Mortgage Closing Check List

As a first-time home buyer, you’re probably about to make the biggest purchase of your life to date. But how can you avoid unexpected complications between the time you find the home of your dreams and the day you close on the deal?

Use our checklist to help ensure everything goes smoothly.

• Compare mortgages. Don’t simply accept the first mortgage option presented to you by your bank, real estate agent or mortgage broker. Spend time comparing offers to be sure you get a plan that’s right for you. There are several variables to consider including the type of mortgage, the term and the lender. Be sure to weigh all of your options.
• Get pre-approved. Getting pre-approved for a mortgage enables you to know exactly how much you can afford to spend. It allows you to make a more aggressive offer, present the seller with more attractive terms and negotiate a better price. It also helps prevent you from losing out to another purchaser who already has financing arranged.
• Reserve funds for closing. In addition to your down payment, you will need to reserve funds for closing costs. Depending on the type of mortgage and your location, these costs can range from 2 percent to 6 percent of the loan, must be paid in cash (certified check) at closing and cannot be borrowed funds.
• Hire a home inspector. You should always check the condition of the home you are purchasing to be sure the home is structurally sound. For that assessment, you should hire a home inspection company (preferably one belonging to a reputable association or that is licensed to practice engineering) and get a detailed written report. Attend the inspection so you can ask questions and discuss concerns.
• Search the title. Your lawyer should search the title records to make sure you’re buying the house from its legal owner and there are no liens (claims on the property as security for money owed), overdue special assessments or other claims or outstanding restrictive covenants filed on record, which would adversely affect the marketability or value of title.
• Obtain home insurance. Another key part of the financing process is obtaining home insurance. Your mortgage lender will require proof of a valid homeowners insurance policy, secured before closing. This policy will protect your investment as well as the lender’s.
• Set a move-in date. Make an agreement with the seller when you sign the purchase agreement as to when you will take possession of the home and when you will move in. Put the agreement in writing to make sure you are both on the same page when it comes to moving day. If you wish to hire a professional mover, compare rates and services as well as availability.
• Obtain a copy of the settlement statement. Before closing, obtain a copy of the settlement statement. It indicates the total amount of funds you will need at closing to cover the balance owed on the property and other disbursements. It also gives you a chance to iron out any possible discrepancies. You will then be prepared at settlement to pay the outstanding balance so the title can be smoothly transferred over into your name.
• Avoid closing at the end of the month. The end of the month and the end of the year are both very busy times for closing agents and mortgage lenders. Avoiding these times means you’re likely to get more personal attention and there will be less chance of an error being made.

Applying for A Mortgage

The process of applying for a mortgage may seem somewhat overwhelming, however the process of applying for a home mortgage loan is actually relatively straight forward. The difficulty typically lies in the applicant gathering together the necessary information and documentation to support their home mortgage application.

Individuals who are organized and keep good records should have little trouble pulling together the necessary supporting documentation. Individuals who are not organized, or who do not save pay stubs and account statements, may have to spend more time collecting together the necessary documentation.

Mortgage Application

The process of applying for a mortgage starts with filling out the mortgage application. This may be done in one of several ways:

The borrower may fill out a traditional paper application received from the lender or downloaded from their web site.

The borrower may verbally provide the application information to the mortgage lender who will input it into a computer and send the completed application back to the borrower for review and signature.

The borrower may fill out an application form online.

Information Needed for a Mortgage Application

Regardless of the means by which the application is filled out, the borrower will need to have certain information in order to complete the application. This information includes:

