Residential Real Estate Closings: Let’s Review Closing Day

Let’s talk about closing day. For sure the buyer is going to want to bring their down payment to closing. This will likely be a cashier’s check made out to themselves, or to the title company. Most title companies either will not accept personal checks or small checks under $1000 if they do. It’s recommended that you view the HUD-1 closing statement 24 hours before closing. That’s really the rules. Now if you want me to be realistic with you, most who have been in the business awhile say that last minute changes hours before closing is common most of the time. It’s just a good idea to view most of that info ahead of time. You can go over it with your agent or your loan officer. There are a lot of fees on there, I’ll just tell you now upfront, be prepared.

For years, I wanted to call all of these fees in my own mind, “junk fees”. Let me assure you that 95-99% of all of those fees have real live people performing hard work to get those fees. Most of the lenders fees are non negotiable anyways. Appraisers, loan officers, agents, title people, most people all get paid at closing. Some appraisers and inspectors will get paid upfront(paid at the door). Appraisals in my state are $350-400. If it’s a duplex, or very large home it can be $750.
On the HUD-1 settlement statement, please keep in mind the first page is really a summary of your credits and debits. Your money coming in and your money going out. For example “seller paid closing costs” is a credit. Where is a down payment “going out”, is a debit. The right side of the HUD-1 settlement statement will show the debits and credits for a seller as well. For a seller the debits will be closing costs they have to pay, commissions they have to pay, taxes, etc. Usually this is all added up into one line. They will also have payoff of current loans. For credits it will show the loan coming in from the buyer’s lender.

The 2nd page of the HUD-1 shows about everything in detail. I could write many posts on just the 2nd page of the HUD-1 line by line, and maybe I will later. It will include prorated taxes, interest. It will include loan fees on the buyer’s side, lender fees. The seller’s side will include taxes, commissions, etc. There will be county fees you have to both pay. Their will be recording fees, courier fees, closing fees. The title company makes a lot of their money from owner’s insurance policies. Owner’s insurance policies will be covered in another post. The seller will want to know their addresses from the past 10 years, this may have changed, last 10 years may not be needed anymore. Seller will need to sign a deed, and will need to provide a forwarding address. Both buyer and seller will need to sign the HUD statement. I’d say that the buyer has 8-10 times more paperwork to sign then the seller. This is in the cases where the buyer is getting a loan, it’s mostly paperwork for the lender. After you close, usually 45minutes to 1 hour, checks will be cut, and most title companies
will give you a nice folder with a copy of some of the paperwork. Seller’s will need to sign some forms for 1099, etc, tax forms about how long they’ve lived in the property, etc.

Usually the buyer will only see the buyer’s side of the HUD, and the seller only sees the seller’s side of the HUD, that’s for privacy reasons. I find most closings go pretty smooth because most all of the work has been done ahead of time. After everything is signed, typically the closer goes in the other room and makes copies for 10-15 minutes. and faxes the lender. Hopefully the lender releases funds so everyone can be paid, with checks cut. If you sign all paperwork, and it doesn’t fund, no payouts that day, it’s said to be a dry closing. If you close late in the day like 3 or 4pm, it’s mostly likely going to be a dry closing, but not always. often the wire is already at the title company before signatures, but not always. I know many people get nervous at a closing because it’s such a big moment, or they are afraid to say something. I would say buyer’s should bring their hand and get ready to sign a lot of papers. Have that down payment. Both parties should have ID’s. Seller’s should have the spouse, or others on title at the closing to sign as well. Buyer’s just need to make sure they don’t make any new or big purchases before closing as this could really kill the entire deal. Seller’s need to make sure to bring the keys, front door, back door, garage keys, shed keys, they should bring the garage door openers. Any warranties they may have for appliances, or warranties to transfer. You can actually get very use to closings after you have done a lot of them, and understand the process.
I had a closing 4 days ago, and I drover right over, knew it would take 25 minutes, and I wasn’t even 1% nervous as the seller, I knew the hard work had already been done, and to me it was like just stopping
at the store for 20 minutes, it’s something you can get use to. I find that reviewing the HUD-1 3-24 Hours ahead of time really helps me feel more comfortable. email me at ron@minnesotainvestors.com with any questions

