualify for a loan on a home that needs work, and actually finance the construction costs / repairs up front.

FHA Rehab Loan Background:

The Federal Housing Administration (FHA), which is part of the Department of Housing and Urban Development (HUD), offers this loan program to provide for the rehabilitation and repair of single family properties. One single loan is used to pay for the purchase (or refinance) and the cost of rehabilitation or updating of the home. Those properties include condominiums, town homes and single family homes. This loan is only available for homebuyers purchasing a primary residence that they will occupy. Unfortunately, it is not a program for investors to purchase a home – fix it up – and then sell.

As you can imagine, there are vastly different degrees of just how much work it would take to bring a house up to your standards.

Sometimes it may only require minor cosmetic work, like new flooring, upgrade a kitchen or bath, put on a new roof or install new windows…you get the idea. Or it could be that you find a home that is the perfect price and location, but inside it needs a complete gut job.

You like the shell of the house but want to blow out the walls to change the floor plan, need to totally re-do plumbing, electrical…major stuff! Maybe the bones of the house are terrific but it is just too small…you need to add an extra bedroom or even an entire new level!

The FHA 203(k) Rehabilitation program, (we’ll call it…the K) is designed to address all of these circumstances. Another great thing about this loan program is that it is originated and underwritten just like a standard FHA loan program. So you can purchase the home with the same 3.5% down payment of a regular FHA loan, depending on your loan amount. In some high cost areas the down payment may be 5%, but there is no larger down payment required on a 203(k) than there is on the regular FHA loan program. And the seller can also still assist you with your closing cost as well…just like with a regular FHA loan.

203(k) Rehab Loans Eligible Property Types:

The property has to have been completed for at least one year, and it has to be a one- to four- family dwelling.

You can use the program to convert a one family dwelling to a two-, three-, or a maximum of four family dwelling.

Eligible property types are single family detached homes, single family attached (like row houses) town homes and condominiums. Cooperatives (Co-ops) are not allowed.

The program will let you “pop the top”…find a single story home and add a new level, take a home…demolish it (at least a portion of the foundation must remain) and build a brand new home in its place, and even take an existing house (or modular unit) from one location and move it to a new location.

That’s pretty cool!!

Let’s take a look at a perfect scenario:

You find this great house that is in the perfect location, close to transportation, great school district, excellent floor plan and the yard you always wanted. It’s the lowest price in the neighborhood.

So what’s not to like?

It’s a foreclosure.

And, the last occupant decided to just destroy the house before they left – taking all the appliances, ripped up the carpet, punched holes in the walls, broke windows….  They even took a toilet with them!  Who takes a toilet?

Can you imagine fixing all of that?

Most first-time home buyers just turn around and walk out the door because they believe they couldn’t possibly come up with the money or the time to fix all of this.

So, a really great house goes unsold.

Two Types of FHA 203(k) Loans:

  • The Streamlined K is used when you want to make minor cosmetic changes to a house and the total rehab cost can not exceed $35,000.
  • A Standard FHA 203(k) loan allows you to make substantial structural improvements, repairs, remodeling and updating to a house…even build a new one.

Streamlined 203(k):

A Streamlined 203(k) allows minimum or limited repairs to be done…basically “cosmetic” repairs, improvements or updates.

It also eliminates most of the paperwork required of a full 203(k) and simplifies the process to obtain rehab funds.

Under the Streamlined program, there is a minimum of $5,000 and a maximum of $35,000 to be financed in the mortgage amount to improve or upgrade the home.

No “structural repairs” are allowed under a Streamlined K, however, making or correcting any structural items is not considered to be minor.

The minimum of $5,000 of required and substantial improvements that will increase the marketability and value of the home must first be included. Any repairs and improvements must comply with HUD’s Minimum Property Standards and must meet all local building, zoning and other codes.

Minimum required repairs include any health and safety repairs like peeling lead paint or replacing missing railings. Whether you want those items included or not, all health and safety issues must be addressed first. Smoke detectors must also be added if missing.