• Information about the property being purchased including purchase amount, down payment amount, address, property tax information, and estimated homeowner’s insurance.
• Information about each borrower on the application including name, social security number, address, phone number, marital status, and number and ages of dependents.
• Employment information covering the last two years for each borrower on the application.
• Monthly income information for each borrower on the application.
• Asset information for each borrower including account numbers and balances. The application also asks for automobile information (year and type) as well as estimated value, and the value of other assets (furniture, jewelry etc.).
• will need to provide the name and address of each company to whom they owe money, as well as account numbers.
• any mortgage liens; gross rental income if any; monthly mortgage payments if any; and insurance, tax, and miscellaneous payments associated with the property.
• Along with the mortgage application, the borrower should be prepared to sign a great deal of additional paperwork, which may include all, some, or more than the following, depending on state regulations:
• Request for verification of rent or mortgage (if applicable)
• Request for verification of employment
• Request for verification of deposits
• Good Faith Estimate
• Federal Truth in Lending Disclosure Statement
• Mortgage Loan Origination Agreement
• A servicing disclosure statement
• Borrower’s certification and authorization
• Disclosure notices
• Required Documentation
• For the “typical” mortgage application, a great deal of supporting documentation must be provided. This documentation includes (but may not be limited to):
• Copies of the last six months worth of statements for checking and savings accounts
• Statements or other evidence for any other assets (bonds, stocks, or retirement savings such as 401k or 403b programs)
• Recent paycheck stubs
• W-2 income tax withholding forms for the past two years. Self employed individuals may be asked to provide income tax returns for the past two years to verify their income.
• List of all credit card accounts and the approximate monthly payment
• List of account numbers and balances for any outstanding loans (car loans, student loans, etc.)
• The name and address of someone who can verify employment
• Purchase and sales agreement for the new home (not necessary in the case of a refinance)
• Homeowner’s association contact information if the property is a condo or part of a homeowner’s association

An individual’s particular situation may dictate additional documentation requirements. A divorced individual who pays or receives alimony will be asked to provide a copy of the divorce decree documenting the alimony. It is also common during the application and underwriting process for a lender to ask for additional documentation in support of a particular part of the application.

Low-Doc/No-Doc

Certain loans may require less or no documentation, may not verify assets, may even not verify employment. Self employed individuals and individuals for whom documenting income may be difficult or too much of a bother may seek out these types of loans to simplify the application process. For these loans, little or no supporting documentation is provided. Borrowers usually pay a higher interest rate for the convenience of low and no documentation loans.

Reasons an Application May Not be Approved

There are many reasons that a loan application may not be improved. These can include:

• An appraisal that comes in lower than the selling price of the house. Such an appraisal can throw off loan-to-value ratios. Lenders will also not typically lend more than a house is worth.
• Inability to verify information provided in the mortgage application.
• A poor credit report.
• Not enough income for the mortgage being requested.
• Too much debt making the loan too risky.
• Inaccuracies in the mortgage application (which may also constitute fraud).

If a borrower’s application is turned down, federal law requires the lender to tell them, in writing, the specific reasons for the denial. The borrower should make sure that they understand the reasons given. Understanding the reasons may allow them to find answers or alternatives that will satisfy the lender’s lending standards or help to improve their chances with another lender.

Options if a Loan Application is Not Approved

For an individual who has their mortgage application declined, there are many options, which can include:

• Seek out another lender who may be willing to overlook the reasons that caused the first rejection. The borrower will typically pay a higher interest rate for the lender’s acceptance of a riskier loan.
• Increase the down payment to improve debt-to-equity ratios and lower the amount of the loan.
• Pay off debt to improve debt ratios.

Consider other types of loans with lower initial payments allowing the borrower to qualify such as adjustable rate mortgages, graduated payment mortgages, or interest only mortgages.

Buying a Fixer-uppers 

You can find distressed properties or fixer-uppers in most communities, even wealthier neighborhoods. A distressed property is one that has been poorly maintained and has a lower market value than other houses in the immediate area.  

Ascertaining whether the property you’re interested in is a wise investment takes some work. You need to figure what the average house in a given area sells for, as well as what the most desirable houses in that area are like and what they cost.   

Some experts suggest that buyers who take this route try to find a “cosmetic fixer” that can be completely refurbished with paint, wallpaper, new floor and window coverings, landscaping and new appliances. You should avoid run-down houses that need major structural repairs. A house price that looks too good to be true probably is. A smart buyer will find out why before buying it.   

