3.1.1 Dealing with Financial Issues
In Getting Started, I stressed the importance of selecting a lender and starting the loan application very early in the process. If you haven’t applied for the loan, the contract will typically specify a brief time frame within which you must do so. Assuming that you’ve completed the application process, you still need to coordinate several things with your lender immediately after you contract on a home.
First, you need to get a copy of the contract to the lender so that they know critical contract terms such as the purchase price, the loan type and amount, the location of the property, and the contract dates and deadlines. If you don’t have a loan commitment from the lender yet, the lender needs to know the date by which they need to complete the loan approval process. That date is established in the contract, as are others that are critical to the lender, such as the appraisal deadline and the closing date.
The lender also needs to begin the process of reviewing and approving the property for the loan. Full loan approval requires not only that the lender approves you as a credit risk, but also that it approves the property as collateral for the loan. The appraisal (see Appraisers) is one of the more ubiquitous aspects of the lender’s evaluation of the property. With condominiums or town homes, the lender will also look at ratios of owner occupied properties to rental properties. With mountain homes, they may look at issues such as access, water supply, and the relative value of the land to the house. You also need to get copies of all subsequent contract amendments to the lender as soon as they are completed. Many minor disasters and frustrating delays occur in real estate transactions because someone failed to notify the lender or the title company of changes in the closing date or changes in the terms of the contract.
Second, you need to start talking with the lender about “locking” your loan as soon as you go under contract. When you “lock” your loan, the lender is committing to provide the loan at a specific interest rate and terms. You are committing to take the loan at that rate, assuming the lender approves the loan and you close on the home. Generally, lenders will not lock the loan until you have contracted to purchase a particular property. When you lock the loan, they are committing to accept the loan funds at a specific rate from their funding sources. If they fail to close on the loan, they may lose money. For the same reason, once you’ve locked a loan with a lender, they are generally not going to give you better terms if interest rates drop before you’re ready to close. And keep in mind that your loan lock must be carefully coordinated with the closing on your home. Rates are locked for limited periods of time, typically 30, 45 or 60 days. If you fail to close within the allotted time frame, your lock will generally expire. This can complicate matters when the contract does not specify a specific closing date, a common situation with new home construction.
Third, you need to work with the lender on the timing of the appraisal. In the typical transaction, where we have at least 3-4 weeks between contracting and closing, we try to put off the appraisal until after the buyer and seller have resolved inspection issues. You don’t want to pay $350 for an appraisal and then terminate the contract over an inspection issue. You need to let the lender know that you want to wait on the appraisal, but you also have to make sure that you allow the lender time to get the appraisal done within the time frame provided for in the contract. If the appraisal isn’t completed by the contract deadline, you may lose your rights to terminate the contract or renegotiate the contract price if the appraisal comes in below the contract price.
In general, communication with the lender is critical at this juncture. Any change in your contract with the seller, and any related agreements such as those involved in the inspection resolution, need to be communicated to the lender as soon as possible. In fact, the best practice is to review with the lender any changes to the contract or any other agreements you’re discussing before they are finalized. Depending on the issue and the type of loan, the lender may not allow certain agreements you and the seller make about resolving inspection issues. And if you and the seller want to extend the closing date by a few days, or if the seller wants to stay in the property for a period after closing, you need to know whether the lender will fund the loan under these circumstances befo