Type of work for Streamlined 203(k):

  • Repair, Replace or Upgrade
  • Roof, gutters, downspouts
  • Existing HVAC systems
  • Plumbing and electrical systems
  • Flooring
  • Painting
  • Appliances
  • Weatherization
  • Repair, replace or add exterior decks, patios, porches
  • Basement waterproofing
  • Window and door replacement and exterior siding
  • Septic and/or well repair or replacement
  • Improvements for accessibility
  • Lead-based paint stabilization or abatement of lead-based paint hazards

What can’t you do? Ineligible improvements under the Streamlined 203(k):

  • Major structural repairs
  • New construction (adding a room)
  • Repair of structural damage
  • Repairs requiring detailed plans and specs
  • Any repair taking more than 6 months to complete
  • Repairs that would necessitate more than 2 draws
  • Luxury items that are not a permanent part of the real estate
  • Granite, marble countertops, jacuzzi tubs, hot tubs, pools, etc

Let’s go through the process of the Streamlined 203(k):

Find the home you’ll want to purchase and determine what improvements need to be made to the property.

The purchase contract offer is written the same as any other, accept you’ll want to make sure that there is language stating the purchase is contingent upon borrower acquiring an FHA 203(k) Loan.

In order to complete the financing of the improvements, you will need to meet with a contractor to determine what kind of work you are planning and how much it will cost.

The contractor will give you a copy of the contract, which you’ll need to pass on to the lender.

The lender will order an appraisal to determine what the value of the house will be once all of this work is completed.

Keep in mind, you’ll also need to be qualified for the full loan amount which is based on the purchase price plus the additional cost of repairs.

Once the loan is approved, you will go to closing like you normally would.

The amount that will be needed to do all of these repairs or improvements will be placed into an escrow account held by the lender.

As the work is being completed, there will be draws from the account to pay the contractor.

What does the Contractor you select need to do?

  • Provide written work plan and cost estimates
  • Must include nature and type of repair and the cost of completion
  • Must be licensed and bonded for each specialized repair
  • Must agree in writing to complete the work for the amount of the cost estimate and within the allowed time

Let’s take a look at a quick Streamlined 203(k) example:

Say you need $20,000 to do all the improvements to the house. Most lenders will require a 10-20% contingency reserve account to be set up. This is money they will set aside for any “surprises” that may happen during the rehab. You don’t want to have something come up that you didn’t expect and then have no money to fix it.

So, in this example another $2,000 would be financed to establish your reserve fund.

A total of $22,000 is now available to be placed into the rehab escrow account.

Once you have completed settlement and own the house, the rehab account will be established and you will be able to start the work.

The contractor will request the first draw of up to 50% of his contract, which in this example is $10,000.

Once the work has been fully completed, he can request his final draw and receive the balance of his contract.

The money in the contingency reserve account is for emergency work. If down the road there was no need to use it and you decided to do some additional work to the house…you could then request a change order and spend that money, but it would not be paid out to the contractor until the final draw.

The reason this program is called a Streamline is because there are fewer draws, less paperwork and only cosmetic, minor repairs involved.

All work should be completed in 6 months or less.

Advantages of Streamlined 203(k):

A great advantage of the Streamlined 203(k) vs the Standard FHA 203(k) is that there is less paperwork.

Under the streamline, there is a maximum of two draws per contractor.  It is easier if you have only one contractor, but a maximum of two contractors to do this level of work is allowed.

After you have gone to settlement and your loan has closed, the contractor will receive the first of two draws. They are usually permitted to get up to 50% of the materials (sometimes 50% of the total work amount) in this draw.

The remaining monies are given out once the project is completed and the work has been inspected.

Standard FHA 203(k):

If you have a larger project that needs a full gut job or additional rooms, the Standard FHA 203(k) is the right program.

This is what we refer to as the “full blown K”.

Under this section of the program, much more extensive repairs or remodeling can be accomplished.

The full K allows you to make “structural” changes to enlarge a house, build a new home on an existing foundation and even take an existing house and move it.

