First Step in Buying a Home: Getting Pre-Approved
Before starting your home search you need to get “pre-approved” for an actual loan for several reasons:
- To know what purchase price and loan amount you qualify for.
- To make sure you’re comfortable with the potential payment.
- To make sure your offers are taken seriously. Sellers will not entertain offers without a formal Pre-Approval Letter attached to it.
Formal pre-approvals can also make offers more enticing by offering a “fast close.” We can close as fast as 14 days at JVM Lending, and sellers often prefer a “fast close,” or short escrow period, over a “slow close,” even if the slower close is associated with a higher price.
How to Get Pre-Approved
It is easy and free. We explain how to get pre-approved here: How To Get Pre-Approved. We’ll email and share a list of documents that we need from you, as well as some questions we need answered for the loan application. The documents consist primarily of tax returns, W2s, pay-stubs, and bank statements.
We do all the work for our clients and make sure all potential issues are addressed up front. We then tailor your pre-approval letter for every offer you make.
Actions to Avoid After Getting Pre-Approved
The below list includes actions that should be avoided after getting pre-approved. These actions do not always disqualify you, but they do prevent lengthy delays and the need for additional time-consuming paperwork.
1) Do NOT have relatives deposit “gift funds” into your account.
It is best to have them deposited directly to escrow instead. If they are deposited into your bank account, we will need a copy of your donor’s bank statements in order to “paper-trail” the transaction.
2) Do NOT make any transactions or deposits that cannot be explained or sourced.
All large or recurring deposits and withdrawals must be explained and/or “paper-trailed.” Any deposits from mattress money, untraceable foreign bank accounts, crypto accounts or cash payments of any kind can render an entire bank account invalid and unusable for qualifying. If any transfers are coming from another account, we will need to provide 2 months of statements for this account as well. If you need to make large deposits that are difficult to “paper-trail” or have crypto investments, contact us for “coaching” or advice. Keep a paper-trail for every large deposit you make.
3) Do NOT liquidate (buy/sell) crypto before going into contract.
If you are planning to use funds currently held as cryptocurrency toward your purchase, please contact your Client Advisor and discuss the best ways to do this.
4) Do NOT change jobs without consulting us.
Job changes can pose a risk to qualification – especially if you are relying on the use of bonus, overtime, or commission income to qualify. This is because lenders need a history of those income sources with your current employer before they can use the income for qualification purposes. Please check with us before making a job change to ensure it does not affect your ability to qualify for the loan you desire.
5) Do NOT take on new debt.
If you increase credit card balances or finance a vehicle, your debt ratios will be adversely impacted, reducing your maximum purchase price.
6) Do NOT take unpaid days off.
If your debt ratios are high or near the limit, even a single unpaid day off from work can push you out of your qualifying range.
7) Do NOT spend substantial liquid assets.
Pre-approval software relies on specific liquid asset levels; pre-approval amounts can change if liquid assets are significantly reduced.
8) Do NOT miss payments on any debts reporting on a credit report.
Even though this is relatively obvious we like to remind buyers that missing any monthly payments can sharply reduce their credit score and their qualification amount.
9) Do NOT co-sign for someone else’s debts.
Even if you are just a “co-signer,” the debt will still show up on your credit report. You will be responsible for that debt and the payments (unless we can show twelve canceled checks from the person making payments, in most cases).
10) Do NOT file taxes with a tax liability owing, or with less income than in previous years.
This applies to self-employed borrowers primarily, particularly during tax season. We always base our qualifying income on the most recent filed tax returns, and we must prove that all tax liabilities are paid. We recommend that borrowers file an extension when possible if they are making offers during tax season. Please consult with us for additional explanation.
11) Do NOT make any transfers from business accounts.
Business accounts are more carefully scrutinized than personal accounts. If any large transfers are traced back to business funds, additional documentation will be needed and added requirements will have to be met. This includes having a CPA write a letter to confirm that the use of these funds will not negatively impact your business.
