Buyers need to know about:
- Making an offer
- What the offer contains
- What are contingencies
- Negotiating tips
- How the seller can respond to the offer
- Whether you can withdraw an offer
Sellers need to know about
Oral promises are not legally enforceable when it comes to the sale of real estate. Therefore, you need to enter into a written contract, which starts with your written proposal. This proposal not only specifies price, but all the terms and conditions of the purchase. For example, if the sellers said they’d help with $2,000 toward your closing costs, be sure that’s included in your written offer and in the final completed contract, or you won’t have grounds for collecting it later.
REALTORS® usually have a variety of standard forms (including Residential Purchase Agreements) that have been utilized thousands of times and are kept up to date with the changing laws. When you use a REALTOR® these forms will be available to you. In addition, REALTORS® offer protection for all parties and cover the questions that need to be answered during the process. In many states certain disclosure laws must be complied with by the seller, and the REALTOR® will ensure that this takes place.
If you are not working with a REALTOR®, keep in mind that you must draw up a purchase offer or contract that conforms to state and local laws and that incorporates all of the key items. State laws vary, and certain provisions may be required in your area.
After the offer is drawn up and signed, it will usually be presented to the seller by your REALTOR® by the sellers’ REALTOR® if that’s a different agent, or often by the two together.
NOTE: In a few areas, sales contracts are typically drawn up by the parties’ lawyers.
The purchase offer you submit, if accepted as it stands, will become a binding sales contract (known in some areas as a purchase agreement, earnest money agreement, or deposit receipt). It’s important, therefore, that it contains all the items that will serve as a “blueprint for the final sale.” These purchase offer items include such things as:
Address (sometimes legal description) of the property;
- Sale price;
- Terms (all cash or subject to your obtaining a mortgage for a given amount);
- Seller’s promise to provide clear title (ownership);
- Target date for closing (the actual sale);
- Amount of earnest money deposit accompanying the offer, and whether it’s a check, cash or
- promissory note (and how it’s to be returned to you if the offer is rejected, or kept as damages if you later back out for no good reason);
- Method by which real estate taxes, rents, fuel, water bills, and utilities are to be adjusted (prorated) between buyer and seller;
- Type of deed to be given;
- Other requirements specific to your state, which might include a chance for attorney review of the contract, disclosure of specific environmental hazards, or other state-specific clauses;
- A provision that the buyer may make a last-minute walk-through inspection of the property just before the closing;
- A time limit (preferably short) after which the offer will expire; and
- Contingencies, which are an extremely important matter (and discussed in detail below).
If your offer says “this offer is contingent upon (or subject to) a certain event,” you’re saying that you will only go through with the purchase if that event occurs.
The following are some common contingencies contained in a purchase order:
- The buyer obtaining specific financing from a lending institution. If the loan can’t be found, the buyer won’t be bound by the contract.
- A satisfactory report by a home inspector “within 10 days (for example) after acceptance of the offer.” The seller must wait 10 days to see if the inspector submits a report that satisfies you. If not, the contract would become void.
- Getting the job you just interviewed for.
Again, make sure that all the details are nailed down in the written contract.
You’re in a strong bargaining position (meaning, you look particularly welcome to a seller) if:
- You’re an all-cash buyer; or
- You’re already pre-approved for a mortgage; and
- You don’t have a present house that has to be sold before you can afford to buy.
In those circumstances, you may be able to negotiate some discount from the listed price. On the other hand, in a “hot” seller’s market, if the perfect house comes on the market, you may want to offer the list price (or more) to beat out other early offers.
It’s very helpful to find out why the house is being sold and whether the seller is under pressure. Keep these considerations in mind:
Every month a vacant house remains unsold represents considerable extra expense for the seller; If the sellers are divorcing, they may just want out quickly; and Estate sales often yield a bargain in return for a prompt deal.
Earnest Money: This is a deposit that you give when making an offer on a house. A seller is understandably suspicious of a written offer that is not accompanied by a cash deposit to show “good faith.” A REALTOR® or an attorney usually holds the deposit, the amount of which varies form community to community. This will become part of your down payment.
You will have a binding contract if the seller, upon receiving your written offer, signs an acceptance, just as it stands, unconditionally. The offer becomes a firm contract as soon as you are notified of acceptance.
If the offer is rejected, that’s that, and the sellers could not later change their minds and hold you to it.
