The home closing process is a daunting task. But, many complex terms and documents have simple explanations. If you’re already “closing” then you have signed the real estate purchase agreement which will, hopefully, make this house your new home.
The whole closing day ordeal won’t be as scary as it seems if you know what to expect. So, we’re here to break down each step in the home closing process.
Things You Should Know Before You Get Started
There are a few events you can’t over-prepare for, and a real estate transaction is one of them.
Technically, the home closing process starts when the seller accepts the final offer. Closing refers to the entire process from the time escrow opens until it closes, and the house is yours.
Now that you’re closing on your home, you also need to be familiar with some more real estate jargon. Some everyday words for people in the real estate industry may be confusing to buyers who never bought or sold a property.
So, here’s a crash course of all those fancy terms you may hear or read in the process.
Escrow is a little more complicated because people use it casually. Simply put, escrow is the account maintained by a neutral third party after a buyer and seller both agree to an offer. Any deposit made by the buyer will remain in this account while finalizing the sale.
Most people say “I’m in escrow” or “10 days left in escrow!” because the whole process is ongoing. But that’s not actually correct. You are “in escrow” the entire time you are “closing” so don’t get thrown off if you hear escrow used for different purposes.
How Do I Open An Escrow Account?
Opening an escrow account is simply depositing the earnest money with the title or escrow company. You can find an escrow company such as First American and go through the forms to open escrow yourself. When you do this, an escrow officer will become responsible for processing your transaction and maintaining the security of your documents.
You can also open an escrow account with a title company since these companies. Most title companies also offer title insurance and title services.
Closing Escrow And Becoming A Homeowner
Each state has a different closing process, but the basic steps are usually similar. The closing day is usually the last whirlwind you have to encounter when buying a home.
During home closing, you sign a bunch of paperwork often referred to as the closing papers. The escrow officer will then place the request for a new deed and send it off to the county recorder.
You will also need to issue a cashier’s check or wire the down payment and closing costs. The lender should send the funds you borrowed to the escrow account.
After completing the recordation process, it’s time to close the escrow. The seller can finally get paid at this point. Real estate agents, if any, should also receive their commission.
Now everything’s done! You have successfully joined the ranks of proud homeowners.
What Is The Best Escrow Option: Lawyer Or Escrow Officer With A Title Company?
For standard real estate transactions, the most practical choice is usually a title company. But, real estate is full of landmines. Sometimes what appears to be a simple sale can be incredibly complicated.
Escrow requirements for buying units in co-ops or planned housing communities, for instance, may require more attention. Working with a Homeowner Association can be difficult and officers from title companies may find these transactions to be too demanding. If a title company or escrow officer can’t meet the requirements required to close the deal, it may be more convenient to hire a real estate lawyer.
Common Mistakes With Escrow Accounts
So many things can go wrong with an escrow account. Sometimes, these mistakes may prolong or even destroy the closing process. Here are some tips to help you avoid issues with your escrow account.
- Always check the addendums in your escrow contract. You’ll want to list all the contract amendments. It’s also better to know your options if something negative comes up during appraisal or inspection.
- Always define parties by name! The contract should include your first and last name, the first and last name of your spouse (if needed) and the first and last name of the seller or sellers.
- Always initial everything! With so many sections requiring your signature or initials, it’s easy to miss something on the escrow form. Double-check the form before handing it over and get the officer in charge to check it for you, if possible. A missing signature or initial can set the entire process back by a week or two.
Making an earnest money deposit does not mean that you, the buyer, should purchase the home. If any issues come up during inspection or if the seller fails to meet stipulations in the offer, the buyer can look for a home elsewhere. However, putting the earnest money deposit on escrow ensures that the seller will not accept another offer.
Where Does My Earnest Money Deposit Go? Can It Go Towards My Down Payment?
Your earnest money should be in escrow. Some buyers worry about making an earnest money deposit because they don’t have a budget for it. But there’s no need to worry – this money will actually be paid towards your down payment and closing costs.
