Love Live DC: Buying in DC — Step 8: Financing Part 2

This column is written and sponsored by D.C. real estate agent and Edgewood resident Jessica Evans. Email her questions at  [email protected].

We’re flying through the steps of the home-buying process with just a few more to go. If you have missed any or want to start at the beginning, you can do that here.

Now that you’ve made it through the home inspection, and have a ratified contract on a home, we’re on to part 2 of the financing process. Financing part 1 was choosing a lender and pre-approval. Now that you have a home lined up to purchase, it’s time for part 2, the loan application and other steps needed to receive your financing on the settlement day.

The loan approval process is in many ways very similar to the loan pre-approval process. In addition to filling out a loan application you will be requested to submit documents. Depending on your financial situation this may be the same documents requested for pre-approval or many more.

Expect your entire financial (and tax) situation to be examined under a microscope with numerous requests for documentation. During this time it is important that there are no substantial changes to your financial situation, in particular:

• Don’t move any funds without discussing with your lender.
• Don’t make any large deposits unless you are able to document the source of the funds.
• Receiving gift funds? These need to be properly documented. Do not accept or deposit gift funds without speaking to your lender.
• Do not apply for new debt of any kind. This includes credit cards, car loans, or refinancing any of your existing loans (unless recommended by your lender).
• Consider credit monitoring (during your search and through settlement) to make sure that there are no unauthorized changes to your credit score.

While the the information that you provide your lender will confirm that you qualify for your loan, the other part of the equation is making sure that the property that you are purchasing qualifies.

Since the property you are purchasing will be collateral for your loan, the bank wants to make sure that your loan is based on the market value and that there are no conditions that would have a substantial impact on their ability to sell the property in the event of foreclosure.

How does a bank know what the home your buying is worth? This is where the appraisal comes in. Your lender will order your appraisal, and it will be conducted by a third party service provider. The appraiser will have a copy of the sale contract. They will visit the home to take measurements, document the size and condition, and note any adverse conditions.

For some types of loans, the lender may require that certain property condition issues are resolved before a loan is approved — this is most common with VA and FHA loans and the issues are typically related to safety and security. It is important that if you are using this type of financing that your real estate agent is experienced in identifying the any loan conditions that may cause financing issues, the seller may be unwilling to pay for repairs resulting in a terminated contract.

After visiting the property the appraiser will prepare an appraisal report where they include the comparable sales and market conditions that they used in calculating their valuation. An appraiser is limited in the comparable sales and under contract properties that they can use in determining the market value, they will need to use the most recent, most similar and geographically closest sales (even if these are not the highest priced sales).

The appraisal report will be received by your lender and distributed to you. If the appraised value is greater than or equal to the sales price then you are good to go. If the appraised value comes in lower than the sales price there are a few options depending on whether or not you have an appraisal contingency.

• First your real estate agent should review the appraisal for accuracy. Were the comparable sales that were used the most recent most similar sales? Are there other properties that should have been used?
• If you have an appraisal contingency, you have the option to pay the difference between the appraised value and the sales price, or submit to the seller written notice requesting that they reduce the sales price to the appraised value.
• The seller may choose to respond by accepting the lower price, continuing negotiations, or deliver notice that they will not be reducing the sales price and declare the contract void if the buyer is not willing to pay the difference.

It is best to try to avoid any appraisal issues by having a realistic understanding of the market value of the home that you submit an offer on and to review comparable sales in detail before submitting an offer.

If you included a financing contingency in your offer there is a specific timeframe in which you have to receive a conditional loan commitment. The competitive nature of our market often requires short timeframes and it is your responsibility as a buyer to meet these timeframes.

A conditional loan commitment is a preliminary step before the final loan commitment, and may be subject to additional items (such as proof of homeowners insurance, updated documents, etc.). A final loan commitment is received when both the buyer and property are fully approved for the loan — once you reach this stage the finish line is in view and there are only a few final details left before you will be receiving the keys to your new home.