ConnectLA

You’ve found your dream home, conducted the initial home inspection and you have found a lender that you think is right for you. Now is the time to finalize the home buying transaction or “close the deal” by submitting and completing all of the required documents. ConnectLA’s goal for this section is to demystify the transaction or escrow process and let you know what is required of you and what is going on behind the scenes.

What the lender needs from you

After you apply for your mortgage, your lender will schedule a loan interview with you and give you a list of documentation you’ll need to bring to the interview. The lender may request additional information from you by mail, rather than scheduling an interview. Below is a list of the traditional loan interview documentation:

• Social Security Number: Both yours and any co-borrowers’
• Birth Date: Both yours and any co-borrowers
• Income: Most recent pay stub showing year-to-date earnings
• Tax Information: W-2 tax forms and tax returns for the last 2 years
• Employers: Names, addresses and telephone numbers of your employers for the past 2 years
• Bank Accounts: Account numbers and current balances of checking, savings and any other accounts
• Assets: Statements of current assets, such as Individual Retirement Accounts (IRAs), certificates of deposit (CDs), stocks and bonds. If you have individual investment, bring a current brokerage statement with the name of the stocks, the amount per share and the number of shares owned.
• Personal Property: The value of your personal property, including employee retirement accounts, furniture, cars, collection, other valuable property and your life insurance.
• Credit Information: Creditor name and address as well as the monthly payment and total amount due for all current loans
• Current Housing Information:
  • If you own your own home, bring the address, current market value, mortgage lender, account number, current monthly payment and outstanding balance due on the mortgage
  • If you rent, bring the address, name and address of your landlord and your current monthly rent
  • If you have lived in your current address for less than 2 years, you’ll also need to provide information for your previous addresses.
• Contract & Deposit: A signed copy of your ratified sales contract (offer), with receipts for the earnest money deposit towards the property
• Gift Letter: If part of your down payment or closing costs will be from a gift, a signed letter from the donor stating that you don’t have to repay the gift money
• If You’re Self-employed: our profit and loss statement and balance sheet for the past 2 years
• If You are Divorced or Separated: A copy of the divorce decree or maintenance agreement, along with any amendments and a 12-month payment history of alimony or child support payments if the payment are needed to qualify for the mortgage
• If you are a student: Your school transcripts or diploma if you do not have 2 years of employment history
• If You Own Rental Property: Federal tax returns along with a schedule of all real estate owned and the account number and address of the mortgage company that holds the mortgages. If the property is rented, a copy of the current lease.

What the lender must provide to you

Your lender is required by law to provide you with several kinds of document once you apply. They include:

• Truth-in-Lending Disclosure: Federal law which requires disclosure of a truth in lending statement for consumer loans. The statement includes a summary of the total cost of credit such as the APR and other specifics of the loans.

Click here to see a sample Truth-in-Lending Disclosure form

• “A Home Buyer’s Guide to Settlement Costs”: A government publication that describes the closing or “settlement” process and its costs as well as information on your rights.
• ARMs Disclosure: Information on the important terms and cost of an adjustable-rate mortgage, the past performance of the index to which the interest rate will be tied and a copy of the booklet, “Consumer Handbook on Adjustable-Rate Mortgages.”
• Your Annual Percentage Rate or “APR”: This is the cost of credit expressed as a yearly rate. The APR includes the interest rate, points, broker fee and certain other charges that the borrower is required to pay.

Watch Out for Unfair Lending Practices

Most lenders are trustworthy—but, unfortunately, some lenders are not. They sometimes direct borrowers away from loans with more affordable rates. Instead, they offer loans that carry high interest rates, questionable fees, and unnecessary charges. These practices are considered predatory lending.

Most often, the victims of predatory lenders are low- and moderate-income persons, persons of color, and the elderly. But anyone can be misled by a predatory lender. The best defense to predatory lending is an informed consumer. ConnectLA housing seeks to provide you with information to arm you against this illegal practice. The more you know the better you can protect yourself and ensure that you get the best mortgage for which you are qualified.

