Steps to Closing a Real Estate Transaction
What is this mysterious "closing" you always hear real estate agents referring to when you're shopping for a house? Closing occurs when you sign the papers that make the house yours. But before that magical day arrives, a long list of things have to happen.
1. Open Escrow
Escrow is an account held by a
third party on behalf of two parties in a transaction. Because there are so many things that have to happen to complete a home sale, the best way to prevent either the seller or the buyer from getting ripped off is to have a neutral third party hold all the money and documents related to the transaction until everything has been settled.
You deposit
earnest money when you signed the purchase agreement. The purpose of this money is to let the seller know that you are serious, or earnest, about your intentions to purchase the home. After all, the seller is going to take the property off the market so that you can purchase it. If you back out, the earnest money goes to the seller as compensation. If the seller backs out, the money is returned to you.
(To complete your purchase, you'll have to deposit additional funds into escrow. Your original earnest money deposit is generally applied toward your
down payment; you'll need to submit the rest of your down payment and pay your
closing costs (unless the seller has agreed to pay them)).
2. Do a Title Search and Obtain Title Insurance
A
title search and
title insurance provide peace of mind and a legal safeguard so that when you buy a property, no one else can try to claim it as theirs later, be it a spurned relative who was left out of a will or a tax collector who wasn't (or thinks he wasn't) paid. A title officer will perform a title search to make sure there are no clouds on the title (third-party claims to a property that could call into question or invalidate your ownership of it). If there are, these problems will need to be resolved before the property becomes yours.
3. Get Pre-Approved for a Mortgage
While getting pre-approved for a mortgage is not required to close a deal, it can help you close the deal quicker as being pre-approved signals to the seller that you have strong financial backing. In turn, being pre-approved can give you more bargaining power when negotiating with a seller. Another key advantage of being pre-approved is that certain lenders will offer you a rate lock, which means that you can secure an interest rate and not be a the mercy of the markets if interest rates rise before you close the deal.
4. Negotiate Closing Costs
The escrow company can't be expected to provide its services for free, of course, but many companies in this industry take advantage of consumers' ignorance and boost their
bottom lines by charging
junk fees. Though there is some debate over what is considered a junk fee, fees to look out for include administrative fees, application review fees, appraisal review fees, ancillary fees, email fees, processing fees and settlement fees. If you're willing to speak up and stand your ground, you can usually get junk fees eliminated or at least reduced. Even fees for legitimate closing services can be inflated.
5. Complete the Home Inspection
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 or pay for you to have it fixed (as long as your purchase offer included a home-inspection contingency).
6. Complete the Pest Inspection
A pest inspection is separate from the home inspection and involves a specialist making sure that your home does not have any wood-destroying insects (termites or carpenter ants). You wouldn't want to buy a house with a termite problem, as even a small problem can spread and become very destructive and expensive to fix. Wood-destroying pests can be eliminated, but you'll want to make sure the problem can be resolved for a cost you find reasonable (or for a cost the seller is willing and able to pay) before you complete the purchase of the home. In fact, if any pest problem, even a minor one, is found, the
mortgage company will require that it be fixed before you can close.
7. Renegotiate the Offer
Even if your purchase offer has already been accepted, if inspections reveal any problems, you may want to renegotiate the home's
purchase price to reflect the cost of any repairs you will need to make. You could also keep the purchase price the same but try to get the seller to pay for repairs.
If the purchase contract states that you're purchasing the property "as is," you don't have much
recourse to ask for repairs or a price reduction, but you can still ask. You can also still back out without penalty if a major problem is found that the seller can't or won't fix it.
8. Lock Your Interest Rate
If you haven't already, you'll need to lock your
interest rate. A good lender will watch interest rates closely for you and tell you when rates are at a low point so you can lock then. You can also watch interest rates by yourself online using your lender's website or a tool like mortgage calculator.
It's important to note though that since interest rates are unpredictable and fluctuate multiple times a day, you shouldn't drive yourself crazy trying to hit rock bottom. Be satisfied with a rate that you think is reasonable given current market conditions and that you can comfortably afford. Also, keep in mind that rates vary by
credit score, geographic region and the type of loan you're getting, so you may not be able to get the best rates you hear advertised.
9. Remove Contingencies
Your offer should be contingent on several things:
- Obtaining financing at an interest rate not to exceed a certain percent that you can afford
- The home inspection not revealing any major problems with the home
- The seller fully disclosing any known problems with the home
- The pest inspection not revealing any major infestations or damage to the home
- The seller completing any agreed-upon repairs
These
contingencies often must be removed in writing by certain dates (known as active approval), which should also have been stated in your purchase offer, for your deal to close. However, in some purchase agreements, contingencies are passively approved (also known as constructive approval) if you don't protest them by their specified deadlines.
10. Final Walk-through
One of the last steps before you sign your closing papers should be to walk through the property one last time. You want to make sure no damage has occurred, and nothing has been removed that is included in the purchase.
11. Sign the Papers
Obviously, one of the most critical steps of closing is signing the paperwork. There will probably be at least 100 pages. Although you may feel pressured by the people, who are waiting for you to sign your papers, like the
notary and your mortgage lender, read each page carefully - the
fine print will have a major impact on your finances and your life for years to come.
In particular, make sure the interest rate is correct and that there is no
prepayment penalty. More generally, compare your closing costs to the
good faith estimate you were given at the beginning of the process and throw a fit about any fees that are off by more than 10%.
12. At closing, determine the status of the utilities required by the home, such as water, sewage, gas, electric. You want utility bills to be paid in full by owners as of closing and you also want services transferred to your name for billing. Usually such transfers can be done without turning off utilities.
About two weeks after closing, contact your local property records office and confirm that your deed has been officially recorded. Such records are public notices that show your interest in the property.
Feel secure in the knowledge that you've done your research and know how to make your closing process go smoothly.
Ref: 12 Steps To Closing A Real Estate
