Making a Successful Purchase - Part Three - Closing
3-Part Series on Making a Successful Purchase
Part Three: Closing
When it comes to Making a Successful Home Purchase, the deed isn’t done once the seller accepts your offer. In a lot of ways, the work has only just begun.
Counting Your Eggs Before They Hatch
When my wife and I got married, we had a little secret. As excited as we were to share our big news, especially with all of our loved ones in one place for our wedding day, we knew it was too early. There was still too much that could go wrong.
However, it wasn’t top secret, and our pastor let everyone know our big news during the middle of the ceremony. Boy, was I embarrassed, and I made sure my pastor felt the same way after the ceremony when I explained to him that we were keeping it to ourselves until it was official. It was still too early to be completely open about it, and my new wife and I didn’t want to have to walk it back if something were to happen.
It didn’t matter now. The secret was out. We were going to be homeowners!
As we were basking in the excitement of our big day, some college friends came over to extend their congratulations. “And you guys bought a house, too! That’s awesome! Congratulations.”
“Well, we haven’t bought anything yet,” I corrected him. “We’re under contract, but we don’t close for another month. There’s still a lot that has to happen.”
“Oh, I see,” he lamented. “We’ve been under contract before. Three times.”
You could see the frustration on his face. Here was a guy who understood the difference between being putting a home under contract and closing on one. Who knows what pains he and his young wife had been through in pursuit of becoming homeowners themselves.
When it comes to Making a Successful Home Purchase, the deed isn’t done once the seller accepts your offer. In a lot of ways, the work has only just begun.
Earnest Money and Performance Deadlines
Once you have an agreement, the first thing you’ll do is write a check. Sounds about right, doesn’t it? Lucky for you, this check is for only a fraction of what the total transaction will cost you, but it’s important to show the sellers that you’re serious about pursuing this contract in earnest. The check I’m talking about is just that: the Earnest Money.
The amount of Earnest Money you put down on a house may be part of the negotiation process, but 1% of the sales price will usually do the trick. If you want to stand out from the crowd of multiple offers, put down a large amount of Earnest Money. Whatever the amount is, it will typically be due within the first few days of the contract being signed, and it will be held in one party or another’s escrow account.
Failure to make the deposit will result in a termination of the contract. Thus, it’s your first performance deadline.
While you’re doing that, your realtor will be forwarding a copy of the contract to your lender and the title company (or closing attorney) who will help facilitate the closing. Those two institutions will have their processes which are initiated by receiving a copy of the contract, and they will be reaching out for more information from you soon.
Home Inspections
You’ll want to have the home inspected by a licensed home inspector. If your agent doesn’t recommend someone, just make sure whoever you contract to do the inspection is ASHI or InterNACHI certified. It’s important to schedule this as soon as possible in case the inspector calls for additional, more specialized inspections, and the length of your Inspection Period will be specified in the contract as one of your performance deadlines.
The home inspector will report on the material defects of the housing structure, and review the home’s major systems and appliances.
Once you receive the report, and you complete any additional inspections the original inspector recommends, you are typically left with three choices. You can…
a) accept the property as-is and move forward
b) terminate the contract on the basis of a bad inspection and recoup your Earnest Money, or
c) make a written list of repairs to be addressed prior to closing the sale.
Now, understand that the seller is under no obligation to address your demands until he or she agrees to them, and sometimes you may forfeit this option in the Purchase phase. If you and the seller are unable to come to terms on how to address the repairs within a previously agreed-upon timeframe (the Resolution Period - another performance deadline), the contract is terminated and your Earnest Money is returned.
Around the time you’re wrapping up inspections and negotiating repairs, your lender will want to order the appraisal.
Lending Process
A couple things have likely happened on the loan front prior to this point. If you hadn’t made full application prior to writing the offer, you’ve definitely done that by now. Your lender has probably presented you with a loan estimate, and you’ve probably paid for an interest rate lock and signed an Intent to Proceed. All of this typically happens within the first week of the contract and goes off without a lot of fanfare. However, it’s worth mentioning because some or all of these steps are part of your performance deadlines.
The seller wants to know that you’re pursuing your financing in earnest. Any guess what happens if you fail to do so? The seller keeps your Earnest Money.
Alright, back to the appraisal.