Find a Real Estate Agent
We strongly recommend the assistance of an experienced Realtor/Real Estate Agent for the following reasons:
- You need an advocate for just you. Many buyers mistakenly believe that they can represent themselves or that they can work directly with listing agents to get an insider track. This, however, subjects buyers to the risk of “dual agency” where the listing agent represents both the buyer and the seller, and may not always act in the buyer’s best interest.
- Experienced real estate agents have access to the Multiple Listing Service (MLS) and can better assess all of the properties available in your price range, outside of property listing sites like Zillow, Trulia, Redfin, etc.
- Real Estate Agents know the local market much better and can help you avoid purchases that are not in your best interest. Appropriate offer-prices can be difficult to assess, and a Real Estate Agent’s guidance and understanding of market conditions is crucial in a competitive market.
- You need an experienced negotiator to call for the appropriate inspections, to know how to review inspections, to know how to negotiate for seller credits for repairs and closing costs, and to simply negotiate on your behalf in an objective manner.
Please let us know if you need a Real Estate Agent referral here; we know experienced Real Estate Agents in most major markets throughout Massachusetts.
When you find a house you like, your Real Estate Agent will write an offer on your behalf and submit it to the Listing Agent (the Real Estate Agent who “listed” the house for the seller). Your offers will not be taken seriously, however, unless they are accompanied by a formal Pre-Approval Letter. Your Real Estate Agent will usually tell us what the offering price is, and we then send a formal Pre-Approval Letter tailored to the exact offering price.
We recommend that you do not use a single Pre-Approval Letter indicating the maximum purchase price you’re qualified for because it may indicate a willingness to pay a higher price to the seller. Often a seller, through their agent, will counter your offer with a higher price or different terms. Buyers and sellers can go through several iterations of this before finally agreeing on the price and terms.
Need a realtor? We can connect you to a great agent in your area here.
Once your offer is accepted, your real estate agent and JVM will take care of almost everything.
- Your Real Estate Agent will open escrow and arrange for necessary inspections.
- JVM will order the appraisal and submit your complete loan package to underwriting.
- You can expect to sign loan disclosures, review the inspection reports and the appraisal, provide additional loan conditions and documents, and show up to sign loan documents about 5 to 7 days before the anticipated closing date.
- You’ll also decide on what concessions are necessary from the seller if the inspections reveal issues that need to be addressed.
Earnest Money Deposit (EMD)
An Earnest Money Deposit (EMD) is a check from you that accompanies your offer for a property. An EMD check proves that your offer is serious and in good faith, and it provides “consideration” to make an offer “valid.” The check is made payable to an escrow company, not to the seller.
EMD amounts can vary from $1,000 to up to 3% of the purchase price, and the amount is applied to your total down payment and closing cost requirements at close of escrow. Earnest Money Deposit checks should come directly from you and not from a person who is not party to the transaction (such as a friend or relative).
When to Pay Discount Points or Buy Down the Rate
A discount point or origination fee is typically used to buy down an interest rate. “One point” equates to 1% of the loan amount, and usually buys an interest down by about 1/4%, depending on market conditions.
We recommend paying discount points if the following four conditions are present:
- Rates are generally considered low and are not expected to drop further.
- You expect to stay in the home for more than 4 years.
- You do not expect to refinance in the near future for any reason.
- You can afford to pay the points (you have the cash). It typically takes about four years to make up a one-point charge with the savings from a lower rate. Note also that points are usually tax deductible in the year of the purchase, so this makes paying points somewhat more attractive.
Inspections are necessary to ensure that there are no health and safety issues and that a home will not be in need of major repairs after close of escrow. Inspections can be done for any one or more of the following items: pest, roof, well, soil, septic tank, and natural hazards. The cost of or payment for the inspections and the cost of any recommended or required repairs is negotiable between you and the seller.