Although federal law does not define predatory lending, and states define abusive lending differently, they usually involve practices that strip equity away for a homeowner. Predatory or abusive lending practices can include:

• Making a loan to an individual without regard to the individual’s ability to repay.
• Repeatedly refinancing a loan within a short period of time and charging high points and fees with each refinance.
• “Packing” a loan with single premium credit insurance products, such as credit life insurance, and not adequately disclosing the inclusion, cost or any additional fees associated with the insurance.
• Charging excessive rates and fees to a borrower who qualifies for lower rates and/or fees offered by the lender.

A loan product or lending practice may not seem predatory until you compare it to similar loan products offered by other lenders. The situation you are in may not seem abusive until you get to the closing table. If any fees or charges differ from what was previously disclosed, delay the closing until you understand all terms of the loan.

How Not to Borrow Trouble

The tips below will help you to avoid the painful prospect of you losing your home to an unscrupulous lender.

1. Shop around. Talk to several lenders to find the best loan for which you qualify. Understand the best loan terms available in the marketplace and compare the APR (annual percentage rate) of loans from different lenders. The APR takes into account both the interest rate and the points and fees of the loan
2. Understand the loan terms. Compare loan terms from different lenders. Don’t accept loan terms just because the lender says they are “standard”. Make sure you understand the reason for—and effect of—every loan term before you sign. If you’re confused, ask a nonprofit housing counselor or a lawyer to review the information with you. Click here to view a list of local housing counselors.
3. Borrow only the amount you need and can afford to repay. You may be encouraged to borrow more than you need. So before deciding on a loan, be clear about how you will use the money and how you plan to pay it back. If you are already in debt and having problems making your payments, you probably shouldn’t borrow more money. Instead, try to negotiate a payment plan with your current lenders.
4. Understand exactly how much the entire loan will cost. Review the complete payment schedule. Be sure to find out how much you will have paid in total when the final payment is made. Above all, be aware or loans with one large “balloon” payment at the end. If you have difficulty making the final payment when it is due, you may have to refinance the loan to make the balloon payment. If your original loan does not guarantee a new loan with reasonable rates, the refinanced loan can cost you even more money because of additional points and fees.
5. Make sure that the loan fees are reasonable. In most cases, loan fees should not exceed 5 percent of the loan amount unless you are paying more for a lower interest rate. For example, if the loan amount is $100,000, the loan fees should not exceed $5,000 ($100,000 x .05 = $5,000). However, there are some situations that may cause the loan fees to be higher. If you’re not sure, ask a trusted advisor such as a nonprofit housing counselor.
6. Don’t be pressured into signing for a loan you can’t afford. But if you do get pressured into signing for a loan you can’t afford, act fast. You have a legal right to cancel, or “rescind” a loan contract when your home is used as security for a home-equity loan. But you must generally cancel the loan in writing within three business days of signing the loan documents.
7. Watch out for loan offers from someone who calls you on the telephone or comes to your door without an invitation. Throw away mail from companies offer to arrange a loan for you. Advertisements promising easy money should be viewed with caution. Remember, if an offer sounds too good to be true, it probably is!
8. Be wary of high-pressure sales pitches, such as claims that an offer is good only for a limited time. If the offer is good—and legitimate—today, it should still be good tomorrow. Take time to check it out.
9. Avoid loans that include extras you don’t need. Loans should not include unnecessary costs like prepaid single-premium credit life insurance. Predatory lenders may require that you purchase a credit life insurance policy as a condition of getting a loan. This is not necessary. These extras will be added to the total cost of your loan and make your payments higher.
10. Never sign an agreement that you don’t completely understand. And don’t take the lender’s word that an agreement is “standard”. if the agreement seems unreasonable, or uses terms that are unfamiliar to you, ask for a complete copy of the loan agreement. Get a second opinion from someone you trust before you sign the loan agreement. Bring it to your advisor or local nonprofit housing or consumer-credit counselor to review it. A glossary of real estate terms is available on this website.
11. Fill in all blank spaces. If an answer is not required, write “N/A” (Not applicable) in the blank. Do not sign a document until you have completed every space. Don’t sign documents that have incorrect dates or blank fields. Be wary of promises that a lender will “fix it later” or “fill it in later.” Someone could fill in the blank later and make you responsible for something without your knowledge or agreement.

