Complete Guide To Buying Your First Home Pt 2

Dated: 02/11/2018

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Appraisal Process


After you are through with the home inspections you’ll be moving on to the to appraisal process.  A home appraisal is an unbiased estimate of the true (or fair market) value of what a home is worth. All lenders order an appraisal during the mortgage loan process so that there is an objective way to assess the home’s market value and ensure that the amount of money requested by the borrower is appropriate. The appraisal can include recent sales information for similar properties, the current condition of the property, and the location of the property, i.e., insight as to how the neighborhood impacts the property’s value.


Who Will Be Appraising My Home?

Appraisals are conducted by highly-trained professionals who are licensed and/or certified to determine the value of a home fairly, objectively and without bias in the state where the property is located.  While no appraiser is infallible, his or her opinion of the value of your home is informed by rigorous training, numerous tests, several years of on-the-job experience and required continuing education. They are also required to substantiate every finding in their reports that could influence a home’s value. Appraisers and their employers (often appraisal management companies) are heavily regulated. Consequences of issuing deliberately misleading or biased reports can be severe, so appraisers work hard to remain impartial and keep personal value judgments and prejudices out of their work.


What Happens After the Appraisal?

After your future home has been appraised you will have to wait to get the final approval from the lender or a “clear to close.”  This process after the appraisal is called underwriting.  



In the mortgage underwriting process, an underwriter will make sure your financial profile matches your lender's guidelines and loan criteria. Then, your underwriter will make the final decision — to approve or deny your loan request. An underwriter's main task is to assess a borrower's risk. Have you ever declared bankruptcy or gone into foreclosure? Or, do you always pay your bills on time or have a fantastic credit score? These questions will reveal how you manage debt. They will also predict your ability to make the proposed mortgage payment.  


The 3 C's of Underwriting: Capacity, Credit, and Collateral

To more easily assess a borrower's risk, mortgage underwriters follow a set of guidelines — the 3 C's of underwriting.

Underwriters typically begin by looking at:

1) Capacity — Do you have the resources and means to pay off your debts?

The first question a mortgage underwriter asks is: can the borrower repay the mortgage? Underwriters determine the answer by analyzing and reviewing the borrower's employment, income, debt, and asset statements. In particular, underwriters will take a close look at your debt-to-income ratio. They want to see that you have enough money to fulfill your current obligations as well as your new mortgage. Underwriters will also verify the state of your savings, checking, 401(k), and IRA accounts. They want to make sure that if you lose your job or become ill, you will still be able to pay your mortgage.

2) Credit — Do you have a solid re-payment and credit history?

As we previously mentioned in Part 3, your credit is perhaps one of the most important factors in the loan approval process. Your credit report will reflect how you have handled and managed to repay past bills (car loans, student loans, and home equity lines of credit). It will also predict your ability to make the proposed mortgage payments on time and in full.

3) Collateral — What is the value and type of property being financed?

An underwriter wants to make sure a loan amount does not exceed a property's value. Otherwise, a lender may not be able to recover a loan's unpaid balance, in the case of a default. This is why an underwriter orders a home appraisal. This report will assess a home's current worth and safeguard a lender from lending too much money.

In addition, underwriters will also review the type of property you wish to purchase. Why is this? Well, not all homes have carried the same risks for lenders in the past. For example, many lenders consider an investment property a more risky investment than an owner-occupied home. Lenders assume that in a difficult financial situation, borrowers would more quickly walk away from an investment property than from their primary residence.

Final Thought

Some home loans can be very easy to underwrite; many of us, however, have more complicated financial lives that make underwriting more challenging. Don't stress if your financial picture doesn't seem perfect to you. Your mortgage loan officer, processor, and underwriter are working as a team to find a home loan program for which you qualify. For example, a strong income, a large down payment, and significant savings could offset some of your possible credit issues. Similarly, good credit and a sizable income could overcome a lower down payment.

Final inspection

Just before settlement, you’ll have the opportunity to do a final inspection of the property. Often this is done the day before or the morning of the settlement. Contact the agent to arrange this inspection.

The seller must hand over the property in the same condition as when it was sold. When you view the property for the final time you should check:

  • appliances, hot water system, heating, and cooling are in working order

  • structure, walls, light fittings, windows, and floor coverings are in the same condition as when you first saw the property

  • locks, keys, and automatic garage door controls are supplied and working.

If you’re buying a new home, make sure all the work is finished and that the appliances are installed and working. You can organize a defects inspection by a building inspector if you don’t feel confident checking these things yourself.

Settlement Day!

Finally, you have made it to the end of the road!  Settlement day is one of the most, if not the most, exciting day in the home buy process!  You are about to make one of the biggest investments and start your new life.  

What is Settlement Day?

Property settlement is the final stage of a property sale wherein the buyer completes payment of the contract price to the vendor and takes legal possession of the property.

Prior to Settlement Day

After you have done your final inspections and you have the clear to close you should receive an ALTA Statement.  The ALTA Statement is an itemization of all the fees and charges that both the homebuyer and seller must pay during the settlement process transaction.  Your agent and title conveyancer will go over each item and show you the exact amount of money you will need to write a check for.  It is important to go over these items prior to settlement so you don’t feel bamboozled when you get to settlement day.   

What Happens on Settlement Day?

On settlement day, at an agreed time and place, your settlement agent (solicitor or conveyancer) meets with your lender and the seller’s representatives to exchange documents. They organize for the balance of the purchase price to be paid to the seller.

Your lender will:

  • register a mortgage against the title of your new property

  • provide the funds to purchase the new property.

Your solicitor or conveyancer checks that:

  • any existing mortgage on the title to the vendor is discharged

  • any third party or person who has rights over the property (a caveat) is removed

  • all clauses on the sales contract are fulfilled

  • the transfer of land and mortgage is registered with the title office in your state or territory.

Once settlement is completed and you have signed all the papers, you can collect the keys from the agent and take possession of the property. It’s time to move into your new home at last!


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Shawn Connors

Shawn Connors is a licensed real estate professional that services the Philadelphia & Greater Philadelphia region. Shawn was born and raised in Philadelphia but has taken up new roots in Chester Coun....

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