Purchasing a home is an exciting but sometimes overwhelming experience. It is likely the single largest purchase you will ever make, and because you buy homes infrequently, the process is foreign, even for repeat buyers. You can ease the arduous process of navigating the unfamiliar road of closing the deal, by understanding the process better.
While some closings are faster (i.e. cash purchases) and some are slower (i.e. bank owned property), most buyers will experience the following steps from contract to closing.
Two Processes Running Simultaneously
To move an offer from purchase agreement to the closing table, you must complete the approval procedure for both the buyer and the home. The lender must ensure that you can repay the loan, and must confirm the home’s quality and value as collateral. The bank wants to reduce their risk, meet the standards of the loan guarantor, and in many cases, ensure the ability to sell the loan to a third-party buyer, all of which impact the process and timing of the closing. For example, if you choose an FHA (Federal Housing Administration) loan, it must meet both the bank and the housing authority guidelines for approval.
Typical Process for Buyer Approval
Having a loan ‘pre-approved’ before submitting an offer to buy a home will simplify and ease the closing procedures. It will reduce delays, and the lender will have all key documents needed for the loan, which will save you time. Presenting standard loan items such as tax returns, proof of income, credit reports, and bank statements ahead of the contract saves time and frustration.
After the seller accepts your offer, the process picks up in earnest. Previously submitted information may require updates due to time requirements. For example, pay stubs typically can be no more than 30 days old. The lender may also need explanations or other details to clarify your financial position.
Quickly responding to the lender will eliminate delays in the closing. Other common mistakes that could derail the loan include, making a purchase that depletes assets, applying for or acquiring new debt (which can impact the debt to income ratio), or making employment changes that alter income or job stability. The lender verifies all information a few days before closing to ensure there are no such changes.
Typical Process for Property Approval to Purchase Agreement
After the seller and buyer agree on terms and price, you will sign a purchase agreement, which moves the process forward.
Hire an attorney of your choice. The attorney will manage the closing, complete the titles search and survey if you request. A survey is often optional and establishes the legal boundaries of the property. The title search is mandatory and ensures there are no liens on the property and that the title has passed cleanly from buyer to buyer, giving you clear title.
Order an inspection. Many lenders require a home inspection, but even if they do not, you should order one to identify unseen issues with the home. Most purchase agreements set a dollar limit on necessary repairs. If the inspection reveals repair estimates beyond the set limit, the buyer can cancel the contract or renegotiate the price. Typically, such a contingency will not cover small repairs, and the seller is not required to fix any items below the threshold in the contract.
A termite inspection is another mandatory inspection required . In most cases, the seller will be responsible for treatment if the inspector finds termite activity, although the buyer typically pays for the inspection. You have the option of ordering additional inspections which might include specialists looking for mold, or hidden issues found more frequently in older homes. A general inspection reviews the overall structure and systems in the home but does not provide specialized testing. If there is a concern about things like mold, you can list clearing an inspection as a contingency.
The buyer pays for the inspections, appraisals, or other professional services used in the home approval process, even if you cancel the contract based on the inspection results.
After the inspection report, the process for the home approval moves forward. The lender orders the appraisal to establish an accurate value for the home and ensure it is in line with what you are paying for the home.
Purchase homeowner’s insurance. You may choose to buy insurance from any company. If you escrow with the lender, you will pay for a year upfront and then prorate the upcoming year’s payments into monthly escrow installments connected to the mortgage payment. Property taxes will also add to the required escrow balance. The total monthly mortgage payment will include the loan, interest payment, commonly referred to as P&I. You may also have a payment for private mortgage insurance (PMI) if you put less than 20% down, and the escrow, which covers the cost of property taxes and insurance.
Prior To Closing
The days before closing the buyer completes a final walk-through of the home. You are verifying the home’s condition and ensuring the seller completed agreed upon repairs.
Read over loan documents. On the day of closing, there is a mountain of paperwork you must sign to complete the loan. You may request these documents a day or two before closing, giving you time to look over the papers and prepare any questions you have for the lender or attorney. Changes must be made before closing, as the lender does not typically attend the closing. Verify the rate and terms of the loan and ask questions about any parts you do not understand. Reading legal documents is not a joyful experience, but you are legally responsible for everything in the papers.
Transfer Utilities. Call each utility before closing to arrange for the transfer into your name. Depending on where you are moving, you may need to budget for deposits.
To close on the loan you meet in an attorney’s office, sign all the papers, turn over your down payment and any required closing costs, and get the keys to the house. Sellers often sign beforehand.
You can review the documents at closing, but there is less pressure before the main event.
After the closing, the attorney records the deed to the house with the register of deeds, which creates a public record of the home’s sale.
The process from contract to close can range from 30 to 60 days depending on the specifics of the home and the loan. A pre-approval loan amount, and having all loan papers to the lender before the offer can reduce the time to closing. During the summer season appraisers and inspector schedules can push the loan back to the later part of this timetable.
While the process is an unfamiliar one for most buyers, you can have a smooth closing by understanding what to expect and preparing yourself when you make the offer on your new home.