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Home-Buying Process:
Mortgage Process 2

Objectives for this Lesson:

* Include in partcipant's packet.

Resources for this Lesson:
Key Points For Educator: What to Say For Learner:
Slide #1: The Mortgage Process Part II
The Mortgage Process Part II Introduce yourself. Participant Introductions.
Slide #2: Objectives:
  • Compare Options in the Loan Application Process
  • Identify Items Listed on the HUD-1 Document
  • Prepare for the Closing Process
 Explain: By the end of this session, you will be able to compare options in the loan application process, identify items listed on the HUD-1 document and prepare for the closing process.
Slide #3: Choosing a Loan
  • By law, ALL fees must be disclosed on the Good Faith Estimate.
  • Analyze and compare line by line each itemized fee on the Good Faith Estimate Forms.
  • Compare the Truth-in-Lending Disclosures of each loan option.
  • Select the institution with the best loan option for you.
 Transition Statement: Once you receive a Good Faith Estimate, Truth-in-Lending Disclosure and a “Buying Your Home” Booklet from several lenders, you can compare your loan options.

Explain: By law, ALL fees must be disclosed on the Good Faith Estimate. When choosing the loan option that best fits your needs, the first thing to do is analyze each fee listed in the Good Faith Estimate. Then, compare these fees line by line from one lending institution to another. Also compare the Truth-in-Lending documents for fees and penalties attached to the loans.
Slide #4: Locking-In on a Loan
Guarantees that the interest rate will not increase or decrease before the loan closes.
  • Float the rate
    • Allowed to lock in at any time during the application process.
  • Float the rate and the points
    • Once you make the decision to lock in your rate and points, it is extremely important that you get it in writing.
 Transition Statement: When comparing your options, you may come across three other issues with which you should be familiar.

Explain: First, during the application process your loan officer may ask you if you want to “lock in.”

A lock-in allows the borrower to guarantee that the interest rate will not increase or decrease before the loan closes. Many financial institutions have different options when you are trying to lock in your rate. Some may allow you to float the rate, while others may require that you “lock in” at the time you submit the application. By floating the rate, you will be allowed to lock in at any time during the application process.

Another option could be to both float your rate and points. Because the market is constantly changing, you never know when the rate and points may go up or down. Once you make the decision to lock in your rate and points, it is extremely important that you get it in writing. This will guarantee that the rate that was quoted is exactly what you are going to receive.
Slide #5: Escrow Account
  • Some lenders require consumers to prepay property taxes and insurance each month into this account.
  • At the end of the year, the bank pays the taxes and insurance on the property.
 Explain: Second, your loan officer may require you to set up an escrow account. If so, this information will be included in a disclosure statement.

This statement requires lenders to disclose to the consumer whether they require an escrow account to be set up to pay property taxes and insurance. If required, this document will disclose the specific amounts to be collected and when they are paid.
Slide #6: Servicing Disclosure Statement
  • Lenders are required to give the buyer written notification as to:
    • Whether they anticipate servicing the loan themselves
    • Or whether someone else will be servicing the loan.
  • This disclosure is usually given within the first three days of the loan application.
 Explain: Finally, your loan officer may give you a servicing disclosure statement.

Lenders usually do not service their own loans, but instead sell them on the secondary mortgage market. Lenders are required to give the buyer written notification as to whether they anticipate servicing the loan themselves or whether someone else will be servicing the loan. This disclosure is usually given within the first three days of the loan application.

This is important because if the loan is sold to another institution, you will not be working with the same mortgage company from which you obtained your loan.
Slide #7: Loan Application Process
  • You may receive additional papers to sign.
  • If you do not understand these, ask questions.
  • The loan officer helps you through the entire loan process.
  • Complete requested paper work as quickly as possible.
 Explain: In addition to the documents listed in this section, each lending institution may give you additional papers to sign. If you do not understand these or have questions, ask the loan officer to answer them for you. The loan officer is there to help you throughout the entire loan process. It is his/her job and responsibility to answer your questions!