For more information about fair housing, predatory lending and services that the Fair Housing agencies in Los Angeles County offer, contact the following:

What’s Happening Behind the Scenes While Closing Your Deal

In California, an escrow agent is used to facilitate the real estate transaction process. An escrow is a service that provides the public with a means of protection in the handling of funds and documents. It allows both the buyer and seller to minimize risk by performing real estate transactions through a neutral third party.

What Happens During Escrow

In California, once an offer to purchase contract has been negotiated to your satisfaction, the real estate purchase contract that was signed by all parties is forwarded to escrow. Your escrow or good faith deposit is also sent with these real estate forms and is cashed and held in escrow. The escrow officer prepares escrow instructions. Escrow acts as a third neutral party, and operates only as a “funnel” for all money and paperwork. These instructions are a restatement of the original terms and conditions of your real estate purchase contract and once received, must be immediately signed by both buyer and seller. The escrow agent is obligated to safeguard the funds and documents while they are in their possession, and to disburse funds and/or convey title only when all provisions of the escrow have been complied with.

Some of the activities of the escrow officer are:

• Receiving and holding all monies, instructions and documents pertaining to the purchase
• Serving as a communication link and liaison between all parties
• Order title search and review preliminary report to determine the status of title to the property
• Requesting a beneficiary statement or payoff demand from existing lenders
• Holding inspection reports, deeds and insurance documents
• Complying with the lender’s requirements in its instructions to escrow
• Preparing or obtaining the grant deed and other required documents
• Prorate taxes, interest, insurance, rents and other costs related to the transaction
• Requesting the deed and other documents
• Order the title insurance policy
• Closing the escrow according to the instructions of the buyer, seller and lender
• Disbursing funds as authorized by the instructions, including charges for real estate commissions, loan payoffs, title insurance, taxes, recording fees and other costs
• Preparing final statements of disposition of all funds
• Forward final documents to all interested parties, buyer, seller, lender and real estate agents.

During your escrow period, certain things will happen, depending on your negotiated offer:

1. As a California homebuyer, you will have the opportunity to have a final walk through of the property to assure that its condition has not materially changed since the sale agreement was signed.
2. Your lender will perform an appraisal on the home
3. A title report will be ordered
4. Additional California disclosures will be ordered
5. California retrofit requirements will be completed
6. A termite inspection will be ordered

Also during this period you will need to arrange for homeowner’s insurance. Unless your home is in a flood zone, most California lenders only require fire insurance. However, most insurance companies offer “package” pricing to include liability and personal property.

Many of the activities described above have a cost associated with them that will be paid by the buyer, seller or lender…depending upon how the deal was negotiated.

At closing itself, all papers have been prepared by the closing/escrow agents, title companies, lenders and lawyers. This paperwork reflects the sale agreement and allows all parties to the transaction to verify their interests. For instance, buyers get the title to the property, lenders have their loans recorded with the County and state governments collect their transfer taxes. When escrow closes you will receive all your paperwork within a few days. As the new owner, you will receive your recorded deed directly form the County Recorder’s office and you get your keys! Congratulations! You are a homeowner!

Sources:
“Borrowing Basics: What You Don’t Know Will Hurt You”, FannieMae Foundation 2003
“Don’t Borrow Trouble”, Los Angeles Housing Department 2002
http://www.realtor.com/