When selling a home without a realtor, or even if you engage a realtor to sell your home, the buyer may need to obtain a mortgage in order to complete the purchase. Most likely when you bought your home you obtained a mortgage. Therefore you are may be familiar with the steps you went through. And I will briefly go over them. However, do you know what the seller experienced? We are going to discuss what you need to know when your buyer is getting a mortgage.
First, as the seller there are a few things you should be aware of.
- In your contract of sale, it states how long the buyer has to obtain a mortgage approval. Be mindful of this date, as the underwriting process is very quick these days.
- All mortgage approvals require “Conditions” to be satisfied before “Clearing the loan to close.” The conditions will be a title report, may ask for an appraisal, and it may ask for other items such as updated paystubs, bank statements, tax transcripts. As the seller you are entitled to a copy of the mortgage approval as well as the conditions needed to be satisfied so the lender will allow the funds to be released.
- Most mortgages will require an appraisal. This means a state licensed individual will visit your home, take measurements of rooms and take photos of every single room, as well as the entire exterior of the home. They will want take a picture of any heating and hot water appliances, as well as any well water hardware. If your home has other structures like a detached garage, the appraisal will want to photograph them as well.
Depending on the loan type the appraiser will also want to look at the smoke and carbon monoxide detectors. Also, some loan types may require chipped paint to be repaired, hand railings to be installed, and steps to be installed for certain exit doors. If it is possible to fix these things prior do so. However, in some cases the appraiser may put what is called a “Cost to cure” for these items. That means it may cost for example $500 to repair these items and simply reduce that amount from the appraised value. Sometimes this small deduction will not affect the deal at all.
There are certain types of FHA and with all VA loans, that will require these items to be repaired before the closing. In these cases the appraiser comes out a second time to take a photo of the repair.
- All mortgages will require a title report and title insurance. This is a search of the history of the home to make sure the seller or sellers are the rightful owners, and it searches for any liens on the property, as well as a written description of the dimensions of the property. There are many things that a title report will include such as a search of the local building department, local village and town, for any open permits, violations, or any amounts due.
- Once the loan is cleared by the lender to close a date will be set for the closing. You will be informed of what you need to bring at this point from a title company or attorney, whomever is doing the settlement or closing. If there are mortgages or liens that need to be paid off the payoff letters must be brought to provided prior to closing so it may be listed on the closing disclosure (The Closing disclosure is what lists out all the expenses for the buyer and seller.).
- In many cases at the closing, the lender must receive a copy of all the signed documents before they will issue the approval to fund.
Before I go on to discuss the different types of loan programs it is important to note a growing scam in real estate. Somehow hackers know you are about to close, they may have hacked your emails or the settlement agent (Attorney or title company.). You will receive a very real looking email with wiring instructions to send or receive money. The way to not fall for this scam is to always call the person you are wiring the money to or whom is going to wire you the money, from a number that you obtain outside of the email, and confirm first that they sent you an email and second the actual wiring instructions. Click here to read about what the Federal Trade Commission has to say about this type of fraud.
Here we are going to discuss the many different types of loan programs. The purpose of this and the hopeful take away is for a seller to be familiar with the basic loan programs, how long they take, what if anything you need to know as a seller about the loan program, and why the buyer chose this loan program.
Right now there are many different loan programs for buyers to qualify under. All offer different benefits that ultimately boil down to the rate, lower PMI costs if putting less than 20% down, and in some cases less documentation.
It is also important to note, a buyer may also go to different types of sources to get a mortgage. They may use a mortgage broker, a loan officer at a bank such as the local bank in your area or a large bank like Chase, or they may get a loan from a credit union. All are not the same. To not get too off topic, loan officers that work as mortgage brokers are signed up with many different lenders and thus offer a wider range of options than a bank or credit union that is limited to their own programs. There is not one that is better than the other because it really boils down to the quality of the loan officer. It is for this reason in my article, “How to manage and reply to offers.” I recommend speaking with the loan officer that issued the pre approval during the negotiating process. A professional knowledgeable licensed loan officer that cares makes all the difference.