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I’ll be the first to admit that “an overview of the loan process” would have been tough for me to explain my first couple of years in the business. The reason for that is I didn’t camp out in the loan officers office. In fact I referred most of my stuff out for years. Much like I do today. I don’t camp out at title companies offices, rarely went to closings, and never had to be a processor. I learned some of it early on buying my own rental properties. What helped me to understand this enough to be able to teach it is from personally, having my sister be a loan officer for up to 3 years, running a loan company a short time, and taking classes a couple of times on being a loan processor. I have taken 3 day classes to become a closer, I have taken classes on what to do before close. I have taken classes on mock closings. I have real life experience now for years. All of this helps.

As a general overview of the loan process from beginning to end here is the general overview of each person and their involvement:

Typically a buyer goes to a loan officer and goes over their plans. The loan officer then tells them they are probably pre-qualified or have a chance to get a loan. The loan officer can’t get them any concrete answers until they have more info. The buyer will typically get the loan officer more info such as w-2, bank statements, tax info, down payment info, your budget, other expenses, etc. They will tell you what you are approved for. You will probably then get a pre-approval letter stating what you “can afford” and what a bank is likely to get you a loan on. From there it’s your job to work with a real estate agent to go look at houses in that price range. This may take you 7 days, it may take you 7 days, it could take you 90 days. This is why you may have to get bank statements, and paystubs again, as the bank wants the most recent info. After you look at houses and find one you like, the real estate agent will help you prepare an offer. You may get a counter-offer, you may get your offer accepted.

After you get your offer accepted, your Purchase agreement likely states a closing date 30-45 days out. Now your loan officer will get a copy of the PA from the real estate agent. The title company will also get a copy of the purchase agreement. The reason it’s important for them to see the PA, is to have the loan officer submit that to the lender. The lender will want to see that the seller isn’t paying too much in concessions, typically it’s 3% max. From there, the loan officer will spend the next 1-3 weeks working hard on your file. The title company works some as well in parallel at the same time as the loan officer. The Real estate agent just keeps in touch with the title company and loan officer just to get updates, and to make sure everyone is on the same page. My pesonal opinion is the title company will get a request for a title search from the title company, and the title company will have to search the history of the property as well as do name searches on both buyer and seller, but the title company won’t need 3 weeks to do this. What use to confuse me for a long time is I use to wonder what was taking the lender so long, but as I found out over the months and years is a lot of the time the lender doesn’t get everything until very late in this process. This is the part I want to try to explain a little more in detail, as I found this to be the part that was misunderstood by me, maybe by others as well.

Let’s say we have a 30 day time clock. Now let’s say that first 48 hours we made sure the lender, title company, loan officer all got a copy of the Purchase agreement. Now let’s have the loan officer, processor, real estate buyer’s agent, listing agent, and title person all do their job over the next 30 days. Let’s go over each of those roles. I think it’s important to understand what each person needs to do so you understand the timeline, it really eliminates a lot of the unknowns and makes you less frustrated.

Typically the loan officer has done a lot of the work upfront, they have seen what you are pre-approved for they have searched and hopefully found a lender right away, so let’s say that most of the following from now until closing is done by the “processor” which can be the loan officer(some like that control) it can be an assistant to the loan officer, or it can be an entirely different company, 3rd party that they pay and hire, that’s paid at closing. Years of experience in processing really shows. A title company will run name searches, they will search your title (abstract) (torrens) and search the history of the property and all owners since the beginning. The title company needs to do this to provide clear title for the lender who will require it, really any new buyer. The title company will make sure to record the deed, mortgage, release the mortgage, prorate taxes, rents, and hold money for state deed tax. I should say that the loan officer will need to get a lot of disclosures signed upfront.