Unlike the Streamlined K, where the improvements are “cosmetic”, under the full blown K the repairs or improvements can be and usually are “substantial”.

So, you can imagine that the process is a bit more involved.

Think of it as a mini construction loan program where your contractor can ask for as many as 5 draws, and each draw request will need to have an inspector come out to make sure the work has been completed for that draw request prior to any monies being paid.

Because it is more involved than a standard loan, there are more costs involved.

Type of work for a Standard 203(k):

  • Structural alterations and additions
  • Garage
  • Attached unit (new)
  • Remodeled kitchen and baths
  • Changes to eliminate obsolescence and reduce maintenance
  • Modernize plumbing, heating, A/C and electrical systems
  • Install or repair well or septic systems
  • Roofing, gutters, downspouts
  • Flooring, tiling and carpeting
  • Energy conservation improvements
  • Major landscaping
  • Improvements for accessibility
  • New free standing appliances
  • Interior and exterior
  • Swimming Pool repairs
  • Other improvements that are a PERMANENT part of the real estate

*Luxury items are not permitted to be included in the financing.

What is different from the Streamlined K and the full FHA 203(k)?

The full K requires a HUD Consultant (selected from HUD’s approved consultant list) to be retained by you.

They will come to the property and meet with you to discuss the anticipated improvements you want to make to the house. They will inspect the property for any health and safety issues required to be included in the rehab and will then provide you with a “Work Write-up” for the project based on the work you would like to have done.

The HUD consultant is someone that is knowledgeable about construction and/ or rehab and who knows the 203(k) program.

What is the role of the HUD 203(k) consultant?

  • To do a Feasibility Study on required repairs
  • To do a Property Inspection/Report
  • To work with you discussing your renovation needs
  • To prepare a Work Write-up and any required architectural and other exhibits
  • To do Draw Inspections, Change Orders and Final Inspection
  • To be a liaison between you, the lender and your contractor
  • To insure that work is completed in a timely and professional manner
  • To watch over the monies spent on behalf of you and your lender

Whew!!! That’s a lot of stuff…let’s get into the nuts and bolts of the full blown K.

What are these studies, write-ups (what’s included) that the consultant provides and what does this cost?

Feasibility Study

It is only a rough estimate of the work that needs to be done and what the cost should approximate. It costs $100 and can be one of the items you finance.

Not every property or borrower needs a feasibility study.

Architectural Exhibits

  • Those appropriate exhibits which show the scope of the work to be done
  • Plot Plan (only for new addition)
  • Proposed Interior Plan, showing structural changes
  • Work Write Up and Cost Estimates

Components

  • Home/Property Review Report (existing )
  • Termite Report/ Well/Septic Report
  • Energy Analysis or Home Energy Rating
  • Proposed Plot Plan (for new additions)
  • Proposed Floor Plan (with wall changes)
  • Other reports/exhibits as necessary
  • Work Write Up (description of work)
  • Cost Estimates (detailed)

Home/Property Review

  • Home Inspection Report – “Cornerstone of successful 203(k) loan”
  • What’s wrong with the house?
  • Note deficiencies and certify the condition of all systems
  • Get wood boring insect report
  • Focus on health and safety concerns
  • Meet HUD’s Requirements for Existing Housing

Format for the Work Write-up

  • There is no specific mandated format
  • It must be prepared in categorical manner with 35 categories
  • It must be detailed as to the work to be performed and costs
  • It is recommended that it be done “room by room” as well as by category
  • There should be a break down between labor and materials

Cost Estimates

  • Based on R.S. Means, Marshall Swift or Home Tech estimating systems
  • Don’t use low bid, because there must be enough money for any contractor to complete the work
  • Must include labor and materials
  • Don’t eliminate labor costs because borrower says he will do the work

Contingency Reserve

  • 10% to 20%
  • If house is old or rehab is extensive
  • Over 30 years old, must have at least 10%
  • If utilities are off, must have 15%
  • Savings from change order go into contingency
  • At the end, contingency can pay for additional work or the changes

What are the Consultant costs associated with this?