If the seller likes everything except the sale price, or the proposed closing date, or the basement pool table you want left with the property, you may receive a written counter-offer, with the changes the seller prefers. You are then free to accept or reject it or to even make your own counter-offer. For example, “We accept the counter-offer with the higher price, except that we still insist on having the pool table.”
Each time either party makes any change in the terms, the other side is free to accept or reject it, or counter again. The document becomes a binding contract only when one party finally signs an unconditional acceptance of the other side’s proposal.
Can you take back an offer? In most cases the answer is yes, right up until the moment it is accepted, or even, in some cases, if you haven’t yet been notified of acceptance.
If you do want to revoke your offer, be sure to do so only after consulting a lawyer who is experienced in real estate matters. You don’t want to lose your earnest money deposit, or find yourself being sued for damages the seller may have suffered by relying on your actions.
When an offer comes in, you can accept it exactly as it stands, refuse it (seldom a useful response), or make a counter-offer to the buyers, with the changes you want. In evaluating a purchase offer, you should estimate the amount of cash you’ll walk away with when the transaction is complete.
For example, when you’re presented with two offers at once, you may discover you’re better off accepting the one with the lower sale price, if the other asks you to pay points to the buyer’s lending institution.
Once you have a specific proposal before you, calculating net proceeds becomes simple. From the proposed purchase price you can subtract:
- Payoff amount on present mortgage;
- Any other liens (equity loan, judgments);
- Broker’s commission;
- Legal costs of selling (attorney, escrow agent);
- Transfer taxes;
- Unpaid property taxes and water bills;
- If required by the contract: cost of survey, termite inspection, buyer’s closing costs, repairs, etc.
Your present mortgage lender may maintain an escrow account into which you deposit money to be used for property tax bills and homeowners insurance premiums. In that case, remember that you will receive a refund of money left in that account, which will add to your proceeds.
When you receive a purchase offer from a would-be buyer, remember that unless you accept it exactly as it stands, unconditionally, the buyer will be free to walk away. Any change you make in a counter-offer puts you at risk of losing that chance to sell.
Who pays for what items is often determined by local custom. You can, however, arrive at any agreement you and the buyers want about who pays for:
- Termite inspection;
- Buyer’s closing costs
- Points to the buyer’s lender;
- Buyer’s broker;
- Repairs required by the lender; and
- Home Protection Policy.
TIP: You may feel some of these costs are none of your business, but many buyers, particularly first-timers, are short of cash. Helping them may be the best way to get your home sold.
Your goal is to select the mortgage loan that is most favorable to your situation. In order to find the best home loan, you should plan to contact several mortgage lenders, including the lender to whom you presently make your payments (if applicable), to discuss the mortgages they have available, their rates, closing costs, and other fees.
Mortgage loans are available from:
- Mortgage companies;
- Savings and loan associations;
- Federal credit unions; and
- Other financial institutions.
You can find mortgage lenders, on this site or check your local yellow pages.
Learn the steps involved in applying for a loan…
At this stage in the process, home buyers have typically made an offer on a house, decided what type of mortgage they want, and selected a lender. The next step is to fill out a loan application. In moving forward, you should understand:
- Pre-application steps;
- The information your lender needs at application;
- Decisions you make at application;
- Application costs you pay; and
- Application legal requirements.
When you’re about to apply for a mortgage loan, you should take the following steps:
- Pre-qualification LetterLender pre-qualification provides an estimate of how large a mortgage you can afford. It doesn’t obligate the lender to approve your loan, but it’s a way to help narrow your home search to within your price range.
- Ratified Sales ContractMost loan applicants go to their loan interview with a ratified contract of sale on a house in hand. Typically, your real estate sales professional has presented your offer to the seller of the property and helped you negotiate any sales contingencies (such as making repairs, settling by a certain date, etc.) A ratified sales contract means both the buyer and the seller have signed off on the final offer. This final sales contract is the starting point for the loan application interview and will specify the amount of your down payment, the price you will pay for your house, the type of mortgage financing you will seek, and your proposed closing and occupancy dates.
- Earnest Money DepositThis is a “good-faith” payment you submit with the offer to show the seller that you are serious. The earnest money is deposited in an escrow account and will be applied to your closing costs. Sometimes, your lender will want you to bring a receipt for the earnest money deposit along with your sales contract to the initial loan application meeting.
- Home Inspection ReportA home inspector evaluates the structural and mechanical conditions of the property and will help identify problems before you purchase the home. Obtaining a satisfactory home inspection report should be one of the terms in your sales contract.
