Buying a home is the largest financial transaction most people engage in during their lives. The process of buying a home induces an enormous amount of stress on first-time home-buyers. Closing on a home purchase requires a significant amount of paperwork and can be overwhelming. Even if you’ve bought and sold real estate before, the process can be stressful and nerve racking. Familiarizing yourself with the steps of a real estate closing can help ease the stress of buying your first — or next — piece of real estate.
What Does it Mean to “Close” on a House?
The closing is simply where the buyers, sellers, and lending representatives meet to transfer property formally. The participants review and sign all the documents — and there are a lot of them — exchange funds, sign the deed, and pass the keys from the seller to the buyer. The closing can be hectic, and it’s important to be prepared.
What Steps Should You Follow for a Successful Home Closing?
Ideally every closing goes perfectly smooth with no delays or complications. Unfortunately, nearly one out of every three closings are delayed or fall through. The closing is the final step in a long process and a lot could go wrong. While there are never any guarantees, there are many steps you can take to reduce, if not eliminate, surprises, lower stress, and get into your new home as scheduled.
Get Help from a Qualified Attorney
Some states require a lawyer to conduct a closing. Other states allow an escrow agent to perform the closing. You should understand the legal requirements of your state.
A closing attorney or escrow agent is a neutral, third-party who has no interest in the closing other than collecting a fee for performing the service. They cannot give you any legal advice because they do not represent you.
Since closing on a home is a complicated process that involves your legal rights and responsibilities, you should consider hiring a qualified real estate closing attorney to represent you. Hiring an attorney can help protect your financial interests and work on your behalf to iron out any wrinkles that come up.
You might wonder why you would need an attorney, especially if you engaged a real estate agent to represent you. Real estate agents owe you a duty to protect your rights; however, they cannot answer legal questions or offer legal advice.
Working with an experienced closing lawyer while you are searching for your home is beneficial. Once the seller accepts your offer to purchase the property, you will have a short-amount of time to execute a contract. This document is known as a purchase and sale agreement in many jurisdictions. With your lawyer’s help, you can negotiate all of the particulars of the deal and re-negotiate if necessary.
Getting Title Insurance
Your mortgage company is taking a calculated risk on you. Consequently, your lender will take all necessary steps to protect against loss. One way lenders reduce risk of loss is by requiring you to purchase title insurance. Your mortgage company may work with you on this, and the cost will be reflected in the final settlement documents.
The title insurance you need to buy to secure a mortgage only protects the lender against a lawsuit after the closing from someone who claims to be a rightful owner of the property. If there is a “cloud” on the title, the title insurance company will not issue a policy. Consequently, the lender will not mortgage your property until that cloud is cleared. You should talk with your lawyer about the benefits of buying a title insurance policy that will protect you and not just the mortgage broker.
The home inspection is another step to encounter on your way to the closing date. Having a professional, licensed home inspection company perform a thorough examination of the home before the closing date is usually necessary if a lender is involved.
A professional home inspector will examine the home’s wiring, plumbing, heating, air conditioning, water, and sewer systems. You should note that in some areas of the country you need a separate inspection for sewerage if you have a leaching field or septic system.
Depending on where you live, a home inspector might look for insect and rodent damage or infestation. Hiring a pest inspector is a smart move if the home inspector does not look for problems associated with bugs and animals.
The final home inspection report could show that the home is not in a condition to be sold. Having a savvy and experienced lawyer can help you negotiate with the homeowner to make the necessary repairs or give you a concession on the price if you want to make them yourself.
Acquire Homeowners’ Insurance
Having a homeowners’ insurance policy ready in the purchasers’ names must be done before the closing date. The purchase and sales agreement may contain a provision concerning homeowners’ insurance. In the typical home purchase, the sellers retain responsibility to insure the property until the closing occurs. The mortgage lender will obligate the buyer to purchase homeowners’ insurance that will become effective when the deal closes.
Get Appraisal and Lock in Your Interest Rate
Shortly before the closing, your lender might want a formal appraisal of the value of the home. Mortgage lenders don’t want to risk losing their money on a house that might decrease in value if it needs to be sold. A lender might balk on financing a purchase if the home appraises for far less than the value of comparable homes in the area.
You will lock in your interest rate with the lender shortly before the closing date as well. Your lender should run your credit again to ensure that you have not financed any large purchases. Your lender could decline your application or raise your interest rates if your credit significantly changes.
Once the lender locks in your interest rate, the lender or their attorney can begin preparing the lending paperwork. Paying cash for a home is a simple transaction. Closings become significantly more complex when you involve an institutional lender. Your lawyer can review the draft paperwork to ensure that all of the financial terms are in order. You must receive these draft forms three days before the closing.
The buyers and sellers, along with their real estate agents, will walk-through the home just before closing. The buyers need to ensure that the home is properly cleaned and in usable condition before buying it. The seller must ensure that the house is empty — except for any items that the parties agree should remain. Depending on the timing of the walk-through, the parties might then proceed to the closing location.
What Do You Need to Bring with You to The Closing?
The buyers and sellers have obligations to acquire certain documents and other items and bring them to the closing. Typically buyers bring with them:
You might need to bring other items with you to the closing table. Double-check with your attorney to ensure you have all that you should in advance of the closing date.
The sellers must bring several items with them to the closing table as well. Some of those items can include:
Some sellers might not appear at the closing and will send a representative instead. The representative can pass the required items but cannot sign the deed without a valid power of attorney. Usually home sellers attend the closing as a courtesy and sign the deed during the meeting. They do not have much else to do at that time except execute some documents to satisfy their financial obligations.
The buyers will spend at least an hour, although it could be much longer than that, reviewing and signing the required closing paperwork. The paperwork includes the promissory note, the mortgage, the HUD forms, and all other financial disclosure forms. Federal banking laws require borrowers to execute these forms. Although it can take a while and may be exhausting, you need to be sure you understand everything that you sign. Ask questions if you don’t understand or if something doesn’t look right to you. Your financial and legal repercussions are too great to leave the closing without knowing exactly what you signed and why.