It is important to keep in mind that when additional documentation is requested, you need to complete these tasks as quickly as possible. Many times a loan officer cannot continue your loan application without these items and failure to provide them in a timely manner may delay your loan application.
Question: Before we move on, are there any questions about the loan application process? Participant questions.
Slide #8: Approval or Rejection
  • Loan officer gathers all needed information.
  • Officer submits application to the underwriting department.
  • Department weighs strengths and risks of loan.
  • Loan is approved or rejected.
 Transition Statement: Once you decide on a lender, he/she will prepare your loan application for final approval or rejection.

Explain: Before your loan is sent out to be approved or rejected, your loan officer will make sure he/she has gathered all the required documentation needed for the loan. Your loan officer will package your information and submit it to the company's underwriting department. When the package is received, the final approval or rejection process begins.

When the underwriter receives the loan package, he/she will weigh the strengths and risks associated with the loan. If the underwriter decides that the risks outweigh the strengths, he/she more than likely will reject the loan. If he/she decides that it meets all of the company's requirements, the loan will be approved.

Some financial institutions use a computerized decision-making process. The loan officer enters your personal information into a program. The computer program will make an approval or rejection decision, and the information for the loan is submitted to the underwriting department for verification purposes only.
Slide #9: If the Loan is Rejected
  • Reasons will be explained.
  • Do not become discouraged.
  • Correct the items in question.
 Explain: If your loan is rejected either by the computer program or the underwriter who reviews it, the loan officer will give you the specific reasons why it was turned down. Some things may be easy to correct; however, some can take longer to fix, such as a bankruptcy or late payments that show up on your credit report.

If this occurs, do not become discouraged!!! Just take the time to correct the items in question. Some financial institutions may overlook bad credit. But remember, if you do not have good credit, you pose a higher risk to the company for non-payments, which means you probably will be charged a higher interest rate and higher fees.

The bottom line - The higher the risk, the higher the APR and fees!
Slide #10: John's Scenario
Explain: Consider this scenario:
John went to the bank and applied for a $100,000 home loan. The loan officer told John he currently did not qualify for a loan because he had an unpaid $1,500 medical bill. John explained to the loan officer he did not want to pay this medical bill because it is in dispute. John requested a recommendation to someone who would give him a loan regardless of his unpaid medical bill. The loan officer referred John to the company's sub-prime lending department where he was approved for a loan at 10% APR vs. the 6.5% he was originally quoted. John left happy because he got his home loan. Did John really receive a good deal?

Let's look at the comparison (Refer to Slide #10).

Question: The total difference between the loans will be $88,200. Now, which is better, paying a medical bill for $1,500 or getting the loan and paying an additional $88,200?

Transition Statement: As you can see, it is usually better to correct items on your credit report than to work with a lender who offers much higher rates. If you take the time to correct these items, your loan more likely will be approved the next time you apply.
Slide #11: If the Loan is Approved
Approval is contingent on items being completed:
  • Sale Price Appraisal
  • Clear Title
 Explain: And, if your loan is approved - Congratulations! You are one step closer to achieving homeownership. There are just a few more things that you need to take care of.

The underwriter will issue an approval contingent on some items being completed, such as appraisal and title work.

If the appraisal does not come back at the sales price, either the seller will have to lower the price or the buyer will have to come up with the difference. If no agreement is reached, then the loan approval will be null and void.

If the title work does not reflect a clear title, then the applicant will have to wait until the items in question are resolved.

Transition Statement: If your loan is approved and all items of contingency are completed, you are ready to close on your loan.
Slide #12: Preparing for Closing
Know the Time, Date and Location.
  • May close at a title company
  • May close in-house
    • Be cautious!
 Explain: When preparing to close your loan, it is important to know the exact time, date and location. Some mortgage companies may close your loan at a title company while others may close your loan in-house at a local office. Be very cautious if you loan is closed in-house. This may be a sign of predatory lending!
Review all fees, costs and terms.

  • Within 48 hours of closing you will receive a copy of all loan documents.
 Regardless of where you close, you should get a copy of your loan documents at least 48 hours BEFORE you close. This will give you time to review all the fees, costs and terms associated with the loan.
Schedule a final walk through. Have your down payment ready. You also should schedule a final walkthrough on your house 24 hours before you close. This may be the last time you see the house before you take ownership of the property. Note anything the seller promised to fix and has not. It may be difficult to correct after the loan closes. We will talk about the final walkthrough in more detail shortly.

