CHAPTER 7-The Escrow Process

Home Loan Process“If she asks me for one more document I’m going to kill someone.” Yes, I have heard those very words spoken. The Loan Officer is just the first person at the lender who will ask for information. For a variety of reasons, including not knowing what type of loan you will be getting early in the process, the Loan Officer never gets everything on the first pass. Next comes the Loan Officer’s Processor. Then an Underwriter approves or disapproves the loan. A Senior Underwriter may have to qualify that and it could even go into Quality Control. Each of these stations in the loan approval’s life is a spot where more information may be requested from you. These seemingly unending requests are just part of the normal loan process. Don’t take them personally. Do everything you can to get the requests handled correctly, completely and quickly.

These may include requests for pay stubs, tax records, cancelled checks, other business records, divorce papers, child custody arrangements, six-months bank statements (all numbered pages), sale-of-previous-home records, military orders, VA certificate of eligibility, award/estate/settlement/lottery winning documents, and other very personal documents. They are not in the business of making your life complicated; they merely want to get your loan approved. So do everything you can to help them.

Note: If you are moving to a new city, pack a special box of these kinds of documents and take that box in the car when you drive away from your old home. In fact, put the box in your car before the movers get to the house to pack you up. Even if you have not started shopping for a new home in the new city get this done. If your financial records are in storage, you don’t even want to know what it will take to pay to get them out. If you can even find them.

A little story from my childhood: on one of our chaotic moves (we had five kids in the family and no less than two pets at any given time) the movers packed Mom’s purse. In it were the hotel reservation details, the cash, the traveler’s checks and Dad’s orders to his new station. They had to UNPACK 19 boxes before they found it. First thing on the morning of your move, put your purse, laptop, financial records, cell phones and the other things in your car that you will be taking on the trip and LOCK the car.

And speaking of locking; the loan must be somewhat approved before you can “Lock” (secure a specific interest rate). We used to have a saying here in town that the Loan Officer with the lowest rates in San Diego was the one who didn’t have your loan package. Don’t be distracted by someone who “says” they have lower rates. Unless they have seen your entire loan package (including all of that mentioned above) they can’t know what rate you would get. After your loan is approved you can lock your loan rate. This means that for a specific period of time the interest rate you are promised is available to you. It might be a 30, 45, 60, 90, or 120-day lock. The longer the time period the more the lock will cost you.

IMPORTANT NOTE: Write on your home-buying calendar the date that your lock is expiring. If you are within ten days of that deadline and it looks like escrow is not going to close on time, you need to get pro-active and figure out what to do next working with your Loan Officer. Do not wait to the last minute.

You can also usually get a one-time rate change. You pay for this in points. Say you have already locked your loan and paid this fee. Escrow goes longer than expected and the interest rates drop. Just once, you can drop to the lower rate. If you have not paid the fee then you are not granted the right to do that. It is a little like insurance. For the price, in a short escrow, it is probably not worth it.

If the lock expires and the interest rate goes down, you will NOT get the lower rate. On the surface this doesn’t seem fair. Here is why it is. If the interest rate goes up within your lock period, higher than your lock, the lender does not get from you the higher rate. They risk having an out-of-the-market interest rate loan, yours, that they must then sell at a discount on Wall Street.

If a home is being built for you, the fellows in construction will do everything they can to finish on time but do not lock your loan with dates close to the scheduled completion date. Things happen and losing your lock because the date passes is never a good thing. (See Chapter 8 Should I Buy New or Resale.) When you lock there is a price to be paid (as points, discussed above) for locks longer than 30 days. If you seriously think the
interest rates are going to rise, it may be appropriate to lock for a longer period, if for no other reason than the peace of mind that comes from knowing the final rates you will pay. There will come a time when you have to lock in order to complete the loan on time. That is typically 2-3 weeks before the close of escrow. Rates fall slowly, so holding off for a few days at that time may jeopardize the completion of your loan and rarely saves any significant amount on your payments.

Your Sales Professional and your Loan Officer work with interest rates every day. Just like you work in your business. Even with this enormous amount of experience; they cannot guess where the rates will be in a week. From experience, I can tell you that rates come down very slowly and rise very quickly. If you try to “play the market” on rates the odds are against you. Interest rates have been as high as 18.5 % during my lifetime (1981) so consider yourself very fortunate to be buying at these incredibly low rates, the lowest in decades.

“Pre-paids” are items that you would have to pay in the near future but are being asked to pay with your escrow. For instance, taxes are paid toward the future. The whole process is a little complicated but the essence is that you are paying the taxes that would be due soon anyway. A nice thing is the deductibility of most prepaids on your income taxes. Counsel with your Loan Officer and Escrow Officer about the amounts involved because it will affect the amount of cash you will need to bring to the escrow before closing. These may also be called Recurring or Non-recurring Costs. The month of the year in which you close and even what day in that month can impact the amount of pre-paids you must bring in.