Normally, the earnest money will become part of the down payment. If little or no down payment is required, it may be credited to your closing costs and other fees. It’s also possible to get a refund if the seller is taking responsibility for the closing costs.
What Is The Difference Between Earnest Money And A Down Payment?
The down payment is the portion of the property’s purchase price that you pay using your own funds. It is usually a large sum of money. You will only have to pay the down payment on the closing day.
Earnest money, on the other hand, requires a smaller cash outlay that you place in escrow after signing the purchase agreement.
Due Diligence Money
Earnest money is different from due diligence money because due diligence money is non-refundable and does not lock the seller into the deal. Due Diligence is not a standard part of the closing process unless the buyer wants to do further investigation concerning the property.
If you have doubts about the condition of the property and the seller is concealing something, you may decide to deposit due diligence money with the seller. Terms covering the due diligence deposit is also included in usually included in the offer and in the purchase agreement. By making this deposit, the buyer can back out of the loan for any reason within a specified due diligence period.
A purchase agreement will flesh out the value of the home, the conditions of the loan and explain if any open-ended areas need resolution before escrow closes. These issues can include the seller making necessary repairs, or the home reaching a certain appraisal value.
If you’re not working with a real estate agent, you should have a real estate attorney review your purchase agreement. Even the most simple agreements have legal jargon that can be confusing and may leave you open to risk.
The promissory note is the “IOU” (abbreviated from the phrase “I owe you”) that you have to sign to show that you agree to pay back the loan. Your promissory contains your loan details including the:
- Amount borrowed
- Number of years you have to pay the loan back
- Interest rates
Before the closing date, you should also receive a document explaining every aspect of your mortgage – this document which is usually 5 pages is the closing disclosure. This document typically details your projected monthly payments as well as fees and closing costs you’ll have to pay. This disclosure will explain the following:
- Loan terms
- Monthly payments
- Amount of fees
- Bank or Lender Fees
When Do I Get the Closing Disclosure?
The law requires that the lender deliver your closing disclosure at least 3 days before closing. This requirement is also known as the 3-day rule. This means that you may only have a limited time to spot any issues with the closing disclosure. But if anything is wrong at this point, you can still correct the issue without jumping through hoops.
Is the Closing Disclosure the Loan Approval?
Not exactly. But in a way, receiving the closing disclosure means your loan passed was approved. Here’s a quick overview of the loan application process.
When you apply for a loan, you have to comply with the requirements and wait for underwriting approval. Upon approval, your mortgage lender should inform you of your loan status. If your loan is approved, you should receive your closing disclosure at least 3 days before closing. At this point, you can still request for changes on your loan term. For instance, you could try to change your projected monthly payments, but this would also change either the duration of the loan or the interest rate.
Even if the closing disclosure contains no errors, your loan approval is not complete until the lender funds the loan. Prior to funding, the lender conducts another round of checks to make sure that your financial situation had no significant changes.
Realtors, lenders and real estate lawyers talk about closing costs. You might be surprised that these costs don’t include your earnest money or down payment transaction. So, what exactly counts as closing costs?
According to a study by ClosingCorp, more than 50% of home buyers get caught off guard when they realize that they have to pay for closing costs. Closing costs place a lot of stress on first time home buyers who may have thought that they only needed to save for the down payment.
Closing costs usually include these fees:
- Deed dues
- Credit reporting fees
- Title insurance
- Appraisal fees
- Loan origination fees
- Mortgage application fees
- Title search charges
- Discount points
- Realtors fees or commission
Closing cost is usually an overarching term that includes all sorts of fees incurred on or before closing. While closing costs don’t require a significant cash outlay, they can add up quickly. And applicable closing costs may differ from one transaction to another. So, it’s better to focus on the fees applicable to the property you’re planning to purchase. If you hired a real estate agent or lawyer, you can also ask for their advice. Needless to say, it’s useful to do your own research to have some background on what these costs are and to learn more about them.
Who Pays The Closing Costs?