You also will have to have your down payment ready if one is required. This money is usually requested in some type of certified funds, such as a certified check.
Slide #13: HUD-1 Document
Itemized statement of services provided and fees charged.

  • Review this document in detail before closing.
  • Do not allow lenders to pressure you to sign anything if you have not had time to review the documents.
 Explain: If your loan documents are not ready, you should at least get a copy of the HUD-1. This document provides the borrower an itemized statement of services provided and the fees charged to the buyer and/or seller. This is the same as a receipt you would get when you go grocery shopping. The difference is that this one is your receipt for your house purchase.

Some dishonest lenders purposely will not give you a copy of your HUD-1 until you are at the closing table. They will then try to pressure you to sign quickly so you will not question the extra fees that may have been added to the loan. This can happen especially if the loan will be closed in-house, where you do not have a third-party neutral organization, such as a title company, at the closing.
Slide #14: HUD-1 Document
  • Should be very similar to the Good Faith Estimate
  • No more than a 10% difference in fees
  • Differences most common are insurance and taxes
  • No fees should be added that were not listed in the Good Faith Estimate.
 Explain: The dollar amounts estimated on the Good Faith Estimate and the actual numbers that show up on your HUD-1 should be very similar.

Although there may be some differences, a good rule of thumb is that none of the individual fees should be more than 10% different from what was quoted originally.

Typically, you may notice a difference in fees on your homeowners insurance or property taxes. The reason for this difference is the result of your loan officer's estimation of what these fees will be. It is not until the consumer actually purchases the homeowners insurance that these fees are set.

You also should make sure that there are no new fees added to the loan. If there are, make sure you ask your loan officer what these fees are for and why they were not included in your original Good Faith Estimate.
Activity: The HUD-1 also is known as the Settlement Statement. Compare the Settlement Statement to the Good Faith Estimate. Fees and charges should be very similar. Activity: Distribute HUD 1 Sample (Also called Settlement Statement)
Slide #15: HUD-1 Document Not Available
  • Contact your Loan Officer.
 Explain: If the HUD-1 is not available 48 hours before closing, you have a few options.

One option is to contact your loan officer. Ask him/her if you can meet at least 24 hours before the closing to go over all the fees associated with the loan. Remember, if you do not feel comfortable with the fees or if you feel that your questions are not being answered to your satisfaction, do not hesitate to back away from the transaction.
  • Contact the Title Company.
 A second option is to contact the title company. The title company should be able to provide you with a copy of your loan documents. If they have not received the specific terms and conditions of your loan, they can contact your lender. Once they get the specific loan terms and conditions, they can go ahead and produce a copy for you.
  • Contact your Real Estate Agent.
 A third option is to contact your real estate agent. Although the real estate agent may not be able to help you with the specific loan terms, he/she can help you make sure all the fees charged to you match what was agreed upon in the contract between you and the seller.

Transition Statement: The agent also will help you set up the final walkthrough on the house you are about to purchase. The final walkthrough may be slightly different depending on whether you are buying a new or used house.
Slide #16: Final Walkthrough
  • The house is vacated.
  • The previous owner has left behind appliances or other property that were agreed upon in the contract.
  • All repairs have been completed that were agreed upon in the contract.
 Explain: During the final walkthrough, you will be able to go back and look at the house one last time before you sign and take ownership of it. It is usually scheduled 24 hours before closing. Typically the new homeowner will want to check the following:

  • The house has been vacated.
  • The previous owner has left behind appliances and other property that were agreed upon in the contract.
  • All repairs have been completed that were agreed upon in the contract.
Explain: If you observe any violations to the purchase contract, be sure to get them in writing. If the violations are not corrected by the closing day, you have the right to postpone closing until they are addressed to your satisfaction.

You also should consider taking a tour of the house with the seller. This will be helpful because it is an excellent time to find out where specific items are located. Consider preparing a list of questions ahead of time.
Activity: These two work sheets provide you some great questions to consider asking the seller or builder of a home.

Explain: If you are purchasing a new house, your builder may do a couple of walkthroughs before you close. The first walkthrough may be scheduled a couple of weeks before you are set to close. During this walkthrough, pay special attention to as many details as you can. If you find certain things you would like your home builder to address and correct, make sure the details are in writing. This list usually will turn into a punch list which will be used as a guide during your final walkthrough.

