THE HOME BUYING & SELLING PROCESS - THE LOAN

Chances are that your new home purchase will be partly financed with a loan. The loan is a significant part of your home purchase and gets due attention from all parties involved in the transaction. Lenders can ease the pain of loan complications.

The most common types of loans are conforming, insured, and conventional loans. A conforming loan is a loan that meets the qualification of a Government-Sponsored Enterprise (GSE) like Fannie Mae or Freddie Mac. These loans usually have better rates and conditions than conventional loans.

The qualifying limit in Texas for conforming loans is currently $510,400 for single family homes. Loans above this amount do not qualify as a conforming loan. Conforming loans also require a minimum credit rate (typically above 620).

Insured loans are loans that are insured by government agencies like the Federal Housing Administration (FHA) or the Veterans Administration (VA). These agencies do not lend money. Instead, they insure or guarantee that the loans will be paid to the lender if you fail to meet the conditions of the loan. There are many types of FHA and VA loans available depending on your situation.

A conventional loan is not backed by any organization, federal or private. An example of a conventional loan is a jumbo loan for an amount exceeding the conforming loan limits. These loans typically require stronger credit (above 700 for best rates) and financial stability. Another example would be a subprime loan. These are loans with low credit ratings (typically below 640) and low down payments.

You will work directly with your lender or mortgage broker to obtain any of these types of loans. They will conduct a process called underwriting to compare your details with minimum loan requirements and calculate risk. If they are providing a conforming or insured loan, they will usually conduct the underwriting on behalf of those organizations.

Most loans require that you provide a minimum amount of money for down payment. The source of your down payment money must also meet minimum requirements. Your lender will explain that in detail, but essentially you can’t borrow your down payment money, even from a family member. However, in some cases you can accept gifted money for your down payment.

Lenders will have additional requirements to complete the loan process. They will want an appraisal and an inspection of the home to make sure it is indeed worth the money you will pay for it. They will also require that you have a homeowner’s insurance policy for the home with a minimum amount of coverage and that they are named insured on the policy.

Your lender will provide an estimate of closing costs for the loan to you and your escrow/title company. This estimate is required by law and helps you to know how much more money you will need to bring to closing in addition to your down payment.

Closing documents will include the loan note from the bank which is a document that describes the loan in detail and your agreement to pay it. The note will include the loan amount, interest rate, term, and monthly payments due. It will also indicate the total amount of money you will eventually pay for the loan.

Another closing document issued by the lender is a deed of trust. This document names a third party trustee by the lender that will be responsible for holding title to your property as long as you have the loan. The trustee can be any individual with the legal capacity to hold and transfer real property, but is typically someone who the lender trusts to manage the legal process of property transfer. This third party can take foreclosure action if you default on your loan agreement.

Lenders will insist on having your primary loan on your home in first position. This means that a lien will be placed on your home’s title giving the lender first priority of legal action if you default.

Second mortgages or loans smaller than the primary loan are sometimes possible. These loans will generally have higher rates and shorter terms than the primary loan since they take more risk as a secondary position holder of lien on title.

There are many more details and possibilities that go into a loan than are described here. Financial professionals and lenders are uniquely qualified to help you with this process. Sellers and real estate agents will not take you seriously if you have not met with a lender. This is why it is critical that you contact your lender before you begin searching for a home.