The processor will spend the next 1-2 weeks collecting additional forms that most lenders will require such as:
VOE-Verification of Employment,VOD-Verification of Deposit,VOA-Verification of Assets, VOR-Verification of rents, VOM, Verification of Mortgage. They will need to complete a lot of forms a long the way. They will call employers, check bank statements, and much more. After they spend that 1-2 weeks doing all of that. Often within the first few days they order a title commitment from the title company. The loan officer or processor will send in a request for appraisal. This is where the appraiser will go out to the property take photos and spend 1-3 days doing their job and getting the appraisal back to the loan officer or processor. The processor is going to take the title work, appraisal and all of these forms, 1003, everything and submit it to the lender. Most lenders have a specific order they like to see these full packages in. Why is that? Because lenders get so many loan packages from so many mortgage brokers they are trained to scan through them quickly to see that everything is there. An AE-Account executive often works for the lender and they are suppose to know the lenders programs and talk to the mortgage broker before they submit and a long the way. The Account executive will be the one communicating with the underwriter. Most of the time the loan officer won’t be talking to the underwriter.
The underwriters are highly trusted and are the ones that really dot their I’s and Cross their T’s they spend days reviewing all of the info throughly.

After the underwriter gets everything in that loan package, now it will come back out of underwriting (U/W) and they will send a letter back to the mortage broker “the conditions” or known as the stips. These are addtional items (often minor) that the U/W requests to be completed before a loan can be completed. The loan officer collects this info from the buyer, and submits it back into the U/W. From that point, the loan officer will wait for a clear to close, but often more stips come back for a 2nd round. The title company will update the title commitment with the lender, and communicate with all parties to make for a smooth closing. After a clear to close is said to the processor or mortgage broker, the lender is still going to get this over to their closing department. The title company will wait for the closing package from them, so they can prepare the HUD-1 (settlement closing statement). All loan fees will be submitted to the title company. All title fees, commissions, etc will be submitted to the title company.

The title company is a 3rd party that gets all info from all sources and this will be reflected on the HUD-1. Even after the title company gets the closing package which can take 24-72 hours. They will still need to get the HUD-1 approved, and also get the wire from the lender. Often the title company isn’t authorized to release funds, and funded the loan and cut all checks and wires to everyone until the lender approves the paperwork and final HUD-1. the listing agent will be busy making sure that all lender info for the seller is over to the title company so that they can get the current payoff. If it’s new construction the builder has to get all payoff’s, lien waivers, etc so everyone gets paid. Sometimes the seller has an old abstract(the large stack of papers) neatly bound with the history of your property. You may have one from your last closing, well give it to the new title company when you close months or years later. The reason is, much of the work has been done for their “abtractor” they hire. It’s considered an update and it saves you money. How much? I just closed a property days ago, and it was $200, I believe it coudl have been $500-600 if I didn’t provide it. Also with closings one title company can close both the buyer and seller’s side, or what’s also popular is that one side (seller’s side for example)is a mobile closer, and shows up at the buyer’s title company. In Minnesota the buyer chooses their title company.

This is a very long post, and the amazing thing, is this is a very very broad overview. There are books written about each job title and item above, this gives you an idea how much their is to know about each job. It shows you just how much goes on behind the scenes. There are assistants and others on payroll at title companies, etc which we didn’t even talk about. I may also add that an inspector typically will view the property a few days after the purchase agreement is signed if you decide to get an inspection. Also you should do a final walk-thru the day of or day before closing to make sure everything is the same.

To work with an agent or loan officer, please contact ron@minnesotainvestors.com and I’ll put you in touch with one.

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The following is not everything you need for a loan, usually you need more, but this is the general stuff you might as well just get ready to prepare for your loan officer. just save some time and days upfront and have some of it ready. Your loan officer may wait for more later. The loan officer really can’t even submit the loan until he/she gets this full package. Now you can take 10 days to collect all of this info, or just have it right away upfront for your loan officer. If you get this to your loan officer in 48 hours or less you will really impress them.

2 years personal tax returns-This is considered a federal document, so they think you will tell the truth and it will be accurate.

2 years business tax returns-This is only if you are self-employed, often you have a lot of write-offs and sometimes stated income works better in these situations.

Business profit and loss P&L-This is a statement your tax account may have showing all profits and all losses

1 full month of pay stubs-They need to see written prove to verify you make that income, and need 1 month to get an average.