Ninety-two percent of the time, the buyer will pay for the closing costs (according to the Realtors Confidence Index 8% of sellers offered incentives such as paying for the closing costs in 2017) so you should always review the true value of your property purchase. Make sure that you factor closing costs in the total purchase price of the property.
A Closing Cost Estimator Is A Useful Tool
Closing costs vary from one sale to another, but it is usually 2 to 5% of the final sale price of the home. If you are expecting to pay closing costs on a $200,000 home, you should save anywhere from $4,000 to $10,000.
NerdWallet has a handy tool to help you compute for the closing cost. The closing cost estimator may also help you assess applicable taxes depending on where you live.
If you buy a property in New York, and your prospective purchase has a sales price of more than $1M, you may have to pay Mansion Tax. But you won’t have to worry about this additional tax in another state. It’s always better to consult a professional on first time home buyer taxes and other tax matters to come up with the best plan to minimize your expenses.
A down payment is a partial payment you make as part of the purchase price of the home. The size of this down payment can vary depending on the value of the house you’re trying to purchase and your financial situation. Lenders often require a down payment between 3% and 20% of the home’s value.
There are several first time home buyer grants and programs which may help you come up with the required down payment.
The Ultimate Home Closing Guide
The mortgage process has no reliable timeline. But, most people go from signing the purchase agreement to closing in about 60 days. Closing may feel like a whirlwind for the first time home buyer – and we’re not joking. It’s an odd stage where you need to be both patient and busy.
Step 1 of 7: Ending Negotiations and Opening Escrow
Negotiations are a difficult task and can cause both parties to go through a lot of stress. Putting in an offer can be done a thousand different ways. In case you have never made one before, here’s a quick guide on how to make an offer on a house.
When negotiations wrap up and the seller accepts your final offer, you are now closing! Congratulations again because negotiations can be draining, and you made it out alive. But you may have no time to celebrate because your clock will start ticking and you have limited time to take care of so many things. Among the items on your to-do list is to review and sign the purchase agreement, make the earnest money deposit and put it in escrow.
Finalizing the Purchase Agreement
After the seller accepts the offer, you should receive a copy of the purchase agreement. But you can’t just sign away. Make sure that the agreement reflects the terms you agreed to on the offer. If not, it’s time to negotiate again.
The trick to every purchase agreement is knowing where to bend. Some buyers get swept up in trying to make it easy for the seller, while others feel that they need to put their foot down on every matter. The middle ground is best, be courteous where it’s reasonable, but stand your ground where you can’t afford to flex.
What to Look Out for in the Purchase Agreement
The purchase agreement comes in after the seller accepts your offer. Purchase agreements contain several clauses. Some terms appear very technical at first glance, but the meaning behind the jargon is easy to understand.
Here are the big-ticket items to look out for:
Contingencies are events on which the transaction depends on. It usually includes a home inspection, appraisal or the sale of your current home.
Settlement date or the closing date specifies is the last step in buying a home. The agreement should indicate a date that works for both parties. It should also give the buyer enough time for the inspection, appraisal, mortgage application, and finalizing the paperwork.
This date tells you when you can move into your new home! It’s an exciting day but be sure to remain courteous to the sellers and negotiate a day that is comfortable for both parties.
Escrow fees typically get split between the seller and the buyer. But these fees may be charged to the buyer as part of closing costs or to the seller. These fees usually range from 1 or 2% of the home’s price.
The purchase agreement should also explain the required means of communication to notify the parties of any event that affects the transaction. Many people agree on using email, but some still prefer getting the letter in the mail.
After finding the middle ground between you and the seller, it’s time to ink the deal and make an earnest money deposit as a sign of good faith.
Earnest Money Deposit Or Transaction
Next up is to make the earnest money deposit. But before you can do that, you need to open escrow.
When you open escrow, you’ll start to see the fees pile up. First, you’ll notice the tax service fee that comes with opening an escrow account. You will only see this fee after the seller accepts the final offer. Usually, the seller pays half of this fee.
Earnest money and the title of the home will both be deposited in the new escrow account. Escrow accounts may hold a variety of important documents and money during the closing process. Putting something in escrow is akin to agreeing to the terms of the agreement and your commitment to the transaction.
