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Escrow
The Loan Process • Credit Scores &
Appraisal
The following is a short imperfect example of what happens during Escrow. An
Escrow is an arrangement where money and documents are held in trust (in
escrow) by a trusted third party (the Escrow Company) until certain agreed
conditions are met. The Escrow Company is this disinterested third party
that coordinates the collection and distribution of money in a real estate
transaction. The Escrow Company will collect and distribute the money as
directed to through the Residential Purchase agreement and Escrow
instructions. The Escrow instructions will outline the responsibilities the
Escrow Company has to the buyer and seller in relation to the Residential
Purchase Agreement. The Escrow Company does not take sides, but works
equally for the Buyer and the Seller.
• Open Escrow with the delivery of a signed Purchase Agreement and Deposit
• Escrow orders preliminary Title Report
• Escrow Instructions typed and sent to Buyer and Seller
• Buyer performs inspections and due diligence
• Seller delivers Transfer Disclosure Statement and other disclosures.
• Buyer and Seller receive escrow instructions for review and signature
• Agent orders termite inspection
• Preliminary title report delivered to buyer from escrow
• Contingencies, reports, inspections, satisfied & removed from escrow
• Preliminary title report approved by lender
• Escrow orders beneficiary statement or demand for payoff
• Agent orders home protection policy
• Agent verifies termite work completed, if necessary
• Escrow orders buyer’s insurance
• Escrow requests loan documents from lender.
• Agent present on walk through
• Loan docs signed by buyer in escrow
• Loan docs delivered back to lender
• Lender funds loan.
• Documents delivered to County Recorder.
• Recording date is verified
How the Loan Process works
Even though you as the seller are not involved in this process with the
buyer, it helps to understand how this process works. The type of loan
program and the qualifications of your buyer will have an impact on how long
it will take to process and fund the loan.
Your buyer should be pre approved which means that they have already had
their credit report ordered and a bank give them a conditional approval.
Depending on the loan program the buyer has qualified for, will greatly
impact the amount of paperwork they will need to submit. The Loan
Application (Form 1003) a transmittal (Form 1008) and their Credit report
will have generated a list of conditions that the buyer will have to
satisfy. Conditions can be very simple or very complicated. Examples can be
proof of rental payments, reserves in savings, employment verifications,
child support statements and letters of explanation.
The general rule of thumb is that the more documentation the borrower can
supply (about the borrower’s financial condition) to the lender, the lower
the interest rate and the more negotiating power the borrower has. However
there are programs for those who have trouble documenting their income
and/or assets. These buyers should not be turned away, especially if they
are going to offer you more for your home. A combination of their credit
score, the appraisal value of your home and the terms of the purchase
agreement can be favorable for someone with less documentation to obtain a
loan to purchase your property.
Credit Scores
As the seller it is nice to see what the buyer’s credit scores are, however,
the numbers of the score really don’t mean much, if you don’t understand
some of the basics of lending. Credit Scores start from a high of 800 and go
down from there. Credit is like school, the ratio of A credit to B,C, and
lower credit is similar to the ratio of As, Bs, Cs and Ds of student’s
report cards. Some borrowers with credit scores in the mid 600s can obtain
financing as quick as borrowers with scores in the 700s, their programs and
interest rates will differ, but the ease of financing can be identical. The
score does not take into account the borrower’s income, so a borrower who
earns $10,000.00 month with a credit score of 665 can be a stronger buyer
than a borrower who only earns $4,000.00 per month with a credit score of
765.
A credit score takes into account several areas from the credit report.
Payment history – Credit scores get a boost from on time payments.
Outstanding debt – Balances above 50 % of credit limits will harm credit.
The goal is to keep balances under 30 %.
Account history – An established history equals a less risky borrower. It is
a mistake to close old accounts before making a loan application, even if
they are unused with zero balances.
Recent inquiries – When a lender or business checks credit, it causes a hard
inquiry and a slight ding to the credit score. Apply for new credit in
moderation.
Types of credit – A healthy credit profile has a balanced mix of credit
accounts and loans.
Credit Scores above 620 usually indicates you have a buyer that will be able
to complete the sale. 720 is the preferred mark where the borrower has more
choices for better programs, but buyers with scores under 720 should not be
readily discarded. Depending on your ability to deal with a possible longer
escrow (30-45 days), a buyer with a score in the 620 – 720 range may have a
higher offer.
One last thing to remember about credit scores, lenders look at a three
bureau score. When a credit report is ordered, the report will come back
with three scores, most lenders look at the middle of the three scores. Keep
this in mind when you request to see the buyer’s credit scores, you want to
see all three numbers so you can see what the middle score is. The Three
bureaus are Transunion, Exquifax and Experian. The information contained on
report will vary from bureau to bureau.
Appraisals
High offers are not always the best offers. I have seen buyers come in and
offer far over the listing price only to tie up the property so they can
later beat down the price after the inspection period and the appraisal. The
appraisal is very important, unless your buyer waives the appraisal
contingency. The lender may reject your buyer’s loan application if the
property does not appraise equal to or higher than the agreed sales price.
Even if you think you can convince an appraiser to write an appraisal far
higher than the neighborhood dictates, the underwriter for the lender is
very likely to pick it up and request a second appraisal. Appraisals are not
cheap and it is better to have it done right the first time.
Underwriters are very keen to notice when the appraiser goes out of the area
to use comparable sales to support a price. Unless the reason is obvious as
to why the appraiser went out of the area for comparable sales, the
appraisal will be scrutinized and most likely rejected. We are all for the
highest appraisal possible, but a wrong appraisal will cost the buyer
additional money, lengthen the time of escrow and give the buyer a point at
which the buyer can cancel the Purchase Agreement.
The Loan Processor and Underwriter.
Both these people are not one in the same. The Processor is the person who
puts the borrowers package together. The Loan package consists of a Loan
application (Form 1003), transmittal page (Form 1008), credit report, pay
information, rent information, savings information, etc. Depending on how
experienced the processor is will have a big impact on how smoothly the loan
process will work. An experienced Processor will have a good idea what
conditions the lender will request before the borrower’s formal application
is submitted. If the processor is really on top of things, they will have
the borrower working on collecting or preparing this data right after the
borrower’s conditional approval is given.
The underwriter works for the lender and follows strict guidelines for the
bank at which they are employed. The program the borrower applies for will
have a set of conditions along with unique conditions related to information
on the borrower’s credit report. As long as the borrower fulfills the
conditions, the underwriter will send Loan Docs for signature.
As seller’s, we do not have the luxury to dictate who the borrower will use
for their Loan, but knowledge of how this process works can save you many
headaches if your escrow begins to slow.
It is sad to say that most Realtors do not explain this process; for the
simple reasons most don’t know the process. Now that you are armed with this
information, we can negotiate a higher sale price for your home
when we are faced with multiple offers.
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