Here is an example: If you close escrow on the 4th day of a month you will need to bring in more pre-paid interest than if you closed on the 25th day of the month. In the first you would bring in 26 days of pre-paid interest and in the second instance you would bring in only 5 days. So less cash up front. Here is the tradeoff: In the first, though you had to bring more cash up front, your first payment isn’t going to be due for about eight weeks. In the second, though you brought in less cash, your first payment is going to come quicker, in about five weeks.

“Points” are the costs of the lender providing certain things for your benefit. You might pay points to have a longer lock period on your loan, you could pay points for a lower interest rate. A “point” is 1% of the loan amount. One of the non-recurring costs are points (you only pay them once up front, not on a regular basis thereafter.) The “origination fee” is the lenders overhead cost for providing the building, machinery, people and paperwork to get your loan approved and funded. Every lender has this cost and must cover it somehow even if they do not charge “origination.” If they are providing an adjustable loan product that involves margins, indexes and variability they can more than make up the cost of their overhead by moving these factors to their advantage. If you do intend to compare loan rates, compare only perfectly matched programs. This is done in a vacuum and, of course, your credit rating, earnings, assets and other factors could influence the rates you are unfairly comparing with un-qualified conditions of approval.

Note: a lender that says they do not charge an origination fee must make up those costs somewhere else. Though adjustable mortgages are out of fashion while I am writing this book, they will return as interest rates rise. The adjustable components of lending are multi-fold. First there is the index – the foundation of the loan rate. I won’t go into a long explanation here. To that is added the margin (a fixed percentage added to the index which is not fixed.) There are also discount points which the lender can achieve by selling you into a higher margin (discount points to the lender can be a profit center.) The speed at which it adjusts, how often it adjusts, and how much it can adjust can also be manipulated to create value for the lender.

“Terms” are the interest rates, amount of time to repay the loan, and the conditions of that repayment including whether you can pay off a loan early without penalty.

Closing Costs are costs paid for all the legal, paper and people work to coordinate the purchase of your home. These include Title Insurance, Escrow fees, county recorder, documents, wiring fees, transfer taxes and many other fees. Some people call several of these “junk fees.” If you do not understand the purpose of a fee ask your Loan Officer or Escrow Officer to explain it to you. You may ask nicely if they can waive that fee for you. The vast majority are ones that cannot be waived. Don’t use up all your favors at the beginning of the process. You may need other items more later, and ones that have a far greater impact than a $75 courier fee.

Interesting Item: Loans are sold. Let’s take a silly example to illustrate. The lender has $1,000,000 to loan and gives out five $200,000 notes. If that was it, they would be out of the lending business. So they sell the loan which is bundled on Wall Street and often sold as mortgage-backed securities. This puts the $1,000,000 back into their “pipeline” to lend to another group of borrowers. Sometimes if their mortgage enterprise is going well enough they will borrow money from other lenders to fill the pipeline temporarily. Since loans are guaranteed by the FHA and VA and sometimes Mortgage Insurers (PMI or
MIP); there must be guidelines of acceptability. Otherwise the loan pools/bundles would not be up to the standards of Wall Street. To a large degree these are the criteria that lenders use to get your loan approved with an eye toward that ultimate sale. (This whole process is invisible to you, because the lender will retain the Servicing Component of the loan and you will continue to write your check to them every month in most cases.)

There are basically two kinds of mortgage companies. One is a Mortgage Broker. They get their rates from the others who are called Direct Lenders or Banks. You might put in an application with ABC Mortgage and Finance and end up with a loan from Wells Fargo. On the outside, this might seem like you got stuck paying twice and ended up with a disadvantage. And this is interesting, the Direct Lender will offer the Mortgage Broker what is called a wholesale rate that is often lower than what the Direct Lender’s own Loan Officers can give you. The Mortgage Broker makes a profit on the difference if they offer it to you at the same rate as the Direct Lender. So the game for them is to be just attractive enough on their interest rates to keep you in, but close enough to the Direct Lenders rate to make a good profit.

One thing that they will not particularly like – you can apply for loans with two different lenders, called a “double ap.” Lock one rate in early and let the other rate float until the last possible minute. This almost doubles the amount of work you will have to do to get your loan but if the rates change dramatically you can have big savings by picking the lower of the two.


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About the author

Robert N. “Bob” Bekins is the Owner/Broker of North County Realty Associates headquartered in San Diego County, California. He has been a Sales Manager with major national home building companies, in international property sales, and in traditional resale. With over 1,000 homes transacted he is qualified to be a fine advocate for your needs in that part of California. You may reach him by texting or calling 760-505-9397 or at Hope you have enjoyed the book and now Happy Hunting and may you live long and prosper in your new home!