Securing Your Title
If you’re working with a realtor, don’t think that you could just relax and bask in the sun while waiting for your new keys. You still have to do several things including the title work. You won’t get your title until you’ve signed everything at the end of closing. But, many title problems can come up during the closing process.
Title Searches And Title Insurance
You’ll want to conduct a title search. Don’t worry, it’s possible to do a title search through your local tax assessor’s office online portal. After that, you have to request a copy of the deed in the recorder’s office in your county. In some areas, you can also request for this document online.
When you’re done with both, it’s time to look into the chain of title. The chain of title will show how the deed changed ownership for the past 50 or more years. It should include details such as the seller and the buyer. This history can help you find gaps in ownership or liens against the current deed holder which may cause issues in your escrow.
You may encounter a variety of issues with your title. Smaller issues include clerical errors and incorrect parcel numbers. Bigger problems, on the other hand, include unknown liens and missing heirs.
To avoid these issues and protect yourself against problems that might come up later, you need title insurance. Title insurance can help you deal with the losses you sustain because of these issues.
You may opt out of title insurance, but it can be invaluable that can safeguard you against some of the most disastrous situations. If you don’t have title insurance, you should seek immediate help from a real estate attorney if you want to claim damages.
Step 2 of 7: Appraisal and Home Inspection
After opening escrow and depositing your earnest money, you’ll need to pay for an appraisal. Appraisal fees vary depending on the location. Most of the time, however, your appraiser will only require a one-time fee.
Expenses related to the appraisal of the property can usually be part of your closing costs. Sometimes, lenders will charge you with the fee and include it as part of your loan. Either way, you, the buyer, still pays the appraiser.
You want to be sure that you’re getting what you pay for, but the lenders want to be sure that the house meets their requirements for the loan. The appraisal will prove to your lender that the home is worth the amount you’re borrowing. But, the appraisal will take place at the same time as the home inspection.
Home Inspection and Appraisal Process
Home inspections are an in-depth analysis of the state of the house and will alert buyers of any unlivable conditions or necessary repairs. The person who makes this decision must be a licensed home inspector. The home inspection can put a series of repairs into place or lower the price of the home.
The most common problems that come up during home inspections include necessary roof repairs or issues with the water heater. New buyers may offer to pay for the repairs in exchange for a lower sale price. Or, the buyers can ask the seller to make the necessary repairs.
Either way, the home inspection will need to go to the loan officer to ensure that the property and the mortgage loan are complementary to each other. These two sides of the mortgage are important because essentially the home is your collateral for a home loan. If the house is worth less than the loan, then a lender will hesitate to provide you with a mortgage.
The home inspection covers everything from the roof to the plumbing, well within reason. Sometimes if the roof is exceptionally old, the seller must provide a 2-year roof certification. Additionally, if the house is on septic rather than a sewer system, they must have a certification to ensure the life of that as well.
When Are Follow-Up Inspections Necessary?
In some instances, a second home inspection is necessary, or you may have to get a specific homeowners’ insurance to finalize the sale. If the appraiser puts anything in his report that would not meet the requirements of the loan, the buyer can request that the seller make the necessary repairs as a contingency to the loan’s approval. In this case, the house may require another inspection after repairs. Negotiations may also reopen based on the findings of the inspection report.
Can Current Homeowner Make The Necessary Repairs?
The buyer would typically pay for any repairs that are necessary but don’t affect the living conditions in the property. For example, if a buyer saw that home inspector listed the deck in the backyard as damaged, the seller would likely refuse to make repairs. But, if the appraiser noted that the water heater was leaking and dangerous, the seller should expect to make that repair.
Deciding who makes repairs for issues found during the home inspection can reopen negotiations.
Reopening Negotiations After Inspection
Occasionally, the appraisal and the home inspection will cause the escrow account to close and negotiations to reopen. Although it’s frustrating, it does not mean that you have to let the house go and move on to something else. You may renegotiate with the seller, open a new escrow account and the home will receive another inspection.