The bank’s recourse, if you are unable to pay back the loan, is to foreclose on the asset (the house) and try to make their money back. Therefore, they need some assurance that the house being used as collateral for the loan is worth the amount you’re paying. That’s where the appraiser enters the transaction.
The bank will only loan you a percentage of the appraised value, so if the appraiser comes back with a valuation lower than the purchase price, the transaction can get a little shaky.
Hopefully you didn’t forfeit this contingency in the Purchase phase, and most likely you didn’t. Assuming the contract is contingent upon appraisal, there are three options in play if the appraisal comes back low:
Option one is to reduce the purchase price to the appraised value (which would of course require the seller’s acceptance).
Option two would be to bring additional funds (as the buyer) to closing in order to make up the difference between loan amount and purchase price.
Option three is to terminate the contract and have your Earnest Money returned. After all, the contract was always contingent upon a successful appraisal, and since the appraisal was not satisfactory for the loan you were seeking, it makes sense that you should get your money back.
The timing of the appraisal, and the negotiation in the event of a low valuation, are part of your performance deadlines.
Hopefully the loan application and appraisal go off without a hitch. Once you’re on the other side of these processes, your lender will likely request a few more documents from you - bank statements, maybe an additional pay stub, and potentially more. Even after you’ve been conditionally approved, you should be careful not to make any significant changes to your CIA. Don’t go quitting your job, applying for a new credit card, or spending all your savings on new furniture for the house; otherwise, you might end up being denied the loan at the last minute, and that is a tough, tough pill to swallow.
You’ve now satisfied your inspection and appraisal contingencies. Great job! Let’s put that bottle of champagne on ice.
Title Company Process
While all of this has been happening - the inspections, appraisals, loan underwriting, etc. - the title company and/or closing attorney has been operating behind the scenes, preparing everything for the closing.
They will check county records to make sure the seller is the rightful owner, or in the case of an estate sale, that the person signing all the paperwork has the legal authority to do so. They’ll also make sure that anyone else laying claim to the property (previous home equity creditors, mortgage companies, mechanics liens) will be satisfied by the sale.
Closer to closing, they will begin working with your lender to make sure all the financials balance. Between the seller’s payoff, the beginning of your loan, and don’t forget Uncle Sam, a lot of money is being transferred, and the title company is going to make sure everyone gets paid the right amount, and everything is recorded properly.
So a few days prior to closing, the title company will reach out with financial figures similar to those you’ve just seen from your lender, and schedule you to come sign on the dotted line - loan documents, the deed to the house, the whole kit and kaboodle.
The last few days of the transaction are action-packed.
Rounding Third, Heading for Home
At least three days prior to closing, your lender will disclose all the terms of your mortgage. Once you acknowledge receipt of that document, they will send those figures to the title company for that final balance we just mentioned. Your “cash to close” amount will be the total of your down payment and closing costs, less any seller contributions and your Earnest Money (finally, a happy scenario involving the Earnest Money).
In addition to working with your lender and closing attorney, your realtor will be coordinating with the sellers to make sure all is in order for possession after closing, reminding you to schedule utilities to be transferred into your name. They’ll also collect receipts for any repairs that were agreed to as a result of inspections and help schedule your final walkthrough of the house.
A day or so before the closing, your lender and title company will balance, and you’ll be given wiring instructions for your “cash to close.” Once that amount and your loan amount are in the attorney’s escrow account, the transaction is “funded.” Your lender won’t wire funds until they see you’ve signed loan documents, but it’s an important term nonetheless.
Along with loan documents, you’ll sign the transfer of deed at the attorney’s closing table (and seemingly thousands of other documents). The sellers will do the same thing. It’s not uncommon for the two parties to sign at different offices, in which case the two attorneys will “swap.” The seller’s attorney will send paperwork to your attorney, and once received, they’ll send the money to the seller’s attorney, who will disburse.
That was it. Did you miss it?
That “swap” right there makes you a homeowner. Congratulations! It’s been a long road, but finally you can pop that champagne you bought last month!
Call your friends and start planning that house-warming party because it’s official!
Of course this whole process was smooth as a baby’s bottom and stress-free because you worked with an experienced team of real estate professionals who care and are trusted in their field (wink). Call The Porter Group when you get crazy enough to take the leap, and if you’re just dipping your toe to see how warm the water is, we can help with that too.