Closing the Door on Closing
This fall my wife and I closed on our first home. The process was filled with highs and lows, but the worse part of it all had to be the waiting. When it comes to purchasing a significant asset like a house there is a myriad of steps to wade through. A lot happens between pre-approval to signing that final stack of paperwork. For someone who’s never experienced this process that looming question won’t go away: Just how long is this going to take? The reality is that there’s no cookie-cutter answer. Every closing, no matter the loan type, has several variables influencing your closing timeline. A quick google search will give you a safe estimate of 30-45 days. Let’s look at the factors at play and what you can expect during closing.
According to ValuePenguin the average closing time for Conventional and Federal Housing Administration (FHA) loans is 47 days while a Veterans Affairs (VA) loan takes slightly longer at 49 days. Conventional, FHA, and VA refinances take less time averaging out to 35, 32, and 42 days respectively. The primary differences that may impact closing time on a Conventional versus FHA loan are that the FHA will require an FHA-approved and licensed appraiser, the appraisal must meet all FHA appraisal guidelines, and there may be a particular type of underwriting required depending on the buyer’s financial situation. VA mortgages come with their own restrictions including certain criteria you will need to meet before even qualifying for this type of loan. You will need a variety of forms proving your or your spouse’s military status. A VA mortgage can only be used to purchase a primary residence and you will likely need to pay a funding fee.
Underwriting may be completed using an automated system or manually. To confirm that the buyer is capable of paying back their loan, the underwriting process will consider factors such as credit score, debt-to-income ratio, and the buyer’s available assets. The information your lender is collecting will take some time to process and will ultimately provide the lender with their basis for approving or denying your loan. Having all of the documentation you may need ready and organized will speed things along.
Part of the underwriting is the appraisal. This allows lenders to weigh the risk of the loan they are issuing. They are measuring the loan-to-value ratio of the property to ensure that in the event of a foreclosure the property can be sold to cover the remainder of the loan. A licensed appraiser will visit the property and assess its value. Once you order your appraisal it should take 1-2 weeks to complete. Depending on how busy the housing market is in your location it could take several weeks.
Locking In Your Interest Rate
Interest rates may also play a role in how fast you close on your purchase. At some point, you will lock in your rate. This means that even as interest rates rise and fall your rate will remain the same. Your locked rate will only be good for a specified amount of time. Bankrate estimates that rate lock periods generally last somewhere between 30-60 days. If interest rates are trending upwards, you may opt to lock your rate early on and stick to it. If rates are up and you are hoping for a better long-term deal you may want to wait it out until they fall again. Timing your interest rate according to market trends could delay your closing. If a lower rate is available with a different lender you will need to balance the possible savings against the trouble of completely restarting your purchasing process.
One of the most critical parts of closing is the title search. During this process, your lender will likely have either a title company or an attorney who will review all public documents connected to your property. They are looking for other possible ownership claims to the property, standing liens on the property, or any issues that could become a liability for the buyer. This is one of the most important steps for your protection as a new homeowner. This is why it is also critical to consider purchasing Title Insurance during the closing process for added protection.
You also may be looking at a new construction home. Adding another party to the mix always complicates things. Builders and contractors will give you an estimate on the completion date, take it with a grain of salt. Odds are there will be some hiccups in the building process whether it’s because of supplies, weather, or simply human error. Various inspections will take place as the house is being built. For the appraisal to be scheduled the home must be nearly complete which in turn pushes back the rest of the closing process.
Time is Money and Money is Time
The quickest way to a closing date is of course paying with cash. Especially in today’s housing market, a cash offer is going to give you an edge. Paying with cash could mean your time to close only takes 1-2 weeks. This is possible because you are completely skipping past the time it takes for credit checks, underwriting your loan, and processing. Since you’re not using a lender, you are not required to order an appraisal, although some industry experts still recommend one. Instead of verifying your income you only need the bank to confirm you have the cash on hand necessary for your purchase. Somewhere in this process, you will be asked to put forward earnest money. This is a designated amount guaranteed to the seller even if you back out of the deal. Once the purchase is finalized it will be applied to your total payment. Keep in mind that even with a cash offer there will still be steps such as your title search, home inspections, and your final walkthrough of the property that will take time to schedule and complete.
Proper Preparation and Communication
Many of the steps in this process may seem straightforward, but to keep the process running smoothly it is important to be in regular communication with all parties involved. Schedule your appraisals and inspections promptly and have all documentation on hand or readily available. You can save a lot of time by having financial records such as your W-2s, paystubs, and bank statements ready to submit to your lender. They may have questions about specific transactions or need further verification of your income if you work more than one job. Respond promptly to these questions with the paperwork needed so that your lender can keep the process moving forward!