Week 8: Under Contract

Week 8: Under Contract: Locking in Your Mortgage and Getting a Home Appraisal

Buying a Home 101 series – Week 8

This step-by-step series will take you through the entire home-buying process — from finding a buyer’s agent to Closing day, and all the details in between. Every first-time buyer will find this information-packed series easy to follow and understand. Make sure to tune in for the next few weeks!

Once you’re under contract to buy a home (also known as “Pending”) you want the final stages of the mortgage process to go smoothly – you don’t want anything to sidetrack the sale from here on out!

Nothing is a done deal yet even when you’re under contract. Both your future home’s appraisal and your ability to lock in a good mortgage rate can affect the outcome of your purchase.

So here’s what you need to keep in mind when you reach this stage:

Appraisal of Your New Home

Why do you need an appraisal now? Your appraisal is the bank’s way to make sure the home you’re buying will sell for at least the amount of money it’s going to lend you.  Your lender has already approved YOU and your finances but now it’s got to approve the home you’re about to buy.

It wants to make sure that this is a sound investment in case you default on the loan. If the property appraises lower than the sales price, the loan might be declined.

A licensed appraiser’s report is much more detailed and the only valuation report a lender will consider when determining if it will lend money to a borrower. The report will include:

• details on the property/home:
• comparisons to three other similar properties;
•  an evaluation of the local real estate market at the time;
•  statements on any issues that may hurt the property’s value, such as structural damage or even if the property took too long to sell.

Don’t confuse an appraisal with a home inspection! Appraisers are not home inspectors so don’t rely on them to determine if your home is in good condition. They don’t look for leaky roofs, test appliances, or any other items found on an inspection check-list.

Locking In Your Mortgage Rate

When you first look for a lender to get pre-approved, make sure you find one with a favorable rate, and options that can help you, such as prepayment privileges.

What exactly is a rate hold?  A rate hold is a lender’s promise to hold a certain interest rate for you, usually for a specified period of time (typically 30 or 60 days), while your loan application is processed. It’ll protect you against any rate increases during the loan process. 

Some lenders have a “float down,” whereby if your rate lowers more than a certain amount within a short time before Closing / Possession day, you get the lower rate for no charge. However, YOU have to be the one to ask if your lending institution offers this option, AND be the one to keep track. 

Ask your lender upfront about what the criteria are to get the lower rate if rates fall before your Closing day or when you go in to refinance after your initial term is up.

Discuss the interest rate outlook with your lender. Will rates rise or dip in the coming days or weeks? Also determine how the ups and downs in interest rate quotes will affect your mortgage payment and your ability to qualify. What are you willing to do?

Determine the lock-in period with your lender and have them estimate the time needed to process your loan. The lock-in period should be long enough to allow for Closing and any other contingencies imposed by the lender. Make sure you factor in any possible delays (construction issues, appraisal inspections, etc.). Lock-ins of 30 to 60 days are common but some may range from seven to 120 days.  Usually, the longer the lock-in period, the greater the fee.

Have a tangible record of your arrangements with the lender in the event of a dispute. Make sure you have a written rather than verbal lock-in agreement. You MUST fully understand your lender’s lock-in rules and procedures.

If your lock-in period expires, you could lose the interest rate. In this situation, most lenders will offer you a loan based on the prevailing interest rate and points, which may now be higher due to market conditions. Sometimes, though, the rates are lower.

If the delay is the lender’s fault such as heavy demand, the lock-in period may be extended; and sometimes it may be extended even if it is your fault. Again, check the lock-in rules.

There you have it—what needs to happen right after you go under contract.  If we work together, I’ll help you through it when we get there, so don’t worry about it too much right now.  Your next step in the homeownership journey is meeting with a few agents to ask them those questions from Week 1—How To Find The Very Best Agent (link to week 1 article).  I just want to be one of the agents you speak to when you are ready.  Contact me (link to my email) 3-6 months before you want to even start looking at houses, as there is a lot to do between now and when we start looking 🙂

Next week — How to Navigate a Home Inspection – is the tenth article of this Buying a Home 101 series. You don’t want any surprises after you move in, right?! You’ll get the breakdown of what to expect during your home inspection and what to do if any red flags arise.