Your Rights as a Buyer
As a buyer, you might feel like you owe the seller. But when you think about it, you’re not taking their house, they’re selling it to you. Because you have to pay for the appraisal, you have the right to keep the information from the appraisal to yourself. You do not have to share the results appraisal with anyone but your lender.
What Can Go Wrong?
Sometimes appraisers and home inspectors miss necessary repairs. Common oversights include roof condition. You have limited options if this happens. It’s possible to contest the home appraisal report but you have to do it within a certain time frame. You may also report the issue to your home insurance provider or hire a contractor to assess the necessary repair and seek legal help.
Step 3 of 7: Finalizing Disclosures and Agreements
A home appraisal usually happens after the home inspection. At this point, you should also start shopping for insurance. The purchase agreement may require certain types of insurance coverage. Sometimes, lenders may also specify any property insurance requirements necessary for loan approval. Many people pay for homeowners insurance and fire insurance. In some cases, you will also need flood insurance.
Step 4 of 7: Loan Approval
Your appraisal will usually be in your loan folder by week three. You should have all the documents ready by now. And, you should prepare for the next stage in your mortgage application.
A loan officer should assist you through the mortgage application process. It may seem easy to apply for a mortgage because people do it all the time but it’s actually not!
The loan officer will want to go through every aspect of the mortgage with you. Whether you have a realtor, lawyer, or buying on your own, you have to deal with a loan officer.
Finalizing The Mortgage Application
Prior to closing, most home buyers have a pre-approval. Getting “pre-approved” means it’s likely that you’ll get the loan but it’s not the final approval. You can’t proceed with the mortgage application until you’ve ended the negotiations and finalized an offer.
You can finalize your loan application after the appraisal. At this point, your lender can “lock” the interest rate.
Locking In The Interest Rate
Locking in the rate only comes after the lender verifies and evaluates your income, credit and down payment information. If your information proves your financial capacity and the property value is adequate, your loan gets approved. When this happens, then the lender draws up the documents for the title transfer and loan financing. These documents include the promissory note and chattel mortgage.
What Your Lender Will Review to Prepare Your Promissory Note
First, you must meet all the guidelines regarding down payment, showing your income, and credit. But the second hurdle is that the property has to meet specific guidelines as well. Loan officers may decline a mortgage or offer a different type of loan if the physical conditions of the home are deteriorating or not in good working order.
Some Special Circumstances
Some people enjoy buying houses requiring extensive repair and are willing to take on the work.
So, what happens if your lender declines your loan application because of the condition of the home?
One option is to apply for the FHA 203(k) loan which is available through accredited lenders. This type of loan is designed for rehabilitating and renovating homes which are in poor condition.
Of course, there are other options such as getting a loan from a private lender.
Borrowing the required funds from hard money lenders is also possible. A hard money loan from a private lender may be the better choice if traditional lenders are not willing to finance the property.
Finalize the Mortgage and Purchase Agreement with Loan Approval
Most people receive the result of their loan application between day 25 and day 45. If nothing goes wrong, you should receive your loan approval.
When you receive the loan approval you’ll clear another obstacle. Most purchase agreements allow the buyer to back out if he or she can’t get approved for a loan within a deadline. So, sellers who want to push through with the sale feel relieved when you finally receive the go signal from your lender.
Loan Approval Will Also Deliver the Terms of Your Loan
The terms of the loan often show up both in the closing disclosure and the promissory note. A promissory note is a legal agreement you need to sign when you apply for a loan. This document lays out the terms of the loan including the interest rates, the duration of your loan and other details.
As preparation for closing, you should review the terms of the loan proposed by your lender before you finalize your application. Some people study the average interest rates for months before accepting a loan. But, like any other part of the preparation process, you can only watch and wait for so long. Eventually, you will have to accept the terms of a loan!