The basic strategy for a fixer is to find the least desirable house in the most desirable neighborhood, and then decide if the expenses needed to bring the value of that property up to its full potential market value are within one’s rehab budget.   

How do you find out the value of a troubled property? 

Buyers considering a foreclosure property should obtain as much information as possible from the lender about the range of bids being sought.  

It also is important to examine the property. If you are unable to get into a foreclosure property, check with surrounding neighbors about the property’s condition.   

It also is possible to do your own cost comparison through researching comparable properties recorded at local county recorder’s and assessor’s offices, or through Internet sites specializing in property records.   

Are there programs for fixer-uppers?  

If you need home loan to buy a “fixer-upper” and remodel it, look at the U.S. Department of Housing and Urban Development’s Section 203(K) loan program. The program is designed to facilitate major structural rehabilitation of houses with one to four units that are more than one year old. Condominiums are not eligible.  

A 203(K) loan is usually done as a combination loan to purchase a “fixer-upper” property “as is” and rehabilitate it, or to refinance a temporary loan to buy the property and do the rehabilitation. It can also be done as a rehabilitation-only loan.   

Investors must put 15 percent down while owner-occupants are required to come up with only 3 to 5 percent. HUD requires that a minimum of $5,000 be spent on improvements.   

Two appraisals are required. Plans and specifications for the proposed work must be submitted for architectural review and cost estimation. Mortgage proceeds are advanced periodically during the rehabilitation period to finance the construction costs.   

Return on remodeling jobs 

Remodeling magazine produces an annual “Cost vs. Value Report” that answers just that question. The most important point to remember is that remodeling a home not only improves its livability for you but its curb appeal with a potential buyer down the road.   

Most recently, the highest remodeling paybacks have come from updating kitchens and baths, home-office additions and extra amenities in older homes. While home offices are a relatively new remodeling trend, for example, you could expect to recoup 58 percent of the cost of adding a home office, according to the survey.   

Government programs for rehab 

The U.S. Department of Housing and Urban Development’s Section 203 (K) rehabilitation loan program is designed to facilitate major structural rehabilitation of houses with one to four units that are more than one year old. Condominiums are not eligible.   

The 203(K) loan is usually done as a combination loan to purchase a fixer-upper property “as is” and rehabilitate it, or to refinance a temporary loan to buy the property and do the rehabilitation. It can also be done as a rehabilitation-only loan.   

Plans and specifications for the proposed work must be submitted for architectural review and cost estimation. Mortgage proceeds are advanced periodically during the rehabilitation period to finance the construction costs.   

For a list of participating lenders, call HUD at (202) 708-2720.   

If you are a veteran, loans from the U.S. Department of Veterans Affairs also can be used to buy a home, build a home, improve a home or to refinance an existing loan. VA loans frequently offer lower interest rates than ordinarily available with other kinds of loans. To qualify for a loan, the first step is to apply for a Certificate of Eligibility.   

Another program is the Federal Housing Administration’s Title 1 FHA loan program.   

Resources: 

• “Rehab a Home With HUD’s 203(K)” brochure, U.S. Department of Housing and Urban Development, 7th and D streets S.W., Washington, DC 20410.

Resources on home improvement

If you’re getting ready to embark on a home improvement project involving contracting help, “Ready, Set, Build: A Consumer’s Guide to Home Improvement Planning Contracts” lays out a road map for selecting the right contractor, obtaining competitive bids up to what to include in a contract. There also is information on consumer rights, liens and financing.   

The book is available for $9.95 through Consumer Press and Women’s Publications, Inc., Dept. SR01, 13326 Southwest 28th St., Fort Lauderdale, FL 33330-1102; (954) 370-9153.   

Resources:  

• Profiting From Real Estate Rehab, Sandra M. Brassfield, John Wiley & Sons Inc., New York; 1992.
• Remodeling magazine’s annual “Cost vs. Value Report”, available for a nominal fee from the magazine; call (202) 736-3447 to order a copy.

