A real estate deal is generally a long and stressful exercise that involves many steps and procedural formalities. Closing on a house occurs when you sign the papers that make the house yours, but before that fateful day arrives, a long list of things has to happen. This article describes the 12 steps that must be taken between the moment your offer is accepted and when you get the keys to your new home.
Key Takeaways
- Real estate deals are generally completed over a span of weeks and have many moving parts.
- Deals start with opening an escrow account and end with a final walk-through before signing on the dotted line.
- The complexity of real estate closings is a good reason to hire an attorney to guide you through the process.
- Don't be surprised by closing costs and ask your loan officer and realtor about all the potential fees.
- Buyers who have been pre-approved for a mortgage are typically able to close sooner.
Why Mortgage Pre-Approval Is a Good Idea
Unless you are an all-cash buyer, it is a good idea to get pre-approved for a mortgage before you start searching for a home. While being pre-approved is not necessary to close a deal, most sellers expect buyers to have a pre-approval letter. Having one can make the process quicker and give you more bargaining power when negotiating. It signals to the seller that you have strong financial backing. It also offers you a rate lock, which means that you are more likely to secure a favorable interest rate.
Getting pre-approved for a mortgage also lets you know the limit up to which you can go for purchasing a property. It saves time and effort, allowing you to search only for real estate that fits your budget.
Finally, mortgage pre-approval gives you more time to respond to possible discrimination. Suppose you feel a potential lender discriminated against you. In that case, you can seek financing from other sources and pursue legal action later. Getting pre-approved prevents a single biased lender from ruining a good deal and delaying your dreams. Once you've found the perfect home and a buyer has accepted your offer, the following are the steps you'll need to take to close the deal.
Mortgage lending discrimination is illegal. Suppose you think you've been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age. In that case, there are other steps you can take. One such step is to file a report with the Consumer Financial Protection Bureau or the U.S. Department of Housing and Urban Development (HUD).
1. Open an Escrow Account
An escrow account is held by a third party on behalf of the buyer and seller. A home sale involves multiple steps taken over a span of weeks. Therefore, the best way to prevent either the seller or the buyer from being cheated is to bring in a neutral third party. This third party can hold all the money and documents related to the transaction until everything has been settled. Once all procedural formalities are over, the money and documents are moved from the escrow account to the seller and buyer, thus guaranteeing a secure transaction.
2. Title Search and Insurance
A title search and title insurance provide peace of mind and a legal safeguard. They ensure that when you buy a property, no one else can try to claim it later. A title search is an examination of public records to determine and confirm a property’s legal ownership and find out what claims, if any, exist on the property. If there are any claims, they may need to be resolved before the buyer gets the property.
Title insurance is indemnity insurance that protects the holder from financial loss sustained from defects in a title to a property. It protects real estate owners and lenders against loss or damage stemming from liens, encumbrances, or title defects.
3. Hire an Attorney
While getting legal aid is optional, it's always better to get a professional legal opinion on your closing documents. The complicated jargon in them can be difficult to understand, even for well-educated individuals. For an appropriate fee, an opinion from an experienced real estate attorney can offer multiple benefits, including hints of any potential problems in the paperwork.
In some states, you may be required to hire an attorney to handle the closing. Check your state's laws.
4. Negotiate Closing Costs
From opening an escrow account to hiring a real estate attorney, all involved services and entities cost money. These costs can snowball into a lot of cash if you aren't careful. For instance, home and pest inspections are crucial to prevent you from buying a property with hidden—and costly—problems. But many such services take advantage of consumers' ignorance by charging high fees. Even fees for legitimate closing services can be inflated.
Junk fees are charges that a lender imposes at the closing of a mortgage, and are often unexpected by the borrower and not clearly explained by the lender. These fees can add up to a hefty bill. Junk fees include administrative fees, application review fees, appraisal review fees, ancillary fees, processing fees, and settlement fees.
If you're willing to speak up and stand your ground, you can usually get junk fees and other charges reduced or eliminated before you go to closing.
5. Complete the Home Inspection
A physical home inspection is necessary to discover any potential problems with the property and get a look at its surroundings. If you find a serious problem with the home during the inspection, you'll have an opportunity to back out of the deal or ask the seller to fix it. You can also have the seller pay you to fix it (as long as your purchase offer includes a home-inspection contingency).
6. Get a Pest Inspection
A pest inspection is separate from a home inspection. It involves a specialist ensuring that your home does not have any wood-destroying insects, such as termites or carpenter ants. Pests can be devastating for properties made primarily of wooden material. Many mortgage companies mandate that even minor pest issues be fixed before you can close the deal.
A small infestation can spread to become very destructive and expensive to fix. Wood-destroying pests can be eliminated, but you'll want to ensure the issue can be resolved for a reasonable fee. Better yet, you might be able to get the seller to pay and have pests eliminated before you complete the purchase. Pest inspections are legally required in some states and optional in others.