  • The consultant must be HUD approved and it’s typically $400 to $1000, depending on rehab cost
  • There is also an inspection Fee – set by HOC – for maximum of 5 draw inspections – plus mileage

How are the Contractors paid?

There is no up-front money to the contractor on the full K vs the Streamlined. He receives his first draw check only after the work to be done under the draw schedule has been completed.

Contractors can have a maximum of 5 draws altogether. The HUD consultant will divide the work into draws depending on the scope of work to be done.

You may do the framing first, then the heating and electric, then the drywall for example. If each of those were in separate draw schedules, the contractor would get paid for each of those as they are completed and depending upon which draw they were to be counted in.

The consultant will go out to see that the work described under the first draw has been completed and will submit a request for that draw. For each of these draws a 10% contingency is held. Again, this is just to be sure there are no surprises and that all of the work is completed correctly.

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So you can see that there is a difference in whether you use a Streamlined K or the standard FHA 203(k) loan.

Most foreclosed properties only require minor cosmetic repairs, so the Streamline is the way to go in most of those instances. Just make sure you have no structural improvements that need to be made if you are thinking of using the streamlined K. Even if the repair would cost say $5,000 which falls into the less than $35,000 max for the streamline, you would have to go with the standard K just because the work is “structural”. So make sure you know which repairs you are planning to do before you decide which 203(k) would work best for you.

These are both great loans to use to find that “almost perfect” home and truly make it into your Dream Home. Not all lenders are able to do this loan however, as you can see they require a bit more attention once the loan has closed. So, be sure to ask for a lender that is well versed in Rehab Loans.

VA Mortgage Loans

A VA (Veterans Administration) guaranteed home loan is the preferred loan program for active, non-active, Reserve, National Guard, and retired military of the armed forces because there is no down payment needed and no private monthly mortgage insurance required.

A VA home loan can be used to purchase a home or refinance an existing mortgage.

We will discuss what role the VA plays in a VA guaranteed mortgage, the benefits of a VA home loan, who is eligible for a VA loan, and the VA documentation you will need to present to your lender.

Did you know that more than 27 million veterans and service personnel are eligible for VA financing, yet most aren’t aware it may be possible for them to buy homes again with VA financing using remaining or restored loan entitlement?

VA Does Not Offer Loans Directly and Does Not Guaranty You Will Qualify.

VA does not actually lend the money to you directly. They offer a guaranty to a lender that if you should default on the loan, they will pay the lender a percentage of the loan balance. The word GUARANTY does not actually guaranty the veteran will qualify for a VA home loan.

Primary Benefits of a VA Home Loan:

  • 100% financing
  • No monthly private mortgage insurance is required
  • There is a limitation on buyers closing costs
  • The loan is assumable, subject to VA approval of the assumer’s credit
  • 30 year fixed loan
  • Seller can pay up to 4% of the veterans closing costs and even pay down your debt to help lower your debt-to-income ratio
  • Interest rates are similar to FHA rates
  • You don’t need perfect credit

Who is Eligible for a VA Home Loan?

Veterans with active duty service, that was not dishonorable, during World War II and later periods, are eligible for VA loan benefits. World War II (September 16, 1940 to July 25, 1947), Korean conflict (June 27, 1950 to January 31, 1955), and Vietnam era (August 5, 1964 to May 7, 1975) veterans must have at least 90 days of service.

Veterans with service only during peacetime periods and active duty military personnel must have had more than 180 days of active service. Veterans of enlisted service which began after September 7, 1980, or officers with service beginning after October 16,1981, must in most cases have served at least 2 years.

VA Documentation Needed:

The three specific pieces of documentation a lender will need to determine your eligibility is a DD214 for discharged veterans, a statement of service for active military personnel, and a certificate of eligibility (COE) to determine you have VA entitlement.

