Lesson 6: Finalizing Your Loan
Jewell: Hello, my name is Jewel DiDucca. Welcome to American Consumer Credit Counseling's presentation on home buying. Our home buying workshop is a nine lesson series focused on the essentials of owning your own home. Today in lesson 6, we'll be discussing finalizing your loan. Let's begin.
Now that you have an accepted purchase and sale agreement, there are some additional inspections, certification documents and approvals that are needed before final underwriting of the loan can be completed. The first thing you need to do is to get your home inspection scheduled. We highly recommend that you have a home inspection. Remember that there's probably a time limit stage in the contract for accomplishing this. When choosing a home inspector, there are a few things you should consider. First, ask for recommendations from your real estate agent, lender, friends, or coworkers. You can also consult national associations for a listing of inspectors in your area. Secondly, remember to interview potential inspectors. At the very least, ask them how long they've been an inspector and what qualifications they have. You want to get the most qualified and experienced person you can get.
Lastly, remember that while price is always a concern, you should keep in mind that you may get what you pay for. In this case, the least expensive home inspection may cost you much more in the long run. Once you've decided on a home inspector, he or she will then go through the home with you and identify any current problems, potential problems and future maintenance issues that you'll need to consider for financial or structural reasons. A good home inspector will take 1 1/2 to 3 hours to inspect the home. They'll point out issues to you as they discover them, they'll also provide you with a full written report to keep for your records. A good home inspector will also identify potential problems and suggest that you have additional testing for radon, lead-based paint, termites, water quality and septic function.
Please remember however, that inspectors are human and they may not be able to identify every problem in the home that you wish to buy. Also, the home inspector usually cannot be held liable for hidden defects that may arise later. Once the home inspection is completed, you'll need to address any problems that the inspector identified with the seller of the home. Also make sure to let the lender know that it's okay to proceed with this property, once you have an agreement on those issues. Another important task that needs to be completed is the appraisal on the property. The lender will usually order the appraisal on your property as soon as the contingencies for the inspections and credit approval are removed from the offer, or they're told to proceed by you, the buyer. An appraisal is done to set the market value of your home and to determine if the home meets industry standards. The appraised value needs to be at least as much as the purchase price because if you were to default on the home, the lender needs to know that they could sell the property for at least the purchase price that you paid.
Also, if the property does not appraise for at least the amount of the purchase price, you'll need to come up with the dollar value difference between the appraised value and the purchase price. The market value of your property is usually determined by comparing your home with at least 3 similar homes within a 3-5 mile radius that have sold within the past 6 months. Once the market value is determined, the appraiser will identify any items that could affect the use of the home such as any major structural problems, safety issues, or non-functioning systems. If the appraiser discovers any issues of concern, the lender may require that these items be repaired before the loan can close. You should know that any problems discovered at this point would need to be negotiated between the buyer and the seller.
Normally the seller is responsible for those items unless he's selling the home 'as is'. However, the home is expected to be safe and in good functional condition at the time of the closing. Sometimes the lender may refuse to make the repairs. In this instance, the lender will reject the loan based on unacceptable appraisal. Please remember that it's not in the buyer's best interest to pay forward or do repairs on a home that they do not own. If you cannot make an agreement with the seller to address repair items, you may need to look for another house.
There are also a few other items that the lender will want to verify before they finalize your loan. These can include obtaining flood certification. The lender will order this to see if the house is in a flood zone. If it's discovered that your property is in a flood zone, you'll need to carry flood insurance since regular homeowner's insurance doesn't protect against floods. The lender will also order a title search from a title company or attorney. The title company will then research the chain of ownership on the home to make sure you have a clear title. Having a clear title means that there are no liens or claims against the property which could affect your ownership interest in the property. Lastly, the lender will order a survey or plot plan if required. A survey is a measured drawing that shows the property you're buying, any improvements on it, such as a garage, driveway or fence and it also shows easements or rights of way granted to utility companies or other parties.
The three most common types of surveys used for mortgage loans are 1. The location survey. This type of survey locates one or two corners of the property and house. A drawing is then based on these measurements but does not guaranteed to be 100% accurate. You'll also find that a location survey is the least expensive. There's also a boundary survey. This type of survey locates all corners of the property and creates a drawing that is 100% accurate. It's a more expensive type of survey, but it's guaranteed to be correct. The final type of survey available is the elevation survey. The elevation survey is the one in which the heights or elevation points of all corners of the property house and other improvements are measured. These types of surveys are important for new construction and also determine the elevation of the property for flood purposes. Due to the complexities, the elevation survey is the most expensive.
Once all of the inspections, appraisals, certifications and verifications are finalized, the final underwriting review of your loan will be completed. Keep in mind that a loan will not be allowed to close unless everything meets the underwriting requirements. If the underwriting requirements are not met, your loan could be denied and your purchase of the property would probably not be able to be completed. To prevent this from happening, make sure that you get specific details about any condition that you have to meet and what documentation would be acceptable. After meeting the requirement of finalizing your loan, you're well on your way to home ownership. This concludes our discussion on Lesson 6, finalizing your loan. I'm Jewell DiDucca with American Consumer Credit Counseling. Please join us next time for Lesson 7, and we'll discuss closing your loan.