Your real estate agent just called you with amazing news - your offer was accepted! While it feels like you made hundreds of offers, none of that matters now. You did it - you’re pretty much/almost/getting close to being a homeowner.
But how do you close the gap from almost/pretty much a homeowner to holding the keys to your own front door? You’ve done all of the work to select a lender and get pre-approved for a mortgage. You’re working with a great real estate agent who’s helped you get an offer accepted.
What could possibly be left to do?
A few things, it turns out, and not all of them are your responsibility. We think it’s important for you to know what needs to happen - and who needs to do it. So, read on!
From Accepted Offer to Legal Contract
When a seller accepts your offer, you’re soooo close to being “in contract.” But a legal contract requires one more ingredient to make it, well - legal. Money.
For your contract to be legally binding, you need to make a cash deposit, called the Earnest Money Deposit. But you don’t actually hand the seller cash at any time during the transaction.
Your earnest money deposit goes directly into an escrow account. In fact, your earnest money deposit, down payment, and the mortgage proceeds are all paid into the escrow account. Through the entire transaction, an escrow officer will collect all the money and disburse it per the contract details.
To learn more about escrow and how it works, check out our article on escrow closing details.
The deposit amount is usually 3% of the purchase price - but not always. Discuss the appropriate amount for your transaction with your real estate agent. They’ll have solid advice that fits with your unique transaction.
Once your deposit is in escrow, the clock - as they say - is ticking.
Next Loan Steps
The next step in the mortgage process is one of the most critical for buyers. Understand that going through the pre-approval process is only part of what’s required to finalize your mortgage.
Lenders evaluate You and the Property in the loan process. During the pre-approval, the lender did a thorough analysis of you and your ability to repay the loan, based on your credit and income at the time. Now it’s time for them to evaluate the property.
Lenders perform a detailed analysis of the property you’re buying because you’re pledging the property as security for the mortgage. If you don’t make your payments as agreed, the lender will take the property to satisfy the loan.
There are two ways they do this:
- Get an independent appraisal done comparing your property to similar properties, in the same area, that were recently sold. The appraisal compares the purchase price of your property to actual recent sales - without adding in emotion or other subjective conditions.
While no one wants to pay more for a home than it’s worth, buyers place value on things that may be more emotional than, say, price per square foot. Even finally having an offer accepted holds value for a buyer. But that wouldn't be part of an appraisal.
- The second way a lender evaluates a property is by examining the Title Report. This document is provided through the Escrow Company in California, however, in some areas of the state (and the country), Title and Escrow are separate entities.
However it’s provided in your area, the Title Report examines the chain of title on a property. The lender reviews the title report for issues that would prevent the seller from providing a clear title to the buyer. This is critical to the lender, because without clear title, a buyer can’t pledge the property as security for the mortgage loan.
The remaining critical loan steps include:
- Choosing a loan program and locking in the interest rate. Many buyers don’t realize that certain steps in the loan approval process can’t happen until the loan program is chosen and the interest rate is locked.
And, remember, time is of the essence when you’re in contract to purchase a home. Part of the contract specifies the exact date the purchase is required to close. It also specifies what date you must have full loan approval and complete all property inspections. Delays put you in jeopardy of being out of compliance with the legal contract.
If you’ve been pre-approved, you’ve already discussed the various loan programs available to you - and now it’s decision time. You’re also likely aware of current interest rates and should be ready to lock in your rate. (Take a minute to read our article on getting the best interest rate, here.)
These are both critical pieces the underwriter considers when evaluating a loan file for full approval. If the loan program and interest rate are not finalized, the file is left in limbo, wasting valuable contract time.
- Be prepared to supply your lender with updated documentation. Some documentation can “expire” and need updating once you're in contract. These include pay stubs, bank statements, and, depending on when you’re going through the process, current W-2’s and/or tax returns.
If you’re renting, you’ll need to provide proof that you’ve continued to pay your rent on time. And credit reports are “good” for 120 days, so if your pre-approval was done more than four or five months ago, it will be updated by the lender (a new credit report is not pulled.)
If something suddenly appears on your credit report, like new debt, higher amounts of debt, or late/missing payments - be prepared to address that immediately with your loan officer.
While your lender is working on approving your loan, be prepared to receive information and documentation requests. During their evaluation process, the lender may uncover information requiring a written explanation from you, or further documentation to explain and support. Your loan officer will assist in relaying information and documents to the underwriter.
Remaining Important Steps
Long before your file reaches final underwriting, you need to shop for a fire insurance policy. The insurance agent will ask for the information they need to generate an insurance quote. This is your time for due diligence and making a final selection for your insurance coverage.
You need to provide proof of the insurance policy to your lender so the underwriter can review and determine if it meets guidelines. If any changes need to be made, the underwriter will detail them and you have time to make them before final approval.
Important note: The insurance agent will send the bill for the first year’s premium to the escrow officer. The escrow officer will pay the bill at the closing and provide the exact proof the lender needs, on your behalf. Following this process will save you time and effort.
The final steps before you get the keys to your dream home can include working with your real estate agent to resolve any seller issues, arranging a final walkthrough of the home, and scheduling a time to sign all the documents.
Once all documentation is signed by you, the buyer, and the seller - and the lender has reviewed and approved all, the escrow officer will release the money to the seller, and hand over the keys.
Now you’re a homeowner - Congratulations!