Because each lender has different qualifying guidelines, the next step is to contact your lender to find out if you meet their qualifying criteria such as minimum FICO/credit scores, debt-to-income (DTI) ratios, and find out what your county’s maximum loan amount is. Your lender can help you attain your certificate of eligibility on your behalf.

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Frequently Asked Questions:

Q: Are the children of a living or deceased veteran eligible for the home loan benefit?

No, the children of an eligible veteran are not eligible for the home loan benefit.

Q: How can I obtain proof of military service?

Standard Form 180, Request Pertaining to Military Records, is used to apply for proof of military service regardless of whether you served on regular active duty or in the selected reserves. This request form is NOT processed by VA.

Rather, Standard Form 180 is completed and mailed to the appropriate custodian of military service records. Instructions are provided on the reverse of the form to assist in determining the correct forwarding address.

Q: Is the surviving spouse of a deceased veteran eligible for the home loan benefit?

The unmarried surviving spouse of a veteran who died on active duty or as the result of a service-connected disability is eligible for the home loan benefit.

Assembling Your Home Buying Team – Knowing The Players

Buying a new home is literally a team sport since there are so many tasks, important timelines, documents and responsibilities that all need special care and attention.

Besides working with a professional team that you trust, it’s important that the individual players have the ability to effectively communicate and execute on important decisions together as well.

Real Estate Agent –

A Realtor® is a licensed agent that belongs to the National Association of Realtors®, which means they are pledged to a strict Code of Ethics and Standards of Practice.

A few of the important roles your agent performs:

  • Determine your home buying needs
  • Define your property search criteria – neighborhoods, school districts, local amenities…
  • Provide insight on market trends and property values
  • Negotiate purchase contracts
  • Pay attention to due-diligence periods and other important timelines
  • Articulate inspection and appraisal reports
  • Professionally estimate fair market value on listings

A common misconception of many First-Time Home Buyers is that hiring a real estate agent will end up costing more money.

However, the typical arrangement in a purchase transaction is for the seller to cover the buyer’s agent commission.  In some cases where a new home developer or For Sale By Owner is listing a property and offering a lower price to deal direct, it is still a good idea to have an agent in your corner to protect your financial and investment interests.

Considering that some buyers may see 5-7 real estate transactions in a lifetime, compared to an agent that closes the same amount in a month, it is obvious to see that there is a big advantage to having the ability to rely on that experience when your home and security is on the line.

Mortgage Professional

A mortgage professional (loan officer, mortgage planner, loan consultant, etc.) is the glue that holds the entire transaction together (biased comment).

In addition to establishing the purchase price and monthly payment a borrower can qualify for, the mortgage team will also need to communicate with all of the other players on the home buying team throughout the entire process.

To highlight a few details your mortgage team is paying attention to:

  • Initial pre-qualification to determine purchase price / loan amount
  • Explain all loan program options that may fit your investment goals
  • Collecting / organizing loan approval documents
  • Watching economic indicators that influence daily rate changes
  • Locking rates
  • Communicating with title / escrow officers
  • Submitting loan package to underwriting departments
  • Updating disclosure / GFE paperwork within proper time frames
  • Following funding through the final recording
  • Tracking inspections, insurance and other lending requirements
  • Post closing rate / program monitoring (although that might just be us)

Insurance Agent

The lender in any mortgage transaction will require a homeowner’s insurance policy (hazard insurance).

This policy protects the property in the case of fire, theft or other damage (except flood or earthquake, those are separate policies and may be optional).

If it is determined that the property that you want to purchase is in a flood zone, flood insurance is not optional, it is mandatory.

The flood zone determination will be done with a “flood certification” from a third-party provider.

Title and Escrow –

It is possible to have a title company and an escrow officer work for different companies.

Also, some states use closing attorneys and there are still a few states where they use abstract of title instead of title insurance.

In most purchase transactions, the seller has the option of choosing the title company.

The title and escrow officers are often thought of as the same role, but in reality are quite different positions.

The title officer takes care of all issues that have to do with the title (also referred to as the deed) of the property.

