Buying a home is probably one of the biggest financial investments you’ll ever make, and the process can be both exhilarating and mind-bendingly stressful. The last phase of the journey will be the real estate closing or settlement – the day the property is transferred from a seller to a buyer. This step-by-step guide will help you navigate the residential real estate closing process with confidence.
1. Preparing for Closing
Review the Purchase Agreement
The Purchase Agreement, or Sales Contract, specifies all terms and conditions agreed upon by Buyer and Seller at the time of the offer. Be sure to carefully read this document. Check to see if there are contingencies like financing, home inspection, and other specific conditions that must be met prior to closing the transaction.
Secure Financing
Getting a mortgage is an important part of the home-buying process. Make sure your lender has all the documentation required for their assessment: tax returns, pay stubs, bank statements and so on. Before approving a loan, the lender or bank will need to have an appraisal performed on the property to make sure that the value of the house or other property matches the value of the loan you are asking for. When everything is approved, you will receive a loan commitment letter.
Title Search and Insurance
The search establishes the ownership of the property by the seller and the legal right of the seller to transfer that property to you free and clear. The search will also reveal outstanding liens, unpaid taxes, outstanding building permits and easements, as well as any errors or omissions in the deed description that might prevent you from acquiring a clear title. Title insurance protects against these issues, safeguarding your investment.
2. Home Inspection and Repairs
Home Inspection
A professional home inspection should also be a requirement because, even if there aren’t obvious problems, your home inspector will look at the structure, electrical, plumbing and roof as well as other major components of the property. If there are significant problems found, you can renegotiate your sale contract to lower the purchase price or make the seller repair the issues.
Negotiating Repairs
You can point out to the seller some specific problems on the basis of the inspection report, and there might be some price negotiations afterwards. If the seller will take these repairs, make sure all the repairs you agreed on have been properly done before the closing and inspect again to verify that you are getting everything you should be receiving.
3. Finalizing the Mortgage
Loan Application and Approval
You’ll then select a lender. After you select a lender, you will complete a loan application that then gets processed by the lender. The lender, in order to verify your financial condition, will demand several documents to support your loan application. After the lender approves your loan, it will send you the Loan Estimate indicating terms and conditions, interest rate, the amount of monthly payments, closing costs, address of the property you are buying or the one of your investment, total due, etc.
Locking in the Interest Rate
With mortgage rates varying so much, it’s important to lock in your rate so you can have peace of mind when the loan process is complete. A rate lock guarantees that you won’t change your interest rate prior to closing.
Reviewing the Closing Disclosure
You will get an updated Loan Estimate three business days before closing, which will be replaced by a Closing Disclosure on closing day. You should look over both the Closing Disclosure and the updated Loan Estimate to make sure your loan terms, monthly payments and closing costs are exactly as agreed upon on the Loan Estimate, and that the Closing Disclosure doesn’t contain any surprises.
4. Preparing for Closing Day
Assemble Necessary Documents
Gather any other documents you might need to complete the closing, such as the purchase and sale agreement, home-inspection reports, proof of homeowners insurance and other lender-related paperwork.
Schedule a Final Walk-Through
Do a final walk-through of the property at least a day or two before the closing to make sure the property is still in the condition it was in when you upped your offer, that all the work your inspectors asked for was done and no one has removed anything from the property since the last time you saw it.
Confirm Closing Costs
Common ones will include loan origination fees, appraisal fees, title search fees, title insurance, survey fees, taxes, and homeowners insurance. Your Closing Disclosure will itemise these expenses. Make sure you have money to cover closing costs at the closing table.
5. The Closing Process
Attending the Closing Meeting
The final meeting is attended by the buyer, seller, two real estate agents, two or more attorneys and a closing agent or escrow officer. It is held in the title company’s or escrow agent’s office, or in the office of the buyer’s or seller’s real estate attorney.
Signing Documents
Get ready to review a mountain of paperwork, including the promissory note (the loan document), mortgage note, deed of trust, and various affidavits. Your attorney or closing agent will explain the purpose and content of each document, and you will have the opportunity to review and sign each one. Take your time to refamiliarise yourself with the information at hand.
Paying Closing Costs and Escrow Items
You may have to write a cashier’s check or wire transfer to cover closing costs and any escrow items, including taxes and homeowners insurance – personal checks are usually not accepted.
Receiving the Keys
So once all documents are signed and all money is paid, the keys will be handed to you and you will become part of the Homeowners Association. Congratulations!