7. Renegotiate the Offer
Even when your purchase offer has already been accepted, you may want to renegotiate the price to reflect the cost of any necessary repairs revealed by inspections. You could also keep the purchase price the same, but try to get the seller to pay for repairs. Even if you're purchasing the property "as is," there is no harm in asking. You can also still back out without penalty if a major problem is found that the seller can't or won't fix.
8. Lock in Your Interest Rate
Interest rates, including those offered on the mortgage, can be volatile and subject to change. Rates are subject to multiple factors, such as geographic region, property type, type of loan applied for, and the applicant's credit score.
If possible, it is advisable to lock in the interest rate for the loan in advance. That prevents you from being at the mercy of market fluctuations, which could cause rates to rise before you finalize your property purchase. Even a 0.25% rate hike can significantly increase your monthly payments and the amount of time it takes to repay the mortgage.
9. Remove Contingencies
Your real estate offer should be contingent upon the following five things:
- Obtaining financing at an interest rate not to exceed what you can afford
- The home inspection not revealing any significant problems with the home
- The seller fully disclosing any known issues with the home
- The pest inspection not showing any major infestations or damage to the home
- The seller completing any agreed-upon repairs
Such contingencies must be removed in writing by specific dates stated in your purchase offer, a process known as active approval. However, in some purchase agreements, contingencies are subject to passive approval (also known as constructive approval). That means they are considered approved if you don’t protest them by their specified deadlines. Buyers must understand the approval process and take the necessary actions by the required dates.
10. Meet Funding Requirements
You most likely deposited earnest money when you signed the purchase agreement. Earnest money is a deposit made to a seller indicating the buyer's good faith, seriousness, and genuine interest in the property transaction. The earnest money goes to the seller as compensation if the buyer backs out. If the seller backs out, the money is returned to the buyer.
To complete your purchase, you'll have to deposit additional funds into escrow. As the original earnest money is generally applied to the down payment, arranging for the various other required payments is crucial before the deal is closed. Failure to do so can lead to the sale getting canceled, with the earnest money going to the seller. Furthermore, you could still be charged for the various services you used before the deal fell apart.
11. Final Walk-Through
One of the last steps before you sign your closing papers should be to look over the property one last time. You want to make sure that no damage has occurred since your last home inspection. You should also verify that the seller has completed the required fixes and no new problems came up. Finally, check to see that nothing included in the purchase agreement was removed.
Closing on a house can take from a week to 60 days, depending on the property type and whether you are paying cash or financing the purchase.
12. Understand the Paperwork
Paperwork is critical to closing a property deal. Despite there being a stack of papers filled with complex legal terms and jargon, you should read all of it yourself. If you don’t understand something, consult a real estate attorney. Your agent will also be helpful in making sense of any complex legal language.
Although you may feel pressured by the people who are waiting for you to sign your papers—such as the notary or the mortgage lender—read each page carefully, as the fine print can have a major impact for years to come.
In particular, make sure the interest rate is correct, and all other agreed terms are clearly mentioned. More generally, compare your closing costs to the good faith estimateyou received at the beginning of the process. Vigorously dispute any fees you think are illegitimate.
How Long Does It Take to Close On a House?
Typically it takes 30 to 45 days to close on a house, depending on a few factors like how fast it takes to get a home inspection and whether or not you are pre-approved for a mortgage.
How Much Money Should You Save Before Buying a House?
How much money you should save before buying a home depends on how much of a downpayment you might need to buy a house. If a home you want to purchase costs, say, $200,000, you might need a 20% downpayment, which would be $40,000, for example.
Even if you don't need a 20% downpayment, and not every buyer does, it may be useful to have money to pay for inspection fees and anything else that might come up when househunting.
How Much Are Closing Costs When You Buy a House?
There are many fees associated with closing costs from the lawyer from appraisal fees to the fees you pay the lawyer who draws up your contract. These costs can add up to 2% to 7% of the home's purchase price and are typically due at the closing.
When Is It Too Late to Back Out of Buying a Home?
If you haven't signed a contract to buy the house, feel free to walk away. If you are "in contract" with the seller to buy the house, getting out of the contract depends on the contingencies in the contract, like a home inspection or if you can't secure financing, were outlined in the contract. You may end up forfeiting your earnest money if you walk away outside of any contingencies. So, if you decide you "don't want the home," then you may have some legal hoops to jump through, so it is best to speak with your lawyer.
The Bottom Line
Though it may seem like the closing process is a lot of work, it is worth the time and effort to get things right instead of hurrying up and signing a deal you don't understand. Be wary of any pressure to close the deal fast. Real estate agents and other entities helping you will want their cut, but they won't be around to care about the problems you could face in the long run from a bad deal.