If an inspection report calls out significant damage or any health and safety issues, lenders will require that repairs be made prior to close of escrow, unless a property is purchased “as is.” An “as is” purchase is a purchase offer with no inspection contingencies.
If a purchase is not “as is” and inspections illuminate significant repair needs that you, the buyer, were unaware of at the time of the offer, you can use the inspection report as a reason to back out of the purchase (see Contingencies). You can also use inspection reports as a reason to renegotiate the terms of your offer, such as a seller credit for closing costs or a reduced price.
Contingencies – How You Can Back Out of the Deal
In most cases, your Real Estate Agent will have “contingencies” written into your purchase contract that allow you to back out of a transaction for a variety of reasons, including cold feet. These contingencies can be for inspections, an appraisal, a loan approval, or other things. The contingency period(s) can last from 5 to 30 days.
Once you “remove contingencies,” however, you are obligated to buy the property; you can no longer back out because you are telling the seller that all contingencies have been met. You risk losing your earnest money deposit if you back out of a transaction after removing contingencies.
In competitive markets, very strong buyers will sometimes make offers with no contingencies at all. Such buyers risk having to front extra cash for appraisal shortfalls or other issues. Non-contingent offers present many risks and should be discussed with lenders and Real Estate Agents before they are made.
Escrow companies act as a third-party buffer between you and the sellers, and they coordinate the transaction overall. Escrow companies order title reports and title insurance from the Title Company.
The Title Company collects and prepares the loan documents and draws up the necessary legal documents as well. They also collect all of the funds from the buyer and the lender and ensure all funds are dispersed properly. Escrow companies are licensed and highly regulated, so it is unlikely that they will ever disburse funds improperly or overcharge borrowers. We like to point this out because buyers and borrowers occasionally become unnecessarily concerned about improper funds handling when large sums are moving through escrow.
Because escrow companies are regulated, their fees are often similar to one another’s. Furthermore, most Real Estate Agents have relationships with experienced escrow officers who are highly vetted and skilled and therefore tend to foster much smoother transactions. Because of this, your Real Estate Agent will typically recommend the use of a particular escrow officer and company when a contract is ratified. In most cases, buyers (and their Real Estate Agents) are allowed to choose which escrow company will manage a purchase transaction. In some cases, sellers will designate the use of a particular escrow company in contract negotiations.
Closing Costs – Nonrecurring and Recurring
NONRECURRING closing costs include the one-time fees that you pay only at the time of purchase. These costs include the escrow fee, the title insurance, the appraisal fee, the underwriting fee, the notary fee, the recording fee, and the transfer taxes, among other things. These fees can range from $4,000 to $20,000 (or more) for a purchase with no discount points or origination fees, depending on the size of the purchase and the amount of transfer taxes.
RECURRING closing costs include any costs that recur after the purchase closes. These costs include prepaid interest, property taxes, hazard insurance, and HOA dues. Recurring costs are significantly larger if there is an “impound account” because lenders will collect four to ten months of property taxes and up to fourteen months of hazard insurance up front to fund the impound account.
The existence of an impound account or a large transfer tax can significantly impact the total amount of closing costs.
Escrow or Impound Accounts
Impound accounts are required in Massachusetts when your down payment is 20% or less of the purchase price. It should be noted that impound accounts are always required for FHA and VA loans.
An impound account is set up to allow you to pay your property taxes and hazard insurance on a pro-rata monthly basis instead of on a semi-annual or annual basis. For example, if property taxes are $6,000 per year, and hazard insurance is $1,000 per year, you would have a total of $7,000 to divide into twelve monthly payments of $583 per month. You would simply add the $583 to your principal and interest payment and make the larger payment to your lender or loan servicer each month. The lender or loan servicer will then make the property tax and hazard insurance payments on your behalf.
Impound accounts substantially increase recurring closing costs because they require escrow officers to collect an additional three to nine months of property taxes and up to a full year of insurance to “pad” the impound account to make sure there is enough money in the account when the property tax and insurance payments actually come due.
