There are difference aspects of the financial picture that are common in what makes a good mortgage loan. All of these elements have a degree of risk to the lender. Mortgage companies judge these risks and assign a credit grade to them. The higher the risk to the lender results in a higher rate to the borrower.

 

We will review the lenders’ point of view on the property itself:

 

The title to the property must qualify for the loan.

 

One of the largest costs when you buy or refinance a home is the title insurance premium. It is one cost that you won’t ever want to do away with because there are so many ways that title can become “clouded”.

A cloud on the title can an easy repair such as a typo in the Grant Deed or a difficult repair of a tax lien or judgment on the property.

Any lender wanting to put a first trust deed or mortgage on a piece of real estate will want to have title insurance on the property at the time of sale. Title insurance keeps the lender first in line if any other liens are subsequently added.

As a buyer of real estate, you would want to know that the property’s title is clear to be passed to you. No one wants a house that might be worth $500,000 that has $499,000 worth of tax liens against it. A title search, prior to closing, would discover this problem and would require that the lien be satisfied prior to closing. If, by some chance, the tax lien were not discovered, the buyer of the property would be insured against any loss due to the lien. The payment of the lien would be the responsibility of the title company and not you, the insured. If a person who had owned the property was sued successfully and a judgment was entered against that person’s name, a lien would be on that person’s name and any real estate that they would have title an interest in.  

Sometimes the easiest cloud to clear up is the spelling of a name or a person being a Junior or a Senior. This is the reason why a Statement of Information is requested once an escrow or settlement is opened. A Statement of Information (SI) is a history of where you’ve lived for the past 15 years, your marriage history, employment, and other information.  It keeps you sorted out from anyone else.

In a purchase transaction in Southern California, the seller customarily pays the lion’s share of the title policy for the new buyer’s benefit. The new buyer pays a smaller premium for the benefit of the lender.

In refinance transactions, the borrower will pay the premium.

The property must appraise for the sales price, value, and livability. 

With most sale and refinance transactions, an appraisal is typically ordered. An appraiser is a licensed, and usually insured, real estate professional who provides his educated opinion as to the value of the subject property

Most of the time, the value is addressed at the current condition of the property. In construction or home improvement loans, it is for future value when improvements have been completed.

The lender, as well as the buyer, wants to have a neutral third party professional verify that the property is indeed valued at the target range defined by the sales price or real estate agents’ opinion.

The term “neutral third party” is sometimes up for grabs when an unscrupulous real estate agent or lender pushes the appraiser to bring the value in at a certain level. A few lenders  are calling for desk or field reviews on appraisals on higher loan to value loans.  

The lender wants to be sure that the property is what he is being told. It is good business to verify that the value is in the ballpark for the new loan amount.

If there were a construction loan being done on the property, then the lender and borrower would submit plans to the appraiser at the time of ordering the report. The appraiser would mentally build the house and then check to see what comparable property will sell for in the immediate area. The same formula follows a new sub-division of homes to be built.  

New construction will be checked by city or county building departments to be sure that all is up to code and done in a workman-like manner. That inspector will eventually give his final inspection and declare that the house has passed final inspection.

From the lender’s point of view it isn’t habitable until a person can reasonably live there. That means that heat, water, and electricity are available at the property along with floor coverings.  

The lender will usually ask that the appraiser go out to the property again once floor coverings are in to verify that the property is ready to be lived in.

In older homes, the appraiser will look for some safety violations such as pools without water in them, fences that are falling down, obvious plumbing problems, and other obvious condition problems.  

Conventional appraisals are easier on condition than say, an FHA or VA appraisal.

FHA is much, more strict about condition of the property. It must be “safe, sound, and sanitary”. That can mean that the appraiser can call out a roof that doesn’t look right or steps or concrete that might have a crack you could fall over. As long as your real estate agent has a good knowledge of FHA, you will avoid most surprises.

The Veteran’s Administration issues a Certificate of Reasonable Value for any VA loans. It is not in the format of FHA and Conventional appraisals, but the same type of information is included. A VA CRV may contain repair requirements as would an FHA appraisal.

At least 99.9999% of any repair requirements called out by an appraiser will have to be repaired prior to closing your loan. The exception would be for home improvement, construction, or other rehabilitation loans.  

In closing:

The service that you get for your home loan is essential. The average loan officer has five years or less of experience. These loan agents have no experience in a credit market like this. Ask what kind of experience you are getting from your Realtor and loan officer. 

I work for a mortgage broker. I do this because I want to have the most freedom to find my clients the best rate and variety of loan programs. If you were to go to XYZ Mortgage Bank and they say no regarding anything on your application; you are done.

You have to start all over with ABC Mortgage Bank and hope for the best.

About twice a decade, I have a loan that is declined. I just go down the street to the next lender. Working for a mortgage broker is a great advantage to my clients.

Be sure your lender and real estate agent understands and listens to what you want and need. Please be sure that you understand the terms of your loan and that your questions are answered in a way that you can understand.  

Real estate is historically one of the very best ways to build wealth. It also changes you and the lives of your grandchildren. Pride of ownership is a wonderful thing!