There are many questions that potential new homeowners may have.  Listed below are just a few that we encounter on a regular basis, and they are essentially very important to the homebuying process. 

Just remember, it is not only OK to ask your lender questions, it's essential that you do, so you have a full understanding of the borrowing process and your particular loan situation.  Here at the Bank of Lake Mills, we believe you have the right to knowledge in the homebuying process.   We don't keep anyone in the dark.  We are upfront with information, and pride ourselves in providing education to the homebuyer before, during and after the homebuying process.    

What is title insurance?

What are closing costs?

What is an escrow account?

What is an appraisal?

What is a Rate Lock Period?

What is underwriting?

What is a FSBO?

Why do I need Homeowner's Insurance?

    Title insurance=Peace of mind.      Determining that your rights and interests to the property are clear is the business of the title insurance company.  Prior to a policy being issued, the title insurance company completes extensive research into relevant public records, maps and documents to trace ownership of the property and determine if anyone other than you has an interest in the property.  Through its research, the title insurance company can usually identify any title problems that may arise and have these problems cleared up prior to closing. Your title insurance policy will protect you from loss if someone contests your title in legal action (the title insurance company will defend the title at no expense to you), or if there is a title defect that cannot be eliminated (the title insurance company will protect you from financial loss - up to the amount of the policy).  Title Insurance is necessary on purchase transactions when a mortgage is being taken out to secure the property, and all refinance transactions.  Title Insurance also provides reassurance to your lender that

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    Closing costs are fees involved in obtaining a mortgage.  Listed below are the most common of closing costs, and they may be charged to either buyer or seller.  Your lender will provide you with a Good Faith Estimate, which will outline the closing costs associated with your particular loan.  These costs can usually be lumped into three general categories:

    Loan-Related costs

• Loan Origination Fee
• Points (Optional)
• Appraisal Fee
• Credit Report
• Flood Certification

Fees to Establish and transfer ownership

• Title insurance
• Escrow/Settlement fees
• Courier Fees
• Attorney fees

Fees to State and Local Governments

• Property taxes (if due, buyer or seller may pay)
• Transfer Tax
• Recording fees

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    An escrow account is an account set up by the lender or investor who will be servicing your loan, in which your property taxes, homeowner's insurance premium and monthly mortgage insurance (if applicable) are paid out of. 

At the time of closing, the lender will collect a certain amount of months for each item being escrowed.  This amount will be shown on your settlement statement as prepaid reserves.  The amount collected will then be put into an escrow account which is held by the servicer of your loan. (The entity you make your payment to) As an item comes due, the servicer pays the amount due.  Your Loan Servicer puts money into your escrow account from your monthly payment, which consists of principal, interest, taxes and/or insurance, or as it's commonly referenced, PITI. 

One thing to keep in mind, as your property taxes and homeowner's insurance premium go up, so will the amount being escrowed to ensure your escrow account has enough money the next time payment is due.  

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    Simply put, an appraisal is a professional appraiser's opinion of value on a particular property. The appraiser may use three common approaches to reach this estimated value, which are Cost Approach, Sales Comparison Approach and Income Approach. 

The Cost Approach to value is what it would cost to replace or reproduce the improvements as of the date of the appraisal, less the Physical deterioration, Functional Obsolescence and the Economic Obsolescence.  The Sales Comparison approach to value makes use of "comparable" properties of similar size, quality and location that have recently sold.  The Income Approach to value is given little weight in single-family residential properties, but is of great importance in income-producing properties.  It provides an objective estimate of what an investor would pay based upon the net or gross income the property produces. 

Sound complicated?  It is to you or I, but a professional real-estate appraiser is licensed and certified in order to provide these written appraisals.  They have completed painstaking, precise educational and experience requirements and must adhere to very firm standards.   

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    A Rate Lock Period is the amount of time a Lender agrees to "hold" your interest rate.  A rate lock or rate commitment is your Lender's promise of a specific interest rate for a specified time while your application is being processed.  This rate that is being "held" is the interest rate you will have for your loan.   Your rate lock should be valid through your agreed upon date of close.  This rate lock prevents you from going through the application process and finding out at the end that the rates have gone up.  Your Rate Lock Period can vary in length and if a longer period is required, you may be required to pay points.    

Deciding on when you should lock your rate is a conversation you should definitely have with your Lender.  Once your rate is locked in, that is the interest rate you have agreed to.  Even if interest rates have gone down, you will get only the rate that is locked.   At the time of application, your lender should provide you with the interest rates available, and depending on when you need to close, your lender may lock you in at that time.  If you are purchasing a property, you need to have a signed and accepted offer to purchase to be able to lock-in on a particular rate.  This rule of thumb applies for all conventional financing options. 

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    Underwriting is the process that a lender uses to determine if the risk of lending to a particular borrower under certain loan parameters is acceptable.  Credit, capacity and collateral are the main criteria used by an underwriter to make a determination.  Your lender will submit the necessary documentation to an underwriter, who will then make the final decision on whether to approve or decline the loan.  An underwriter may also ask for additional supporting documentation from the lender or the borrower to clarify certain aspects of loan file to help make this decision.  Your loan must be approved by an underwriter before you can close.   

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    FSBO is a commonly used acronym in the real estate profession that stands for "For Sale By Owner."  The property owners are not using a real estate agent to market and sell their property.  and are the only point of contact for interested buyers.  The owners may also choose to hold their own open houses, or may do showings by appointment.  If you are looking at a property that is FSBO, and you have decided not to have a real estate agent represent you, it is recommended that you hire an attorney to handle the details of the purchase agreement. 

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    Homeowners Insurance provides financial protection against disasters.  A standard policy will insure the home itself and the things you keep in it.  It covers both damage to your property and your liability or legal responsibility for any injuries and property damage you or members of your family may cause to other people.  There are exceptions  to the disasters they are covered.  These are caused by floods, earthquakes and poor maintenance to a property.  Separate policies must be purchased for flood and earthquakes, and the maintenance-related problems are the homeowner's responsibilty. Your lender requires homeowners insurance to protect their investment in case your home is damaged by a fire or any other disaster.  

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