Homebuying 101

Mortgage Process

We walk you through the mortgage process from start to finish, with information about pre-approvals, inspections, and more.

Questions & Answers

What does escrow mean?

Once your offer has been accepted, you will put some money down right away to show that you're serious about moving forward with the purchase. This money is held by an impartial third party until all parties have agreed on the deal. When this is completed, the escrow is delivered from one party to the other and you can close on your home. Your money is applied toward your down payment.

The impartial third party is someone with nothing to gain or lose from your real estate transaction. That third party can be an escrow agent, title agent, or closing attorney - depending on where you live - and will handle the escrow process.

What is an escrow account?

Escrow accounts (in some states called impound accounts) are set up by mortgage lenders as an easy way to pay property taxes and insurance.

Because the bills for both property taxes and homeowners insurance are large and infrequent (payments happen about twice a year), you might prefer to pay these in monthly installments, along with your mortgage payments. The lender will determine the amount to be owed by calculating the yearly payment, then divide this number by twelve. The money is then put away until the bill is due, and the lender will be responsible for paying these bills on time.

Certain lenders will require you to maintain an escrow account, especially if you have less than 20% for a down payment.

What is an impound account?

Impound accounts (in some states called escrow accounts) are set up by mortgage lenders as an easy way to pay property taxes and insurance.

Because the bills for both property taxes and homeowners insurance are large and infrequent (payments happen about twice a year), you might prefer to pay these in monthly installments, along with your mortgage payments. The lender will determine the amount to be owed by calculating the yearly payment, then divide this number by twelve. The money is then put away until the bill is due, and the lender will be responsible for paying these bills on time.

Certain lenders will require you to maintain an escrow account, especially if you have less than 20% for a down payment.

Are there fees associated with going into escrow? If so, what are they?

There is a closing fee associated with going into escrow. It is generally calculated at $2 per every thousand of the home's purchase price plus $250. For example, if the home you're purchasing is $100,000, your escrow fee would be $2 x 100 + $250 = $450. This is paid to the impartial third party for conducting the closing, which can be a title company, escrow company, or attorney.

What other fees, outside of down payment, should I expect in purchasing and closing on a home?

The fees associated with closing a real estate transaction vary based on where you live and the property you buy, but are normally lumped together into one fee called a closing cost.

Closing fees include:

– running your credit report

– loan orgination fee

– attorney's fees

– charges for any inspection requested by the lender or you

– discount points (fees you pay in exchange for a lower interest rate)

– appraisal fee

– survey fee (the cost of verifying property lines)

– title insurance

– title search fees

– pest inspection fee

– recording fee (paid to a city or county in exchange for recording the new land records)

– underwriting fee (covers the cost of evaluating your mortgage application)

How do I estimate my total out-of-pocket costs when buying a home?

The best way to estimate your closing costs is to use the average percent and do your own math. Closing costs are typically 2-5% of the purchase price of a home.

Lenders are required to provide you with a Loan Estimate that includes your closing cost within three days of applying for a loan. The Loan Estimate should outline all out-of-pocket costs that are included with buying your home. However, the difference between the Loan Estimate and the actual cost of closing fees can fluctuate. For this reason, lenders must provide you with an HUD-1 (a standard form used to itemize services and fees you're being charged), which outlines the actual cost of all closing fees, within a day of closing.

What are typical closing costs?

Closing costs are typically 2-5% of the purchase price of the home.

Is there a way to avoid closing costs?

No-closing-cost mortgages are possible, but they don't mean you skip out on paying the fees, they're just paid at a different time in the process. You may also be able to negotiate with the seller to get them to pay all or some of the fees.

No-closing-cost mortgages, while eliminating the closing cost fees, may result in a higher interest rate. The seller might also put the closing fees into the total mortgage owed, in which case you will be paying interest on your closing fees, instead of paying them up front.

Alternatively, it is possible to negotiate with the seller so that they assume some of the closing fees.

How long does the closing typically take?

To close the sale of your home, you'll want to set aside a full or half day, though closing typically takes around thirty minutes to an hour. Make sure to bring your photo ID with you!

How long after closing do I receive my keys?

Whether or not you receive your keys on the day you close your home depends on the area in which you live.

In some areas, you will receive your keys during the closing appointment.

In other areas, the paperwork from the signing appointment must be recorded with the local government and the seller must confirm the receipt of money from the sale. If this is the case, it can take up to 2-3 days before you receive your keys.

How much money do I have to bring to closing?

Federal law requires that you be told the exact amount you will have to pay at closing at least one day before the appointment. Prepare to pay for the down payment, plus the closing fees. The easiest way to pay the money due at closing is by wire, although you can also often choose to use a certified or cashier's check. Personal checks won't be accepted.

Who comes to closing?

Who attends the closing can vary based upon where you live, though the following are commonly present:

– the home seller

– the seller's real estate agent

– the title company representative

– the attorneys of both the buyer and seller

– the closing agent, yourself

– the lender

Is the closing in person?

Many closings take place in person. The federal goverment now allows electronic signatures, meaning paperless, online closings are also possible.

What are the key qualities of a great lender?