The lender may require a title insurance policy guaranteeing that the title is free and clear of all liens except those being filed by the lender.

Escrow takes care of receiving, signing, and notarizing the final loan documentation, as well as collecting the other paperwork associated with the home sale.

The escrow officer is a neutral third party that makes sure no money is transferred until all conditions for each side are met.

The money management of an escrow company include:

  • Real estate commissions
  • Funds to mortgage company
  • Homeowner’s Insurance Premiums
  • Property Taxes
  • HOA Dues and other third-party fees

Finally, the escrow officer will see that you are properly recorded as the new owner with the county.

Home Inspector –

When you have found the home that you like, it is a wise idea to have a professional take a look at the home to see if there are any issues with the property that could be a problem in the future.

Even though some buyers have an “Uncle Joe” who has owed several homes and knows what to look for, a certified Home Inspector can be money well spent.

They will look at the functionality of the home to make sure the electrical, plumbing and physical aspects of the home are strong, which will help the buyer make an educated decision about following through with the purchase, or renegotiating certain aspects of the contract.

Keep in mind, the home inspector and appraiser have different jobs. An appraiser determines value, while the inspector looks for structural problems, defects or maintenance issues.

The inspector is doing this strictly for the buyer’s sake. The lender is not concerned if a faucet has a minor leak as long as the property is worth the sales price. Therefore, the lender generally does not require an inspection unless the purchase contract requires one.

So, an inspection is not required, but it is recommended. As a matter of fact, one of the forms in an FHA application package is one that says “For Your Protection: Get a Home Inspection.”

Appraiser –

While the appraiser is typically never seen by the home buyer, an appraisal is obviously an important component of a home purchase transaction.

The appraiser will conduct an analysis of the property to determine the current market value. The bank will always require an appraisal, and in some cases need a second opinion of value if the program guidelines or loan amount require it.

Appraisers compare the sales prices of similar properties sold in the neighborhood and surrounding areas with the subject property.

This can be a very tricky process, especially if there are few properties to choose from, or if there is an overwhelming amount of foreclosures and short sale listings.

Now, since two homes are rarely identical, the appraiser has the difficult job of trying to compare apples to apples; sometimes red delicious to yellow delicious, or sometimes Fuji to Winesap.

When done, the estimate of value is given. If that value is below the purchase price, then negotiation may take place. If it is at or above the purchase price, we are ready to go forward.

Making Sure Your Cash-To-Close Comes From The Proper Source

Providing proper asset documentation and the actual source of the funds is a critical element of the loan closing process.

There’s nothing worse in a real estate purchase than making it all the way through the hoops and hurdles just to have a loan denied after the final documents have been signed due to the borrower using the wrong checking account for the down payment.

Seasoning of the down payment money is just as important as the source, which is why underwriters typically require at least two months bank / asset statements in the initial mortgage approval process.

A Few Acceptable Sources Of Down Payment Include:

  • Bank Accounts – checking / savings
  • Investment Accounts – money market, mutual funds
  • Retirement Funds – keep in mind that borrowing against a 401K plan will require a repayment, which will be calculated in the Debt-to-Income Ratio
  • Life Insurance – Cash value and face amount
  • Gifts – Family members can gift down payment funds with certain restrictions
  • Inheritance / Trust Funds
  • Government Grants – Many state, county and city agencies offer special down payment assistance programs

It is extremely important to make sure your loan officer is aware of the exact source of your down payment as early in the process as possible so that all necessary questions, documentation and explanations can be reviewed / approved by an underwriter.

A good rule-of-thumb to remember is that whatever funds you’re using as a down payment have to be pre-approved by an underwriter at the beginning of the mortgage approval process.

Basically, if you accidentally forget to deposit money in your checking account on the way to the closing appointment, it is not acceptable to get a cashier’s check from a friend’s account until you have a chance to pay them back later.

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Frequently Asked Questions:

Q:  What if I don’t have a bank account and cannot properly source my funds to close?