Title - Companies, Reports and Insurance
Title Companies also provide title insurance. The Lender’s Title Policy is a guarantee your lender requires to ensure there are no other liens against the property when your mortgage is recorded. The Owner’s Title Policy is your assurance that there are no claims for or against the property you are buying. Lenders require the Lender Title Policy, but the Owner’s Title Policy is not required. We recommend both policies, however, because they are relatively inexpensive when bundled together, and we think the extra insurance both policies provide for a small fee is well worth it.
In Massachusetts, attorneys handle the closing. All parties use ALTA owner’s and lender’s title insurance policies and endorsements. Buyers pay closing costs and title insurance fees, except in Worcester, where sellers pay. Sellers pay the documentary taxes.
Mortgage insurance is typically required when your down payment is less than 20% of the purchase price. Mortgage insurance associated with conventional loans is known as “private mortgage insurance,” or PMI, and mortgage insurance associated with FHA loans is simply called “mortgage insurance.”
- For an FHA loan, mortgage insurance is always required. You can pay mortgage insurance in two ways: (1) an Up-Front Mortgage Insurance Premium of 1.75% of the loan amount is added on to your loan; and (2) a monthly mortgage insurance premium of 0.85% of the loan amount divided by 12 (in most cases), and this is permanent in most cases.
- For conventional loans with loan-to-value ratios over 80%, there are 3 options for PMI: (1) Monthly PMI; (2) Single Payment or Lump Sum PMI; and (3) Lender Paid PMI.
- Lump Sum or Single Payment PMI involves paying a single sum at close of escrow to permanently cover PMI with no monthly PMI payments required. We discourage this option typically because if you refinance within a few years of purchase, you will not get your lump sum PMI reimbursed. When homes are appreciating quickly, borrowers can often simply refinance out of PMI when their “equity cushion” hits 20%.
- Lender Paid PMI is a feature where you would take a higher interest rate in lieu of PMI. Lenders effectively pay the lump sum PMI payment on your behalf in exchange for a higher rate. Borrowers often think they are getting a better deal with lender paid PMI because they are avoiding PMI, but they are really just getting stuck with a higher rate for the life of their loan no matter how much their home appreciates. We often discourage lender paid PMI.
- Monthly PMI ranges from 0.2% to over 1% of the loan amount, paid over 12 months, depending on loan-to-value, credit, loan amount, etc. You can petition to remove PMI once you have sufficient equity, but many lenders require you to retain the PMI for a minimum of two years irrespective of appreciation.
All lenders require you to obtain homeowner’s or hazard insurance when you purchase a property. The cost of the coverage can vary depending on the size of the home, the size of the deductible and the terms of coverage. Homeowner’s insurance costs range from about $1000 to $2,500 per year for most homes in Massachusetts. Oftentimes your auto insurance carrier will offer a discounted rate if you bundle your auto and homeowner’s insurance.
When you find an insurance agent and policy you like, you simply need to provide the insurance agent’s name and phone number and we will procure the necessary proof of insurance.
Closing Process Overview
CLICK HERE to review the basic steps required to close your loan once you are in contract.
Cash to Close/When to Bring in Your Money
Cash to close is the total amount of funds you need to bring into escrow before a transaction closes. These funds include the entire down payment and all closing costs. It is extremely important that you know where these funds are coming from before getting into contract, as all lenders require that every dollar that goes into the cash to close be sourced and paper-trailed. It is also extremely important to understand that “cash to close” is much more than just the down payment, as prepaid hazard insurance, property taxes and interest along with third-party closing costs and transfer taxes can sometimes add up to tens of thousands of dollars.
Cash to close funds are usually paid in increments – for example, 1% of the price when the offer is accepted, an additional 2% of the price when contingencies are released, and all remaining funds when loan documents are signed three to five days before close of escrow.