TIP: If you put this kind of contingency clause into your agreement, then you will be able to cancel the sales contract if serious problems are identified, or you may be able to get the seller to agree to pay for needed repairs or renegotiate the terms of the purchase.
Before you meet with your lender, you will likely have to complete the Uniform Residential Loan Application, a four-page document that asks in-depth questions about you, your income, your assets and liabilities, and your credit as well as a description of the property you wish to buy.
In some cases, the lender may ask you to fill out a loan application before your interview. You will then bring your completed application form to the interview. In other cases, you can mail or fax the application to your lender prior to your appointment. Some lenders may even let you fill out your application over the telephone with a loan officer.
TIP: By receiving your completed application before your meeting, your lender will be better prepared to advise you.
At the time of application, your lender will need information about the following:
A) The Type of Mortgage You Want
- Your loan application asks you to specify the type of mortgage you want. It’s advantageous to learn about the various types of mortgages available before applying for your loan – even before you start the house-hunting process. The type of mortgage you choose will directly affect how much house you can afford and the amount of your monthly mortgage payments.
If you bring a ratified sales contract to your loan application interview, it may specify the type of financing you want. Your contract to buy the house may depend on your ability to secure or receive a commitment for the type of loan you specify.
TIP: Even if you come to your loan interview without a specified type of loan in mind, it’s important to do research beforehand and have some idea of which type of financing is best suited to your lifestyle and budget.
B) The Mortgage Amount
- This is a decision you most likely will have made before the loan application. Your requested mortgage amount will be based on the purchase price of your new home and the amount of money you will be putting toward a down payment.
However, if you have been pre-qualified, remember that your pre-qualification letter from a lender is only a ballpark range of your buying power. The lender can approve you for the amount requested, or a lesser amount, or nothing at all, depending on other factors such as your credit, and the appraised value of the property. If your loan application reveals you as creditworthy, it is likely that your pre-qualification amount will be close to the actual amount of mortgage funds a lender will be willing to loan you.
C) Down Payment
- Most lenders expect buyers to make a down payment of at least 5% of the value of the home. If you can afford to put more money toward a down payment, it will reduce the amount of your monthly mortgage payments. Some loan programs offer 3% down payments if you meet certain income standards. The Veterans Administration (VA) and the Rural Housing Service (RHS) offer no-down-payment loans.
The lender will want to know how much money you plan to put down and the source of those funds. Sources you may draw upon include savings, stocks and bonds, pension funds, real estate holdings, life insurance policies, mutual funds, and employee savings plans.
You may also use a gift of money from a family member that need not be repaid. If you do this, you will need to present a letter to your lender that states the amount of the gift, is signed by the giver, and is notarized by a third party.
You are also now allowed to withdraw up to $10,000 from both traditional and Roth Individual Retirement Accounts (IRAs) with no early withdrawal penalty, if used toward buying your first home.
Under some mortgage programs, such as Fannie Mae’s Community Home Buyer’s Program® with the 3/2 Option®, part of your down payment may come from a grant from a nonprofit housing provider in your community.
D) Settlement Date
- In your sales contract, you specify a time frame in which you wish to close on your new home (usually 30, 45, or 60 days from the time you have a ratified sales contract). If you have a limited time frame, ask your lender about express services, which may allow for less documentation and alternative means to verify information you’ve furnished on your application.
TIP: Tell your loan officer the approximate date you would like to close your loan, so that your loan processing will coincide with this date.
E) Lock-in Interest Rate
- The mortgage interest rates quoted to you the day you apply for your mortgage may change by the time you actually close on your home. That’s why many lenders offer a rate “lock-in,” which guarantees you a specified interest rate, provided the loan is closed within a set period of time.
When considering this option, ask the lender:
- Can the rate be locked in at the time of application or only at loan approval;
- How long the lock-in remains in effect;
- Whether there is a charge for locking in the rate; and
- If you can also lock in points.
- You will need to let the lender know if you want to accept the interest rate available on the day of your loan application or let the rate float until you go to closing. If your lock-in period expires before you go to closing, your lender is not obligated to give you the same interest rate you had locked in earlier.
You should bring your checkbook to the loan interview because most lenders require you to pay an application fee, a credit report fee, and in some cases a separate appraisal fee at the time of your loan application. Remember, costs and terms vary among lenders.