 Activity: Distribute the Final Walk Through Checklist (Newly Constructed House) and Final Walk Through Checklist (Existing House)
Slide #17: The Final Walkthrough
  • Last time you will enter the house as a buyer.
  • Next time you will be responsible for all repairs.
  • Look carefully at the property.
  • Get any negotiations or changes to the contract in writing.
 Explain: The final walkthrough will probably be the last time you will be walking into the house as a buyer. The next time you enter the house, it will be officially your house and any repairs that come up may be your responsibility unless they are under warranty. It is important that you take the time to look carefully at the property during this final walkthrough. If you notice something, or have questions, this is the time to bring up your concerns and get any negotiations or changes to the contract in writing.

Transition Statement: After the final walkthrough, you are ready to close on your house.
Slide #18: Title Company
  • Neutral party
  • Common place to close a loan
  • Makes sure the title is free of liens
  • Can explain documents in detail, if needed
 Explain: In the state of New Mexico, it is common to go to a title company to close your loan with an Escrow Officer. The title company is a neutral party in the home buying process. It is primarily there to make sure the title of the house is free of any liens and to help close your mortgage loan.

Your familiarity with the closing process will determine how quickly you will go through the signing of all your closing documents. If you are not familiar with the process and feel that you need the loan closing to go a little more slowly, do not hesitate to ask your escrow officer to explain the closing documents to your satisfaction.
Slide #19: Closing Documents
Explain: You can expect to see quite a few documents at the closing and, although all are important, you should pay particular attention to the following:
HUD 1 - Itemized statement of services provided and the fees charged to the buyer and/or seller for the transaction
  • HUD 1 - Gives the loan borrower an itemized statement of services provided and the fees charged to the buyer and/or seller for the transaction. There should be NO changes in this statement from the copy you received before.
Truth and Lending - Discloses the annual interest rate of the loan
  • Truth-in-Lending - This is a document that is supplied by the lender and discloses the annual interest rate of the loan. You will probably recognize this form because by law you should have received a copy of this document at least 3 days after your original loan application. Again, there should be NO changes in this document from the copy you received before.
Slide #20: Closing Documents
Explain: You also should pay particular attention to the:
Note - Discloses information such as the payment due date, date of first payment, and the specifics of how to make your mortgage payment.
  • Note - The note is sometimes called the promissory note. This document discloses information such as the payment due date, date of first payment, and the specifics of how to make your mortgage payment. There also will be an explanation of what kind of late fees will be assessed to the monthly payment if it is late, as well as the implications of violating the terms of the contract.
Mortgage - Document that is used to secure the property and will reflect the full legal names of the buyers, how they will be taking ownership of the property, as well as the name of the financial institution that is financing the transaction.
  • Mortgage - The mortgage is the document that is used to secure the property. The mortgage will reflect the full legal names of the buyers, how they will be taking ownership of the property, as well as the name of the financial institution that is financing the transaction. This document will be notarized at the time of closing and be submitted for recording at the county clerk's office. If the loan borrower defaults on the loan, the financial institution will have the legal right to foreclose on the property.
Slide #21: Closing Documents
1st Payment Letter - Tells the customer where and when his/her payments will need to be mailed.

Initial Escrow Letter - Lets the customer know the specific amount that will be going to into the escrow account and what will be paid out on an annual basis.

NEW HOUSE KEYS!! 		Explain: And finally, you will receive these two letters at closing.

  • 1st Payment Letter - Tells the customer where and when his/her payments will need to be mailed.
  • Initial Escrow Letter - Lets the customer know the specific amount that will be going into the escrow account and what will be paid out on an annual basis.
Explain: And, one of the most exciting experiences of buying a new house is receiving the house keys. On closing day, the set of keys will be presented to you as the new homeowner!
Slide #22: Summary
  • Compared Options in the Loan Application Process
  • Identified Items Listed on the HUD-1 Document
  • Prepared for the Closing Process
 Lesson Summary:
Congratulations! You have completed The Mortgage Process Part II in this Home Buying Process series of classes. You are now ready to consider buying your first home. This could certainly be the biggest purchase of your life!

Today we compared options in the loan application process, identified items listed on the HUD-1 Document, and prepared for the closing process.
Question: Are there any questions? Participant questions.

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