Cash on hand is an acceptable source of funds for some loan programs, but make sure you bring that detail up at the application stage

Q:  Can I use a bonus from my employer for my down payment?

Yes, but generally this needs to be a bonus you regularly receive

Q:  Can I borrow the money from a friend?

No, any money that needs to be repaid is typically an unacceptable source of funds

Talk the Talk – Know the Mortgage Lingo at Closing

What the heck are they talking about?

Many borrowers go through the closing process in a haze, nodding, smiling, and signing through a bunch of noise that sounds like Greek.

Even though you may have put your trust in your real estate and mortgage team, it helps to understand some of the terminology so that you can pay attention to specific details that may impact the decisions you need to make.

Common Closing Terms / Processes:

1. Docs Sent Buyers sit on pins and needles through the approval process, waiting to find out if they meet the lender’s qualification requirements (which include items such as total expense to income, maximum loan amounts, loan-to-value ratios, credit, etc).

The term “docs sent” generally means you made it!! The lender’s closing department has sent the approved loan paperwork to the closing agent, which is usually an attorney or title company.

Keep in mind that there may be some prior to funding conditions the underwriter will need to verify before the deal can be considered fully approved.

2. Docs Signed –

Just what it implies.  All documentation is signed, including the paperwork between the borrower and the lender which details the terms of the loan, and the contracts between the seller and buyer of the property.

This usually occurs at closing in the presence of the closing agent, bank representative, buyer and seller.

3. Funded –

Show me some money!

The actual funds are transferred from the lender to the closing agent, along with all applicable disclosures.

For a home purchase, if the closing occurs in the morning, the funds are generally sent the same day. If the closing occurs in the afternoon, the funds are usually transferred the next day.

The timing is different for refinancing transactions due to the right of rescission. This is the right (given automatically by law to the borrower) to back out of the transaction within three days of signing the loan documents. As a result, funds are not transferred until after the rescission period in a refinancing transaction, and are generally received on the fourth day after the paperwork is signed.

(Note – Saturdays are counted in the three day period, while Sundays are not). The right of rescission only applies to a property the borrower will live in, not investment properties.

4. Recorded –

Let’s make it official. The recording of the deed transfers title (legal ownership) of the property to the buyer. The title company or the attorney records the transaction in the county register where the property is located, usually immediately after closing.

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There you have it – an official translation of closing lingo.

As with any other important financial transaction, there are many steps, some of which are dictated by law, which must be followed.

Closing Process

The home buying process is full of paperwork,  important dates, contracts, market movements and checklists that can even overwhelm seasoned real estate investors.

One of the main reasons to make sure you’re working with a professional real estate buying team is the fact that you get to lean on their combined experience to ensure a smooth and painless closing.

Some agents and loan officers can close upwards of 20+ transactions a month.  Compared to the 5-7 homes an adult may purchase in his/her lifetime, you can obviously see where it helps to have a few trusted professionals in your corner.

The closing process can be argued as the most critical part of a real estate transaction where the most amount of things can go extremely wrong.  This is where that professional team will really prove their value.

If all of the initial questions, concerns, documents and contingencies were addressed early in the mortgage approval and home shopping process, then you should feel confident about walking into the closing with all bases covered.

However, we’ve listed a few bullets, links and frequently asked questions on this page to help highlight a few important topics you may want to be aware of during the closing process.

Six Prior-To-Closing Conditions That Can Delay Your Escrow:

Even though your lender may have provided a Pre-Approval and/or Mortgage Commitment Letter, there may still be several conditions that could delay a closing.

Sometimes buyers and agents let their guard down with the relief of getting closing documents to title, and they forget that there may still be a bunch of work to be done.

Prior-to-Closing conditions are items that an underwriter would require after reviewing your file, which could simply be an updated pay-stub, a letter of explanation of recent credit inquiries or more clarification on information found in a tax return.

Here is a list of a few Prior-to-Closing conditions you should be aware of:

1. Updated Income/Asset Documentation-

You may have supplied your lender with a mountain of documentation, but make sure you continue to save all of your new paystubs and financial statements as you move through the process. Chances are your lender will want updated documents as you get closer to closing.