The key qualities of a great lender are accuracy, efficiency, and timeliness.

Accuracy is important in a lender so that you can obtain a clear picture of what your rate, costs, and fees will be in the future.

Efficiency is important so that the process of getting approved can be as organized and painless as possible. You also want a lender that will return your calls and answer your questions in a way that is helpful to you.

Since the mortgage loan process is time sensitive, having a timely lender is imperative.

What should I be sure to ask all of the lenders I am evaluating?

You should make sure your lender can estimate and explain all of your fees. You may also want to ask for the contact information of previous clients to reach out to them to ask about their experience with this particular lender.

What is a pre-approval?

A pre-approval is a written statement from a lender that you have been pre-approved for a loan of a certain amount.

The lender qualifies you based on your income and credit information, and the pre-approval is usually good for sixty to ninety days. A pre-approval, however, does not guarantee a loan, nor does it lock in a rate and term. A lender will likely still require additional information before extending you a loan. If your financial situation changes, a lender can also cancel or modify your pre-approval. It does give you a good idea of what you can afford and lets real estate agents and sellers know that you are serious.

Why do I need to get a pre-approval?

When buying a home, getting a pre-approval is useful so that you can get an accurate idea of how much home you can afford, and thus target your search correctly.

Because a pre-approval determines if you qualify for a loan and how much the lender will give you, you will be able to know what types of homes you will be able to afford. This will save you time and effort during your home search. It will also let your real estate agent and home sellers know that they can take you and your offer seriously.

What sorts of documentation do I need to provide in order to get a pre-approval?

In order to get a pre-approval, typically you will need:

– proof of income (W-2s and pay stubs)

– bank statements showing your proof of assets

– employment verification

– your Social Security Number

– your signature allowing the lender to pull your credit report

Is my pre-approval something I need to send to my real estate agent?

It will benefit both you and your real estate agent if you send them your pre-approval.

Pre-approval indicates how much home you can afford. By looking at this, your real estate agent can make sure that you are looking at homes that are in your price range. This saves everyone time.

How does a pre-approval help in the homebuying process?

A pre-approval can speed up the homebuying process, as much of your loan application will already be filled out.

A pre-approval also offers a guide for how much you can afford and can make you stand out from other buyers.

What is the loan estimate mortgage form (LE)?

A Loan Estimate is a form that you recieve after applying for your mortgage, detailing important information about the loan you have requested.

Your lender is required to give you a Loan Estimate form three days after receiving your application. Information in this form includes the estimated interest rate, monthly payment, and total closing costs for the loan. It will also tell you about estimated costs of taxes and insurance, and how the interest rate and payments may change in the future. It also indicates if the loan has special features that you will want to be aware of.

Since all lenders are required to use the same Loan Estimate form, it's easy to compare and contrast different loans.

When can I lock in my interest rate and what does that do?

You can protect yourself against interest rate changes with a rate lock, since the rate can change between the time you talk to the lender and when you sign the home loan. Your lender will generally give you the option to lock your rate once you have moved into a certain stage of the loan process.

To lock in your interest rate, or make an agreement with a lender that will guarantee the interest rate they originally offered, you must wait until a seller has accepted your purchase offer for a specific property.

Will having a co-borrower help me qualify for a mortgage loan?

Having a co-borrower may improve your chances of getting a mortgage loan.

When applying for a mortgage, the financial history, job history, and credit of both you and the co-borrower is considered. This means that if your co-borrower has more established credit than you, this may help your chances in getting a loan. This also applies to your co-borrower's assets and income. You will both be responsible for payments, and have an equal stake in the house. Be sure to completely discuss and research a potential co-borrower's financial history, as poor credit could hurt your chances of getting a mortgage loan.

What sorts of inspections should I request before closing on my new home?

Typically, homebuyers order a general home inspection and get further inspections at the referral of the original inspector. A pest inspection is also typically recommended.

A general home inspection will usually include a report on the type and health of the house's heating and cooling system, electrical system, plumbing, walls, ceilings, flooring, foundation, roofing, drainage, and basement. If the inspector notices anything unusual about the home, it may be recommended that you seek out the inspection of a specialist - such as a pest inspection or lead-based paint inspection. These types of specialized inspections are outside of the expertise of general inspectors. Additionally, if you notice anything out of the ordinary about your home, you can ask for additional specialized inspections as well. For example, if you live in a high risk area for floods or earthquakes, you may want to ask for a soil stability inspection.

What are the most common types of inspections done prior to closing on a new home?

By far the most common inspection requested prior to closing on a new home is a structural and mechanical inspection.

This inspection makes sure that the roof, basement, plumbing, electrical systems and overall structure are sound. A detailed report is delivered to you, the buyer, and your agent. Additional inspections vary according to your preferences and the area in which your new home resides. Other inspections include radon (gas inspection), wood destroying pest inspection, well water and septic systems, asbestos, and lead based paint inspections.

What is a pre-qualification?

A pre-qualification is an estimate of what you might be able to borrow. Your bank lender will estimate your borrowing power based on information you provide about your income, assets, and sometimes your credit. This can take place over the phone or online, and will usually be free. Keep in mind this is not the same as a pre-approval, and in no way guarantees a mortgage loan, especially because none of the information you provide is verified with documentation.