6. Post-Closing Activities
Record the Deed
The closing agent will usually be the one to record the deed with the register of deeds’ office, so that you officially own the home and it’s on the public record.
Set Up Utility Services
Contact local utility companies to transfer or schedule services for electricity, gas, water, and internet. Calling well in advance will ensure that you have all utilities in place when you move in.
Move-In
Set a date for your move-in. Get movers if you need them, and make sure that all logistics are in place. You might be all over the place, but if you plan the endeavour, you can do it right.
Keep Documents Safe
File all your closing documents for safe keeping and for future tax purposes, refinancing or selling of the property. You may consider making a digital copy of the documents for easy access and as a backup.
7. Common Closing Issues and How to Handle Them
Title Issues
Provided you have paid for your portion of the purchase price at closing, title problems will have to be sorted out. The most common types of title problems include liens, often left unpaid by a previous owner on foreclosure, corrections of errors, such as typographical mistakes or outdated references to a previous owner that does not exist any more. Title insurance can protect you against unexpected issues related to your property’s title.
Loan Approval Delays
Make sure that each loan contingency is cleared, or that extensions are planned if they are likely to stretch the date past your contract contingency period. If your lender needs additional information to grant approval, do everything you can to provide it. In certain cases, this might mean extending the closing date.
Homeowner’s Insurance Issues
To be on the safe side, secure your homeowners insurance policy before you close. Most lenders need to see proof that insurance is secured before closing the loan. Compare rates and make sure the policy you select is high enough to cover your new home.
8. Understanding Closing Costs
Breakdown of Closing Costs
- Loan Origination Fees: Charged by the lender for processing the loan.
- Appraisal Fees: Paid for the property appraisal to determine its value.
- Title Search and Insurance Fees: Cover the cost of the title search and insurance.
- Survey Fees: Paid for verifying property boundaries.
- Recording Fees: Charged by the county for recording the deed and mortgage.
- Prepaid Items: Include property taxes and homeowners insurance paid in advance.
- Attorney Fees: Paid for legal services if you have an attorney representing you.
Negotiating Closing Costs
And finally, some closing costs are negotiable: you can try getting the seller to cover a portion of your costs or you can negotiate your terms with your lender in exchange for reduced fees, or ask around for the best rate when it comes to things such as title insurance.
9. Role of Key Players in the Closing Process
Real Estate Agent
Physically, your agent is integral to the process until the closing, taking care of each step of the way: coordinating contract signings, inspection schedules, walk-throughs – anything that goes wrong and needs negotiation.
Mortgage Lender
The lender performs all the necessary actions required to provide the loan to purchase your home, such as making sure all conditions are met, and reflecting them in the closing documents.
Title Company
The title company does the title search, issues title insurance and conducts the closing to transfer the property properly and legally.
Real Estate Attorney
Yes, being represented by an attorney provides peace of mind in a complex transaction. Review of documents, legal compliance, and representation at closing are typical attorney services.
10. FAQs About Residential Real Estate Closings
How long does the closing process take?
For a transaction which goes smoothly, the period from the time you sign the purchase agreement to closing day is usually 30 to 45 days (but it can be longer depending on the complexity of the transaction and the number of issues encountered).
Can I back out of the purchase before closing?
Yes, you can walk away at any time prior to closing but there could be legal and financial consequences. Check the purchase agreement regarding contingencies and discuss your options with your real estate agent or an attorney.
What should I do if I find issues during the final walk-through?
If you still plan on going through with the purchase and the final walk-through uncovers problems, alert your real estate agent. Request the seller make a repair or negotiate a credit at closing to cover the cost of the repair.
What happens if the seller fails to complete agreed-upon repairs?
Should the seller fail to perform the repairs, the two of you should negotiate a different resolution: you could seek a price reduction, closing credit, or delay the closing until the repair work is done.
Do I need to attend the closing in person?
Though it is desirable to attend the closing in person, it is not necessary; that is, it often is possible to do a power of attorney or electronic signing if the party cannot make it for whatever reason.
Conclusion
The residential real estate closing process can be daunting. The good news is that with a little preparation and understanding, you may be able to minimize special problems and frustrations while completing each step required to take possession of your new home. Whether you are a first-time home buyer or a seasoned real estate investor, here’s how to handle the process from execution of your purchase agreement to all that takes place between the time your mortgage is finally approved to the time you sign the closing papers and become the proud owner of your new home. Congratulations!