2 years of W-2′s. Again this will be considered accurate info and used as the lenders like to see 2+ years at the same job, it shows stability. Less than 2 years at one type of job, loans for that are avaiable, just tougher.

2 months most recent bank statements both checking and savings (all pages)-As you can imagine they need to verify your assets and not that it was just put in this week. They want to see that the money has been sitting in there for awhile(seasoned) And they want every page, even if the last page is blank or has 2 lines, those 2 lines may show a big withdrawl, don’t hide anything show them all pages.

Most recent quarterly statement or 2 months most recent retirement account-Sometimes having money here helps if it’s seasoned and you don’t have to use it. IRA, 401k/mutual funds/stocks-anything you have invested you’ll want to show them, as this helps you look good to the lender.

Certified Copy of Divorce Decree (if applicable)-Obviously only if applicable, ownership to sell requires two signatures, at least in Minnesota, so this is important to a lender. as well has how assets are broken down.

Bankruptcy papers filing and discharge-The reason a bankruptcy is important to a lender is a bankruptcy can slow down a foreclosure a lot and cost a lender a lot. Borrowers also can “clear the slate” and file bankruptcy every 7 years. If the borrower had a history of a bankruptcy and had one 6 years ago, the lender may see that differently then someone who has never had a bankruptcy or had one 1 day ago, where it will take 7 more years minimum.

home ownership insurance info-You will need pre-paid insurance or an insurance binder typically for 1 year for the closing. Often the lender keeps 4-6 months of pre-paid insurance paid at closing to protect the house, which also protects themselves. If at anytime your insurance lapses, the lender will immediately order insurance themselves, and put it on the property and use monies held in your escrow account.

mortgage statements for ALL loans-It’s just easier to show payment amounts, and obligations as your mortage statements have all important info all on that page, so you might as well grab that page.

Lease agreements-If you have renters in any of your properties, you will want to show a signed lease to the lenders. The reason is that it shows you are taking in rental income. Often the lenders count 75% of that income in your debt to income ratio. You will want to provide leases for all properties you have leases on.

Property Tax statements-This is counted as a debt, a liability to you, it will have to be added to your 1003 and your liabilities.

Copy of Driver’s license or state ID-Your driver’s license will be needed also at the time of the closing, so the notary can stamp your papers and know the right person is buying.

Your loan officer will ask for more info along the way, but the above will get you started and get the process moving forward. Even days before closing the loan officer could ask for more stuff, that’s because the lender asked for more stuff, you may not know that stuff until 1 week before closing. The loan officer will need this info back promptly, these are your stips and conditions, the final things the lender needs.

You will also need to verify where your down payment is with the loan officer and will need that ready to bring to the closing.

Call your loan officer along the way for updates. History has proven to me that loan officers who are too hard to reach or seldom call back, often have too much they are working on and the results often are lacking. 24 hours before a call back isn’t that long if it happens a few times, but if you have to call them 5 times in 2 days, then something is wrong.

If you need to be put in touch with a loan officer please email me ron@minnesotainvestors.com

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Credit Pre Approval: Pre-Qualification Process

As a general rule Pre-qualification is a real simple piece of paper from a loan person stating you are pre-qualified based on some of what they heard to get a loan on a property. The paper it’s written on and that opinion aren’t worth much and the reason is not that much research has been done on your behalf to see that you truly can qualify for a specific lender.

A Pre-approval on the other hand should be a little bit more solid. Some loan officers write Pre-approvals and don’t take them that serious, others take them very seriously. Most Pre-Approvals will stated that a borrower is approved for a loan with some conditions. Those conditions are usually stuff like, no changes in what the buyer told them, and also verification
of income, assets, employment, down payment, etc. What they are saying is if everything checks out and doesn’t change from they were told then it’s pre-approved. Hopefully a loan officer has even gone as far as submitting a 1003 form and other basic info to a specific lender and under writer for some kind of approval. Sometimes the approval is quick manual approval, often in the technology age it’s simply a computer generated pre-approval. Those use to mean something, but they mean a little less these days with the lenders changing loan programs and tightening standards, but that computer generated pre-approval is far better than just a pre-qual letter. There are different types of computer model systems that offer the approvals. AT the time of this writing a popular one is D/U which is Desktop Underwriter program.
There are other ones, I believe another one is Loan Originator, I have to check on that.

