The Home Buying Process, Part Five: Mortgage Limbo

You’ve had your inspections and asked for your repairs — the Seller responded and, presumably, those fixes are underway. Your loan officer has all your paperwork, so now there’s nothing to do but wait. Welcome to Mortgage Limbo. I’ve found this part of the process particularly difficult to write about because as a Buyer, it really seems like nothing is happening for a ridiculous amount of time.

As my husband put it, it seems like a lot of hurry up and wait. I know it seems that way — but there’s a lot of motion going on in the background that you’re meant to never see. Don’t worry, I’m about to pull back the curtain and show you how the whole thing works.

Watching the Gears Spin

Just so it’s not too confusing, understand that I’m going to be discussing two different process that are going on at the same time. One is happening at the closing company and another is happening at your bank. Each of these parties is now at full throttle, working their hardest and fastest to get your loan approved and closing documents ready. This is no small feat, so make sure you thank your underwriters and closing company employees.

Most of what happens now is research, but it’s deep, intensive research into you, any co-borrowers and your home. If you only knew the things your bank’s underwriters looked at, you’d be embarrassed by your spending habits.

As for the closing company — well, they’ve got a stack of their own. One of their big jobs is to research the legal history of the real estate your home sits on, just to make sure that no one else might have an ownership claim to it besides the person selling it. Today it’s done by computer, but just a few decades ago this information was collected into a book that was added to each time a new owner came along.

Why Title Research Matters

Books called Abstracts of Title were once the norm in title research and while they’re really neat to read if you ever get a hand on one, chances are increasingly rare that you’ll stumble across one. A quick glance at one can give you some idea what your closing company has to go to in order to give you title insurance. They literally trace your home from the first person to purchase it from the United States government, through each owner and lienholder to the present.

Each person and entity on that list has to be checked to ensure that they passed title or released their lien in its entirety to the next owner. That’s what we call a “clean title.” There’s no question who owns the property, there’s no potential heir floating around out there that might be able to challenge your purchase — it’s nice and easy.

A clean title can have title insurance issued, just in case there is a skeleton in the closet that no one managed to find. And you want title insurance. It’ll protect you just in case there’s a problem with the title down the line or someone tries to question your ownership because their great aunt died owning your property and it went through probate, but they weren’t notified.

Title insurance will also protect you in case an adjoining neighbor believes they have a claim to any or all of your land because of easements or through adverse possession. Let me explain these two concepts quickly, because they’re not always what you think.

Easements can be created when a neighbor crosses or otherwise uses your property on a regular basis — that’s probably the most common type in the title insurance scenario. So, if they cross your property regularly to reach their own backyard and have for many years, you may have an unofficial easement that will be difficult to manage. Establishing that easement is different, depending on your state.

You may not know if a neighbor has an easement until after closing, but it’s usually a lot more obvious if someone is attempting to claim adverse possession. First of all, they’ll claim that part or all of the real estate you’re purchasing belongs to them — that’s a good tip-off. And they may be right, even if they’ve not sued for title yet.

The most common scenario is when a neighbor’s fence or garage or whatever is on the wrong side of the property line and has been for many years. One day you’ll have a survey so you can put in a new fence, and BAM!, you’ll realize there’s a problem. Your title insurance can clear up this problem for you by buying the neighbor out or handling your court case. If you end up in court and you lose, the insurance ponies up the dough, so it can really make a huge difference.

These situations are why you get title insurance, and why all banks require it. So when you see the charge for it on your HUD-1, don’t freak out — it’ll pay for itself one thousandfold if you have to use it.

Behind the Bank’s Curtain

While the closing company is busy doing their thing, your lender is working hard behind their own curtain. They’re doing several things at once and many, many people are sticking their noses in your file. Here are the main things they’re working to get ready before closing:

Getting a Flood Certificate. Most loan programs require a flood certificate, even if they’ll lend on a house in a flood zone. It lets them know what type of insurance you should have in place. Your bank will either contract with a third party company to pull that information from FEMA’s databases or they’ll have someone on hand who can do the certification for you.

Verifying Your Information. Even though you brought in stacks of tax returns, paycheck stubs and bank statements, your lender has to check all of that stuff out for themselves. They also look into everything about you, your employment and, sometimes, your past, to make sure you’re a good risk. They want to see that you’ve got a stable job that will last and that you’re not getting some sort of short term pay boost that’s skewing your income figures. It’s very routine, your HR department fields these requests all the time.

Checking Your Credit. Your bank pulled a credit when you were pre-approved for the loan, but they’ll pull it at least one more time to make sure you’re still credit-worthy. This is no joke, I’ve seen people charge up credit cards prior to closing and discover at the last minute that the bank has decided to decline the loan. Your credit and everything else about you needs to remain stable during the time between your application and the closing table — don’t make any waves or your boat might just tip over.

Appraising Your House. Your home is your castle, but the bank might not agree — so they send out somebody to find out if it’s worth what you think it is. It’s nice to know that you’re paying the right amount for real estate, but the appraisal is actually another way the bank ensures that the loan they’re making won’t go south on them. They want to be 100 percent sure that they can sell your home for what you owe if they have to foreclose. Some loan programs (especially FHA and USDA) require an additional special appraisal before the servicers will buy those loans, as well.

Clear to Close

Whether you’re a Realtor, a Buyer or a Seller, there are no three words that sound sweeter than “Clear to Close.” Those three little words mean that all the hoops have been jumped through, all the paperwork is done and the only thing you’re waiting for is your time at the closing table. Crunch time is over, you can breathe easy again (but still refrain from dipping into those credit lines or getting new ones!).

Once your file is clear to close, the bank sends all their information over to the closing company, where they proceed to put it all together, incorporating the file from the bank with their own file on your home’s history and title insurance policy. It’s really something, to be honest. The pile of papers you get at closing is nothing compared to what’s gone into the file behind closed doors.

You’ll know that you’re out of Mortgage Limbo when you get that call — the one where your lender or Realtor lets you know just how much money to bring to closing. When that happens, run to your bank and get certified funds (no checks, credit cards or cash allowed) made out to your closing company. They’ll then take all the funds coming into the transaction and use them to pay all the parties involved. Simple as pie.

The Bottom Line: Mortgage Limbo is Down Time for You Alone

When you’re buying a home, it seems like very little is getting done during Mortgage Limbo, but there’s nothing further from the truth. This is where the real action is, and it’s where your Realtor’s ability to hold a transaction together is tested the hardest. There’s always something that they have to fix. When it’s small, they can do it without you ever knowing, but when it’s big, try to remember that they’re in your corner.

Our transaction had a major problem prior to close, and if not for my Realtor, we’d not have closed on time. Or at all. I was so done with the poor communication coming from our Seller’s agent that by the time we learned they wouldn’t have their repairs made on time, I was ready to just take our downpayment, go on vacation and forget the whole thing. But our agent saved it, and our regret for riding the teacups at Disney instead of acting like adults about it all. More on that in the next installment, where I talk about the closing table.