Conventional Mortgage
A conventional mortgage is the most common type of mortgage. This is a loan that a government sponsored company Fannie Mae and Freddie Mac, will purchase from a lender in order for the lender to recoup the money they lent, in order to lend it to more people. There are many programs that fall under the conventional loan title, HomeReady, HomePossible, High balance loans, to name a few. Conventional loans tend to offer the lowest cost. What I mean by cost is that some loans, like FHA and VA loans discussed below, have funding fees charged at closing. FHA also requires the PMI for the life of the loan unless a certain down payment is met. Compared to conventional loans where the PMI goes away when a certain loan to value of the home is reached. Also conventional loans offer lower interest and PMI rates if the buyer meets certain income requirements. The conventional loan application, approval, and closing process has decreased substantially over the years, especially since COVID pandemic. There are lenders that boast of an application to closing day of less than week. This is possible because some conventional loans do not require an appraisal. Generally a conventional loan will take about 21 to 60 days to close, if not quicker.
FHA
FHA loans are mortgages that meet the HUD guidelines for lending. Housing and Urban Development, a federal government agency controls FHA loans. This loan type was created for those borrowers that have some credit issues and or little money to put down. FHA also offers a rehab loan for homes that need repairs. FHA loans will accept very low credit scores, and offer as little as 3.5% down. FHA loans charge the borrower a funding fee at closing that is included in these loans and require in some cases PMI for the life of the loan to offset the risk of these loans. FHA loans in the past few years have offered lower interest rates than conventional loans. So they are beginning to gain in popularity again, as they did in the 80s and 90s. FHA loans take a little longer than conventional loans because certain information and approvals have to be obtained from HUD. A FHA loan can close as fast as 30 days but typically takes 60 days to close.
It is important to note that if a buyer of your home is getting an FHA loan, the appraisal stays with the property. So if that buyer backs out another buyer looking for an FHA loan can use the same appraisal. This can be an issue when there are problems with a home. Once the FHA has held the appraisal, if there are repairs noted, they will need to be completed regardless of whom the buyer is or the lender. FHA appraisals are good for 120 days, after which they get recertified or a new appraisal is ordered.
VA
VA loans, loans for those whom have served in the military. They offer no down payment, and no PMI. In fact a VA loan will lend 103% of the value of the home, meaning the buyer does not have to put any money down and can finance all the closing costs. VA loans like the FHA loans require a little more work behind the scenes than a conventional loan thus typically closing is between 45 and 60 days. VA appraisals have a special ordering process. And as of today they don’t allow the Veteran getting the loan to pay any real estate commission which is a new issue in light of the law suits against realtors that are forcing buyers to pay real estate commissions directly. VA loans are very good loans that have some unnecessary bad press. A seller should not be wary of a VA loan. The appraisals like the FHA are going to look for the chipped paint, hand rails on stairs and other items. As noted above the seller can always repair these items prior to closing if needed.
NON QM loans
Simply put Non QM loans are ones in which the buyer does not supply the typical information a buyer would to get a conventional FHA or VA loan. These types of buyers may have provided only bank statements for proof of income. In some cases the buyer is going to use what would be considered market rent if the property were being rented in order to qualify for the loan. In all cases these types of loans require no less than 10% down. However because of the limited documentation needed to close this type of loan, the process for closing can be extremely quick. Because they all require an appraisal since the property is vital to the loan, these loans can close in 15 to 45 days.
Hard money loans
These loans are high interest rate high cost loans that are not advisable to get. A buyer will use hard money when they cannot qualify for any other type of loan. These loans generally require very large down payments and an appraisal. These loans can close in as fast as 7 days.
As a seller it is important to stay on top of the buyer, especially those selling without a realtor. You want to be mindful of the time frame things should take. When is the buyer suppose to get the mortgage approval? Was the appraisal ordered if required? Has the title report been ordered? Buyers that drag their feet can cause delays in getting the loan approved and closed or more importantly may indicate an problem the buyer is having with getting a loan.