2. Credit Inquires – If you have had recent inquires on your credit report, a lender may check to see if any new credit has been extended that may not yet actually appear on your report.

An inquiry could be for something minor such as a new cell phone, but can also be something that will impact your ability to qualify for the loan such as a car payment or another loan that you co-signed to help out a family member.

……(read more on Credit Inquires)

3. Employment Verification-

Your lender will be making sure you are still actively employed in the position that is listed on your loan application, and they will do this more than once in the process.

So make sure regular life events, such as maternity leave or a scheduled surgery, have been brought to your loan officer’s attention ahead of time.

Once an underwriter starts to uncover surprises, they may hold a file up for a while to do a bunch of unnecessary digging to find out if there are any other issues that the borrower failed to mention.

4. Funds for Closing-

Lenders will want to source where every dollar for the transaction is coming from and verify that it has been deposited into your bank account. If funds need to be liquidated from a retirement account or home equity line start the process sooner rather than later.

Sometimes lenders will not release all of the funds immediately after a large deposit so it is important to have these in place well ahead of your closing date. The same applies for Gift Funds-make sure the donor is aware of your time frame and is willing to supply the required documentation to your lender.

5. Title and Judgment Searches–

Typically, title and judgment searches are performed farther along in the mortgage process because they are not ordered until after you receive your mortgage commitment. These searches could reveal judgments against your name or the sellers along with liens against the property you are buying or selling.

Sometimes, even an old mortgage appears against the property since it was never properly discharged, or if you have a common name items could appear that are really not yours.

Either way, the underwriter and title company will want to be sure that these are cleared up before the closing.

6. Homeowners and Flood Insurance Coverage –

Lenders want to review your policy several days prior to closing to make sure coverage is sufficient and accurately account for it in your monthly payment.

Insurance coverage can sometimes be difficult to obtain depending on your past history with claims, credit, location and type of the property.

Items to Bring to Closing Appointment:

Your real estate agent and/or mortgage loan officer should be providing you with a final list of documents that need signatures or updated verifications, so the general list of items needed at closing is quite basic:

1.  Funds To Close –

If you are required to bring in a down payment and/or pay for closing costs to finalize the transaction, you’ll need to bring a certified check from a bank.  The escrow company, your agent and loan officer should provide you with a full breakdown of all fees / costs involved in the transaction.

While these final numbers may be more accurate than the initial Good Faith Estimated which was provided at the beginning of the application process, there will still be a small buffer amount added by escrow to cover any prepaid interest or other minor changes.

If you don’t have to bring in any funds to close, then you might actually be getting a portion of the Earnest Money Deposit back.

Keep in mind, it is important to make sure these funds to close come from the proper sources.

2.  Proof of Identification –

Official Drivers License or State ID card.  Passports will work as well.

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Frequently Asked Questions:

Q:  Does It Matter Which Day of the Month I Close?

The date of your closing is all about how you view the money being applied. Pay now or pay later, but it will always be collected.

Let’s first look at how mortgage payments are broken down:

When you pay your rent for the month, you are actually paying for the right to live in the house for the upcoming month.

However, your mortgage payment is broken into four separate components; principle, interest, taxes and insurance (PITI).

The principle is paid towards the upcoming month, interest is paid towards the previous month and the taxes and insurance are deposited into an impound account.

As far as closing on a particular day of the month to save money on interest payments, it depends on the type of loan program you are using.

If you’re more concerned about successfully closing with the least amount of stress, then early to mid month is usually the best time to close.

Q:  I am refinancing an FHA loan, will it benefit me to close in the beginning of the month?

No, in fact FHA refinances should always close at the end of the month because you are responsible for the entire month’s interest.

Q:  Should I be concerned about the closing date on a conventional loan refinance?

Not really, however you can save a couple dollars by closing early in the month, just avoid closing on a Friday because you could be responsible for the interest on two loans over the weekend.