We will use a $400,000 FHA purchase with a 3.5% down payment and $12,000 in closing costs as an example:
- This buyer would likely write a $4,000 (1% of the price) personal check as an earnest money deposit with their offer.
- They will then likely increase their total deposit to $12,000 (3% of the price) when they release contingencies.
- They will also be responsible for all remaining funds to close when they sign their loan documents.
- The final deposit will include the remaining $2,000 required for the down payment and the $12,000 of closing costs, or $14,000 in total. For this example, the total cash to close for the entire transaction, including the earnest money deposit and the deposit increase, is $26,000.
Escrow companies will often accept personal checks for initial deposits but when you sign loan documents and are required to bring in the final funds to close, escrow companies usually require cashier’s checks or bank wires to ensure funds are “good,” since waiting for a personal check to clear can be time-consuming.
Closing Cost Credits
Most lenders allow sellers to pay your closing costs in the form of “credits.” These closing cost credits can cover both recurring and nonrecurring closing costs, and they can equal as much as 6% of the sales price.
Such credits are not, however, a “free lunch.” If someone buys a house for $400,000 and has the seller credit back 3% of the price ($12,000) for closing costs, the seller is really only netting $388,000. That buyer therefore could also pay $388,000 for the house with no seller credits, and the seller would still be equally satisfied.
The advantage of a closing cost credit is that it allows you to keep more cash in your pocket. For example: if a cash-strapped FHA buyer is purchasing a $500,000 home, the closing costs will be in the $10,000 to $15,000 range. If the buyer does not have the extra cash to cover the closings costs, they can request a credit from the seller. Sometimes it is necessary to increase the offer price somewhat in order to ensure the seller is willing to extend the credit.
In competitive markets, sellers are often not willing to extend credits irrespective of price. In these situations, you can also request lender-credits. Lenders, like JVM Lending, can also help cover closing costs, but such credits often result in slightly higher interest rates.
The When, What, and Where of Signing Papers, and the Closing Process
- Disclosures need to be signed (electronically) when we submit your loan to our underwriter. Disclosures include the loan application, the interest rate, the closing costs, and other forms to comply with our industry’s many regulations. These forms are not binding in any way, they can be signed anywhere, and we do not need originals. Faxed or emailed copies are fine.
- Closing Disclosure (CD). After a loan is formally approved by an underwriter you will be sent an additional disclosure known as the CD that must be acknowledged or signed electronically before lenders can draw loan documents (in most cases). The CD is similar to the initial disclosures and it is sent to ensure closing costs have not changed significantly. It is also not binding, and you are not allowed to sign loan documents until three business days have passed from the signing of the CD.
- Loan Documents will be emailed to the escrow/title company by our documents drawer after the loan is formally approved and after ALL conditions are met. The escrow officer receives the lender’s loan documents and prepares them for signing. This is a lengthy process that requires working out all the numbers including interest, property taxes, hazard insurance, lender fees, remaining down payment funds, etc. Once the “signing package” is ready, you will go to the escrow office or title company to sign the loan documents – or a mobile notary can meet you at a different location, like your home. The signing appointment can be a lengthy process, since there are many forms. You’ll also typically wire your remaining funds or “cash to close” on the day you sign.
- The Funding Package consists of the signed loan documents and all other necessary documents prepared by the escrow officer after you have signed. The funding package needs to go back to our funding department (typically via overnight mail) so our funder can review everything to ensure the file is complete and ready to fund. Lenders “fund” loans by wiring money or loan proceeds to escrow once they are satisfied that all final funding conditions have been met.
- Recording the deed of trust (or mortgage) and the grant deed (which transfers title to you) typically takes place at the County Recorder’s Office the day after a loan funds. This stage is when you formally become the owner of your new home, as your name is now on “public record” as the legal owner of the property you just bought.
Expected timeline: The very last stage of the closing process (preparing final loan documents, signing, funding, and recording) takes three days at best, and sometimes over a week if there’s a delay with escrow or the signing appointment needs to be rescheduled.