Do I need to get a pre-qualification?

You don't need to get a pre-qualification, and cannot use the pre-qualification in the same way that you can a pre-approval when making an offer on a home.

What are the benefits of a pre-qualification?

The benefits of pre-qualification include knowing the size of loan you're likely to qualify for.

Because a pre-qualification gives you an assessment of how much you can reasonably borrow, it gives you an opportunity to discuss with your lender any goals or needs you may have regarding your mortgage. It helps determine the best type of mortgage for you, and speeds up the housing search as you find the price range that you can comfortably afford.

Is my pre-qualification something I need to send to my real estate agent?

It will benefit both you and your real estate agent if you send them your pre-qualification.

Pre-qualification is the first indication of how much home you can afford. By looking at this, your real estate agent can make sure that you are looking at homes that are in your price range. This saves both you and your real estate agent time. Keep in mind that your pre-qualification may qualify you for a greater loan than you can comfortably afford while still having enough money to buy the things you need, such as furniture. This may result in your real estate agent showing you homes that are, in fact, out of your range. That said, you are not required to share your pre-qualification with your real estate agent.

How does my pre-qualification help in the home buying process?

Pre-qualification helps in the homebuying process by narrowing down the price range of homes that you can afford. By knowing your borrowing power, you are able to accurately asses the type of monthly mortgage payments you can make, and thus figure out which homes you should be looking at. You can also give your real estate agent your pre-qualification, so that they know to only show you homes within that price range.

What sorts of fees do lenders typically charge?

Lenders charge fees for a variety of services. These may include:

– Application fees: Cover the cost of running a credit report and processing the application.

– Origination fees: (Also called underwriting fees) are charged by the lender for the cost of processing the loan, evaluating your credit, notary costs, and preparing documents.

– Points: These are optional and are paid at closing to reduce your interest rate, making your monthly payments cheaper over time.

– Appraisal and inspections fees: Cover the cost to evaluate the property.

– Pre-paid interest: charged for the balance of the month the closing takes place. The loan starts collecting interest the day it originates, but loan payments begin after the first month, so there’s a period where interest must be paid in advance. The total cost of this fee will depend on a few factors: your principal balance, interest rate, and the number of days between the settlement and last day of the month

– Mortgage Insurance: Amount will depend on your down payment. This does not apply to homebuyers who put at least 20% down

– Escrow account: If you’ve opted to set this up, you’ll have to deposit money for property taxes and homeowner's insurance in the hands of a third party, to be paid by the lender.

– Title search fee: Paid to ensure the seller holds clear title to the property

What is origination?

Origination simply means the process of initiating a home loan or mortgage. Simplified, the homebuying, or origination process, includes submitting a variety of financial information to a mortgage lender and getting approved for a loan.

What are origination points?

Origination points are loan fees that you pay to your broker or lender to cover the cost of the loan. One point equals one percent of the total loan amount; for example, if you take out a $200,000 loan and you pay two points, your fee will be $4,000. These points are typically negotiable in part or in full between you and your lender. Keep in mind that origination points are not tax deductible.

How do I estimate my total loan fees?

The fees that lenders typically charge include application fees, origination fees, "up-front" payments called points, appraisal fees, inspection fees, prepaid interest, mortgage insurance, escrow fees, and title search fees. Find out what you might be paying for each of these fees, and use this calculation to estimate how much you will be paying for your total loan fees.

What is a non-contigent offer?

A non-contingent offer is one in which you buy a house without a grace period. Normally, a buyer will go into a contract, and then have a contingency period during which they initiate a physical inspection and review before deciding whether or not to close the deal. In a non-contingency situation, this period of reflection does not happen.

What is the benefit of a non-contingent offer?

Non-contingent offers often occur in very competitive markets or when the home is being offered for a discounted price in exchange for a quick sale. Because of the low price, buyers feel they can make up for potential problems with the saved money, and, therefore, feel comfortable waiving common contingencies like inspection requirements.

What are appraisal fees?

Appraisal fees are the cost of having a licensed expert come out and asses the value of your potential home.

What is an appraisal?

An appraisal is when an expert evaluates your home and property to estimate how much it's worth. This will be done by a professional who is licensed by the state. In many cases, an appraisal is required by the lender so that they can ensure the home could sell for the price that they are lending to you.

How does an appraisal affect my loan?

Appraisals are an important part of the home buying process because they assure the lender that your home can sell for the amount they are lending you. If, for example, the selling price of the home is much higher than its value, there's a chance the lender will not loan you the money.

What happens if my appraisal comes in under value?

If the appraisal comes in under value, there's a chance your lender will not approve your loan for the home. Before moving on, however, you can attempt to either appeal the appraisal and hope for a higher number to come back, or you can negotiate with the seller to lower the asking price.

Who does the property appraisal?

The property appraisal is done by a licensed professional. These professionals are required to take courses and complete an internship in order to qualify.

Can I choose who does my property appraisal?

Lenders generally require that you use their designated appraiser when purchasing a home. This it to ensure the value of your home is being assessed by an impartial party.

Back to top