Many agents who have been in the business for a long time, are skeptical when they hear the words pre-approved. An agent with years of experience may ask a lot more questions, to see how much time and how far along this loan person has really spent with this buyer. The term pre-qualified and pre-approval is thrown around too loosely these days. In the loan officers defense though since about Feb of 2007 when the subprime collapse began, lenders have often not stuck to what they advertise, so loan officers have had to watch lenders change their programs and terms often.

Once a loan officer has verified a lot of the assets and has a specific lender in mind and has read their qualifying info, then I would take the pre-approval more serious. After the loan is submitted you will want to find out what the “stips”(conditions) are the lender will ask for before granting the loan. Once the loan has been submitted and you get the conditions back, this is often called “conditionally approved” meaning you can get a loan contigent on providing this info and completing it. Most of the times it’s small stuff and doable, sometimes it’s not. What I have been seeing more in 2008 that I didn’t hear about before is when you submit for certain doc type like stated loan, and after all the work the lender last minute counters with “full doc”.

Just remember the more info you provide and the more experience and the better the loan officer, the more that pre-approval means, the more accurate it is likely to be. To get in touch with a loan officer please email me ron@minnesotainvestors.com

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1003 Application Form: What is listed on a 1003 Form

We will most likely do future posts on what a 1003 form is, but we’ll give you a general overview here. A 1003 is basically a financial summary of the borrower applying for a loan. It’s made and approved for Fannie Mae and is the standard form to submit to lenders. It’s kind of the starting point. Many times a loan officer will call you on the phone and ask you financing questions, they are most likely filling this info out on the 1003, either on paper, or on the computer. There are a couple of popular computer programs for loan officers that do 1003 forms and others. Calyx Point is one. They fill out all of the info online and can submit to most lenders. What’s important to you though is that you know the answers to properly fill out a 1003 form. The loan officer will be asking the questions. As of 2008, loan officers have to be licensed to be able to do loans, legislation required it. There may be situations where someone working for a big bank as a w-2 employee under their supervision, it may differ. On a 1003, you are generally going to give out some personal info about yourself. You are going to put where you live, and enter any co-borrower info. You will tell them where the down payment comes from. The next couple of pages generally are pages for assets and liabilities.

Assets are things such as:
Checking account balance
Savings account balance
401k
Roth IRA
Stocks
Bonds
Furniture
Cars
Cash on hand
The goal here is to show the lender that you are a strong borrower. For banks checking, savings, etc you will need to put account #’s, etc. A lot of your information will be verified. You will end up providing info about your job, if you are self-employed, w-2, and taxable income will come up. Real estate owned will also be a section under assets. You can show rental income, equity as you state today’s value and what’s owing.
There will be a section about liabilities, where you will state everything you owe money on. This will include mortage balances on all properties, credit cards, revolving credit, installment loans, furniture loans, auto loans, visa, mastercard, discover, american express, student loans, anything that’s a liability, debt, anything you owe money on.

Both of these sections are needed as it gives the lenders your financing picture, also they will need to determine your debt to income ratio. Generally speaking that’s the ratio of your house payment to your gross income. Many many years ago this number was 25%. It grew to 33% years later. We saw it go to 50-60% DTI (Debt to Income) ratio in the peak of the housing market. Due to losses lenders are starting to be more conservative now and ask for more of a down payment and lower DTI.

The 1003 is just a starting form that the loan officer and you will put together. I will write other articles on the other forms, but it’s many from disclosures, verification of deposits, verification of employment, and many verifying forms. Ther is a lot of behind the scenes stuff done by either a loan officer or his/her processor who handles a lot of that paperwork. All of this paperwork goes together to provide a complete package that is submitted to the lender for approval. Often a title commitment and appraisal can be part of that full package. This post is only about the 1003 for now, so just keep in mind that it’s a standard form, and loan officers will need to get accurate info from you to fill this out.

Email me ron@minnesotainvestors.com if you want to get pre-approved.

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