The average rate in the U.S. in 2018 is 4.38% interest with a 30-year fixed loan. These terms aren’t available to everyone and often depend on these factors:
- Local market
- Your credit history
- Your Assets
- Duration of loan
Always consider which loan options work best for you. You can use the average lending rates as a starting point to find the best rates. Don’t forget to account for the duration of the loan. You can turn to reliable sites to help you find the best mortgage for you such as Quicken Home Loans, LendingTree or even Zillow!
Last Minute Loan Funding Issues
Credit spending is also well-known for causing catastrophe late into escrow.
You may think that you’re out of the woods after loan approval but you’re not. Before the lender funds the loan, you are better off keeping your cards in your wallet. If there’s a significant change in your credit report, lenders may decide not to decline your loan at the last minute.
Step 5 of 7: Removing Contingencies
We mentioned contingencies before, and although they seem like they might cause a lot of problems, they are relatively simple. A typical contingency is that one sale is reliant on another home sale. Terms like this can make a real estate deal more desirable for some sellers.
Home Inspection Repair Contingencies For Current Homeowner
Some repairs, whether they were brought up during the appraisal or home inspection, may play a role in the final closing of the home. New homeowners will usually deal with minor repairs. But bigger issues like dealing with faulty electrical wirings or replacing a leaking water heater could fall to the seller.
If the buyer agrees to take the property, the agreement may be amended to include a clause covering these changes.
Note: The seller may schedule repairs before or after closing. To remove home inspection repair contingencies whoever is paying for the repair must show that the repair was scheduled, completed, and released by the contractor who made the repair.
Step 6 of 7: Final Walkthrough
Doing a final walkthrough is always a must. This ocular inspection is the last time you’ll be inside of the house before it becomes yours. This usually happens 24 hours before the closing day. Although it’s too late to back out now, the final walkthrough helps you check if no damage occurred after the appraisal and inspection.
You don’t want to get your keys and find out that someone has scavenged the copper out of the house and stolen various home fixtures. These cases are extremely uncommon. The seller may have to file a police report and press charges. As for the transaction, you may re-negotiate the deal. In extreme cases, the agreement may be nullified and the whole deal may be thrown out.
Step 7 of 7: Signing the Closing Documents and Final Transaction
The closing disclosure and purchase agreement would follow you around like a shadow while you’re in escrow. When you finally sign the closing papers, it’s the end, and you can close the escrow account.
When Will I Know How Much to Pay for Home Closing Costs and the Down Payment?
On the closing day, you know exactly how much down payment you’ll have to put down. The actual closing costs, on the other hand, may remain a mystery down to the last 24 hours. Usually, the final amount for closing costs isn’t disclosed to the buyer until 24 hours before closing escrow. However, you should have a very close estimate of the total closing fees when you get the closing disclosure.
You can also calculate pre-paid taxes, escrow-related fees and other expenses related using a closing cost estimator.
When Should I Send the Transaction?
Some states require a cashier’s check while others allow you to do an electric transfer to pay the down payment and closing costs. You need to make a personal appearance to get a cashier’s check, so you should allocate time to get one before the closing day.
Who Do I Make The Check To?
This question is tough because rules differ from state to state. Most of the time, however, the payee is either your title company or the name that the title company gives you to list as the payee.
Is This Really The Final Transaction?
It might seem like you’ve been nickeled and dimed to death, but this is the final payment. When you provide the cashier’s check or wire transfer you’re done.
Signing the Closing Documents
Signing the closing papers and making your final payment happen at the same time. You’ll want to bring all of these with you when you go to sign the closing papers:
- Your spouse if married
- Closing disclosure
- Loan estimate
- Initial escrow statement
- Mortgage Note or Promissory Note
- Cashier’s check or the proof of wire transfer
- Checkbook (just in case)
- Valid ID
Who Will Be There?
There’s a lot of activity around the closing paper. But, the only people who need to be there are you, your spouse or co-buyer, the lender, the seller, and the escrow or closing agent. Sometimes, a representative from the title company attends the home closing. If you have a real estate attorney or if your state requires the presence of one, your lawyer would be there too. It’s a small party, but a quick meeting.
Congratulations, You’re Done!