You will be liable for property taxes after purchasing a property. In Massachusetts we estimate property taxes at a rate between .9% to 1.5% per year against the purchase price of the property. Tax rates do vary from county to county, so knowing which specific areas you’re looking at will help us narrow in on the estimated tax rate.
Property taxes are due twice a year on November 1st and May 1st, with options to make 50% payments on August 1st and February 1st as well. This means you can pay 50% of total taxes twice, in November and May, or 25% of total taxes four times, in August, November, February, and May.
If you have an impound account with your mortgage, your loan servicer will be responsible for making the property tax payments on your behalf, with no action needed on your end.
Factors That Influence Your Interest Rate
Your interest rate is impacted by several different factors including property type, down payment, loan amount and credit score. JVM is happy to provide current market rate quotes for your particular scenario at any time, but rates cannot be guaranteed until locked.
NOTE: Rates cannot be locked unless a property is identified and we have an address to associate with the rate-lock.
Here are several key factors that influence your interest rate:
- Property Type: Condos, high-rise condos and multi-unit dwellings (2 – 4 units) usually have higher interest rates associated with them, as compared to single-family dwellings.
- Property Use: Investment properties have higher rates than owner-occupied properties.
- Credit Scores: Credit scores significantly affect rates. A borrower with a 750 mid-score might have a rate as much as 1% lower than a borrower with a 670 mid-score.
- Down Payment: The bigger the down payment, the lower the rate, in most cases.
- Loan Amount: Very small loans (under $150,000 for example) can have higher rates, as can very large jumbo loans (over $3 million for example). In addition, “Low Balance” conforming loans under $726,200 will have lower rates than “High Balance” conforming loans (from $726,200 to $1,089,300).
- Loan Type: FHA and VA rates are usually lower than conforming (Fannie/Freddie) rates, and our jumbo rates are currently the lowest of all for very strong borrowers.
- Rate Lock Period: Interest rates can be “locked in” or guaranteed prior to close of escrow for 15, 30, 45 or 60 days in most cases. The longer the lock period, the higher the rate.
- Fixed Period/Loan Maturity: The longer a rate stays fixed, the higher the rate. For example, a 7/1 ARM (fixed for seven years) will usually have a lower rate than a 15-year fixed-rate loan, and a 15-year fixed-rate loan will have a lower rate than a 30-year fixed-rate loan.
- 1st/2nd Combo Loans: Loans with a concurrent 2nd mortgage can have higher rates too, depending on the loan-to-value ratio.
If several of the above factors work in tandem, your interest rate can be significantly affected. You can learn more about these factors here.
For example, if a buyer with a 690 credit score is buying a high-rise condo with 5% down and a high balance loan, his interest rate might be 1% to 2% higher than his rate would be if he were buying a single-family residence with 25% down, a 750 credit score, and a low balance loan.
First/Second Combo Loans
First/second combo loans are first and second mortgage loans that fund concurrently or at the same time. The first mortgage is typically at a loan-to-value of 80% or less, and the second mortgage accounts for the loan-to-value portion above 80%. This type of financing allows you to avoid PMI requirements as well as jumbo loan restrictions.
For example, a 90% loan-to-value purchase of a $700,000 home can be structured as a $560,000 1st mortgage and a $70,000 2nd mortgage. Because the first mortgage is at 80% loan-to-value, PMI is not required.
Combo loan financing requires a minimum of 10% down, and the credit and income guidelines are stricter.
How JVM Earns Revenue
JVM is paid if and only if your loan closes. We typically quote interest rate options with “no discount points.” With the no points option, our entire commission is earned when our mortgage bank sells the loan to an investor for a premium on the secondary market.
We typically do not recommend that you pay points to buy down your interest rate because the return on investment is too small. However, if you choose to pay points, a 1% discount fee will buy down an interest rate by approximately a 1/4%, depending on loan type and market conditions.