Timing is Everything When You Finance the Purchase of a Property
By Doug Goelz, Mortgage Services
When you finance, the calendar is key! Disclosure requirements, contractual obligations, prorations, and documentation all are driven by dates. Here are some of the key dates and timelines that can impact your purchase and financing of a property:
Disclosures sent to you by the lender:
- Within 3 business days of when you apply for the loan (once you have gotten into contract), the lender has to send you a Loan Estimate (LE) with an accurate estimate of your closing costs.
Impact to you: I have seen loans cancelled with lenders if they can’t document an LE sent within 3 business days of the application date.
- Once you are getting ready to close, the lender will send you a Closing Document (CD) with an updated estimate of closing costs and funds needed to close.
Impact to you: Once you receive the CD, there is a mandatory 3 businessday review period before you can sign loan documents. With refinances, once a borrower signs loan documents, there is another 3 business day rescission period before the loan can fund.
Your Purchase contract:
- In your contract, you will specify the number of calendar days you have, once the contract is ratified, a) to remove your inspection contingency, b) to remove your appraisal contingency, and c) to remove your financing contingency.
Impact to you: Although it is an extreme measure, if you don’t act on those dates, the seller can issue a “perform or quit” notice demanding that you act or cancelling the contract.
- In your contract, you will specify the number of calendardays, once ratified, until the close of escrow.
Impact to you: Again, although it is an extreme measure, the seller can issue a “perform or quit notice” if you don’t close within the specified escrow period.
Dates of documentation you send the lender:
- If you are self-employed, the lender will look at your last two filed tax returns to calculate your qualifying income. Right now, for example, lenders are looking at 2014 and 2013 tax returns of self-employed borrowers to calculate income UNLESS the borrow has already filed 2015 taxes. If the 2015 taxes have been filed, lenders will look at the 2014 and 2015 tax returns.
Impact to you: If self-employment income is improving and self-employed borrowers want to buy at the beginning of the year, I often advise them to file their taxes early in the year so that a lender can use higher income from the most recent full year when calculating their qualifying income for a loan.
- Every year around the end of March and the beginning of April, with the crush of tax returns being filed, it can take many weeks for the IRS to verify to a lender that tax returns have been filed (lenders always verify tax information with the IRS to make sure that the paper returns provided to the lender are what was filed with the IRS).
Impact to you: In some cases, if the IRS is slow to respond to a lender’s online request for tax information, borrowers may have to go to an IRS office to get validated transcripts from the IRS to provide the lender.
Funds to close:
- When you close, generally the funds you need to close will include interest on your loan from the date the lender funds through the end of the month.
Impact to you: Your first payment will be due about 30 days after the end of the month in which you close. For example, if your loan funds on March 12, you will pay interest from March 12 through March 31, and your first mortgage payment will be due May 1. If you close during the first few days of the month, however, the bank won’t collect interest through the end of the month as part of the funds to close, but your first mortgage payment will be due the first of the following month. For example, if you close on April 3, your funds to close won’t include any interest and your first mortgage payment will be due May1.
- Property taxes are prorated from the date you own the property through December 31 or June 30 (whichever date is sooner).
Impact to you: If the current installment of the property taxes have been paid, the buyer will owe the seller some money for the days the buyer owns the house but for which the seller has already paid the taxes. If the current installment of the taxes has not been paid, the seller owes the buyer some money because the buyer will pay the property taxes for the entire half year even though the buyer hasn’t owned the property for the entire six months.
When you close may impact how much cash you have to come up with at close of escrow, but whether you pay interest and property taxes at closing or after closing, you never end up paying interest for days you aren’t using the money, or any prorated property taxes for days other than when you own the property.
Sound complicated? It can be, and escrow officers and lenders are constantly referring to calendars and dates. However, as the buyer, you can rely on your lender and escrow to guide you through your escrow and keep you on track with deadlines and date requirements.
Questions? Feel free to get in touch with me at 415-730-4665 or firstname.lastname@example.org