Tax breaks for historic rehab

Qualified rehabilitated buildings and certified historic structures currently enjoy a 20 percent investment tax credit for qualified rehabilitation expenses. A historic structure is one listed in the National Register of Historic Places or so designated by an appropriate state or local historic district also certified by the government.   

The tax code does not allow deductions for the demolition or significant alternation of a historic structure.   

Resources:  

• National Trust for Historic Preservation, Washington, D.C.; (202) 588-6000.

Trustee sales

Trustee sales are advertised in advance and require an all-cash bid. The sale is usually conducted by a sheriff, a constable or lawyer acting as trustee. This kind of sale, which usually attracts savvy investors, is not for the novice.   

In a trustee sale, the lender who holds the first loan on the property starts the bidding at the amount of the loan being foreclosed. Successful bidders receive a trustee’s deed.   

Get-rich-quick real estate schemes 

Most real estate experts say there is no such thing as getting rich quick in real estate. But there are no end of get-rich-quick programs presented to the public as alternative methods of buying real estate. Some are reputable while others depend on your financial circumstances to work. A handful are simply scams.   

Many get-rich-on-real-estate programs offer advice on how to buy government foreclosure properties and participate in other government programs. Most of this information can be obtained by calling the government offices involved directly.   

Anyone interested in real estate investments would be wise to explore a variety of sources. Most investors view real estate as a long-term investment. Deals that sound too good to be true often are.

Foreclosures

Buy a home below market?  

While a typical home buyer may look at five to ten homes before making an offer, an investor who is looking for bargain properties usually look at many more. Most experts agree it takes a lot of determination to find a real “bargain.” There are a number of ways to buy a bargain property: Most experts agree it takes a lot of determination to find a real “bargain.” There are a number of ways to buy a bargain property:   

• Buy a fixer-upper in a transitional neighborhood, improve it and keep it or resell at a higher price.
• Buy a foreclosure property (after doing your research carefully).
• Buy a house due to be torn down and move it to a new lot.
• Buy a partial interest in a piece of real estate, such as part of a tenants-in-common partnership.
• Buy a leftover house in a new-home development.

What types of foreclosure are there?

Judicial foreclosure action is a proceeding in which a mortgagee, a trustee or another lien holder on property requests a court-supervised sale of the property to cover the unpaid balance of a delinquent debt.   

No judicial foreclosure is the process of selling real property under a power of sale in a mortgage or deed of trust that is in default. In such a foreclosure, however, the lender is unable to obtain a deficiency judgment, which makes some title insurance companies reluctant to issue a policy.   

Are foreclosures an option?  

A foreclosure property is a home that has been repossessed by the lender because the owners failed to pay the mortgage. Thousands of homes end up in foreclosure every year. Economic conditions affect the number of foreclosures, too. Many people lose their homes due to job loss, credit problems or unexpected expenses.   

It is wise to be cautious when considering a foreclosure. Many experts, in fact, advise inexperienced buyers to hire an expert to take them through the process. It is important to have the house thoroughly inspected and to be sure that any liens, undisclosed mortgages or court judgments are cleared or at least disclosed.   

What are problems buying foreclosures?  

Buying directly at a legal foreclosure sale is risky and dangerous. It is strictly caveat emptor (“Let the buyer beware”).   

The process has many disadvantages. There is no financing; you need cash and lots of it. The title needs to be checked before the purchase or the buyer could buy a seriously deficient title. The property’s condition is not well known and an interior inspection of the property may not be possible before the sale.   

In addition, only estate (probate) and foreclosure sales are exempt from some states’ disclosure laws. In both cases, the law protects the seller (usually an heir or financial institution) who has recently acquired the property through adverse circumstances and may have little or no direct information about it.   

Where can you find foreclosures?  

In most states, a foreclosure notice must be published in the legal notices section of a local newspaper where the property is located or in the nearest city. Also, foreclosure notices are usually posted on the property itself and somewhere in the city where the sale is to take place.   

When a homeowner is late on three payments, the bank will record a notice of default against the property. When the owner fails to pay up, a trustee sale is held, and the property is sold to the highest bidder. The financial institution that has initiated foreclosure proceedings usually will set the bid price at the loan amount.   

Despite these seemingly straightforward rules, buying foreclosures is not easy as it may sound. Sophisticated investors use the technique so novices may find themselves among stiff competition.   

Resources: 

• “The Smart Money Guide to Bargain Homes, How to Find and Buy Foreclosures,” James I. Wiedemer, Dearborn Financial Publishing, Chicago; 1994.
• “Real Estate Principles,” Charles O. Stapleton III, Thomas Moran and Martha R. Williams, Dearborn Financial Publishing, Chicago; 1994.
• “Real Estate Investing From A to Z,” William H. Pivar, Probus Publishing, Chicago, 1993.

How do you get financing for a foreclosure?

One reason there are few bidders at foreclosure sales is that it is next to impossible to get financing for such a property. You generally need to show up with cash and lots of it, or a line of credit with your bank upon which you can draw cashier’s checks.   

How do you find government-repossessed homes? 

The U.S. Department of Housing and Urban Development acquires properties from lenders who foreclose on mortgages insured by HUD. These properties are available for sale to both homeowner-occupants and investors.   

You can only purchase HUD-owned properties through a licensed real estate broker. HUD will pay the broker’s commission up to 6 percent of the sales price.   

Down payments vary depending on whether the property is eligible for FHA insurance. If not, payments range from the conventional market’s 5 to 20 percent.   

One caution. HUD homes are sold “as is,” meaning limited repairs have been made but no structural or mechanical warranties are implied.   

Can I get a HUD home for as little as $100 down?  

If you are strapped for cash and looking for a bargain, you may be able to buy a foreclosure property acquired by the U.S. Department of Housing and Urban Development for as little as $100 down.   

With HUD foreclosures, down payments vary depending on whether the property is eligible for FHA insurance. If not, payments range from 5 to 20 percent. But when the property is FHA-insured, the down payment can go much lower.   

Each offer must be accompanied by an “earnest money” deposit equal to 5 percent of the bid price, not to exceed $2,000 but not less than $500.   

The U.S. Department of Veterans Affairs also offers foreclosure properties which can be purchased directly from the VA often well below market value and with a down payment amount as low as 2 percent for owner-occupants. Investors may be required to pay up to 10 percent of the purchase price as a down payment. This is because the VA guarantees home loans and often ends up owning the property if the veteran defaults.   

If you are interested in purchasing a VA foreclosure, call 1-800-827-1000 to request a current listing. About 100 new properties are listed every two weeks.   

You should be aware that foreclosure properties are sold “as is,” meaning limited repairs have been made but no structural or mechanical warranties are implied.   

Where can you find foreclosed HUD homes?  

The U.S. Department of Housing and Urban Development acquires properties from lenders who foreclose on mortgages insured by HUD. These properties are available for sale to both homeowner-occupants and investors.   

You can only buy HUD-owned properties through a licensed real estate broker, whose commission will be paid by HUD.   

Down payments vary depending on whether the property is eligible for FHA insurance. If not, payments range 5 to 20 percent. When the property is FHA-insured, the down payment can go much lower. Each accepted offer must be accompanied by an “earnest money” deposit equal to 5 percent of the bid price not to exceed $2,000, but not less than $500.   

You should be aware that HUD homes are sold “as is,” meaning limited repairs have been made but no structural or mechanical warranties are implied.   

You can only purchase a U.S. Department of Housing and Urban Development property through a licensed real estate broker. HUD will pay the broker’s commission up to 6 percent of the sales price.   

One good source is their Web page http://www.hud.gov .   

What about buying a foreclosure “as is”?  

Buying a foreclosure property can be risky, especially for the novice. Usually, you buy a foreclosure property as is, which means there is no warranty implied for the condition of the property (in other words, you can’t go back to the seller for repairs). The condition of foreclosure properties is usually not known because an inspection of the interior of the house is not possible before the sale.  

In addition, there may be problems with the title, though that is something you can check out before the purchase.

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