Application fee: The application fee covers the lender’s cost to process the information on your loan. Often the fee includes the appraisal.
Credit Report Fee: The credit report fee covers the lender’s cost for ordering a credit report on you. This report will verify information that you supply on your application and will supply additional information from the credit agency’s own files and from the public record.
Appraisal Fee: The lender will arrange to have a professional appraiser estimate the market value of the house you plan to buy. An appraiser, a person certified to estimate the value of real and personal property, usually charges one fee for a single-family home and slightly higher fees for a two-family, three-family, or four-family home. Appraisals for government-insured loans need to be done by specially certified appraisers and may cost less than those for other types of loans.
TIP: Check with your lender to see if there are any circumstances under which you would be entitled to a refund of your application or credit report fee. In some cases, you can only get a refund of your application fee if your lender does not approve or deny your application in the time agreed upon.
Under federal law, your lender is required to furnish you with several types of documents and information in conjunction with your application for a mortgage loan. This information includes the following:
- Annual Percentage rate (APR): This figure factors interest plus certain closing costs, any points and other finance charges over the term of the loan. The APR must be disclosed to you according to federal Truth-in-Lending laws within three business days of when you apply for a loan, or prior to or at closing for a refinance.
- Disclosure about ARMs: You must also get a written summary of the important terms and costs of the loan, the past performance of the index to which the interest rate will be tied, and a copy of the booklet “Consumer Handbook on Adjustable-Rate Mortgages.” You will receive this information when you receive an application form for an ARM or pay a nonrefundable fee-whichever comes first.
- Good-Faith Estimate: Within three days after you have submitted your application for a home loan, the lender must give you an itemized estimate of the costs to close the loan, called a “good-faith estimate.” It is an idea of how much money you will need to pay at the closing table along with the seller’s costs. Costs can and will vary from the actual amounts indicated, so be sure to take this for what it is – an estimate.
- Guide to Settlement Costs: The lender must also give you a copy of the government publication “Settlement Costs: A HUD Guide”, which describes the settlement process and nature of its charges, provides information about your rights, and includes an item-by-item explanation of settlement services and costs. The lender has three business days after your written application is taken to give this guide to you.
- Authorization Forms: You may be asked to sign several authorization forms that will allow your lender to verify the information on your application. These include the authorization of credit investigation, verification of employment, past rental or mortgage payment history, and bank deposits.
- Consumer Credit Protection: When compiling a credit profile of you, your lender must certify that the credit report will only be used for the purpose of qualifying you for a mortgage loan. As part of the credit evaluation process, your lender cannot seek any subjective information from your neighbors or co-workers concerning your character, reputation, or other personal aspects unless you receive notice. These limitations are set by the Fair Credit Reporting Act. Under the Equal Credit Opportunity Act, your lender cannot discriminate based on race, color, national origin, sex, marital status, age, religion, and the fact that all or part of your income comes from a public assistance program, and your exercise of any rights under the Consumer Credit Protection Act. Your lender also cannot ask questions about your future parenting plans, although the lender may ask about the current number of children you have and their ages.
- Alternative Documentation Loans: An alternative-doc (or alternative documentation) loan uses methods such as W-2 forms, computerized pay stubs, bank statements, and canceled checks to verify information. Before your loan interview, ask whether your lender offers alternative documentation and find out if you are eligible. In most cases, alternative documentation can be used for salaried individuals who receive a computerized (as opposed to handwritten) paycheck. Self-employed individuals or those who earn commissions will most likely not be able to use alternative documentation for employment verification.
Understand how your lender processes your loan…
Lenders follow a specific process, called underwriting, and certain guidelines to determine whether you are a good risk for a loan. They are primarily interested in the property you plan to buy, your current financial situation and credit history. After applying for a loan, you should understand:
- The steps your lender follows;
- How the lender views your application; and
- What to do if your loan is denied.
- Make sure all information is current and bring it to the loan application meeting;
- Be up front about any past credit problems; and
- Get documents to your loan processor promptly.
In evaluating your loan application, your lender will do the following:
A) Obtain a Property Appraisal
- The lender will arrange to have a professional appraiser estimate the market value of the house you plan to buy. The appraiser evaluates the property’s age, structural soundness, and other physical characteristics, as well as location. The lender wants to ensure that the value of your home would support the amount of your mortgage because it serves as collateral for the loan. In some circumstances, the lender may require certain repairs or improvements.
TIP: Factors such as surrounding homes, access to transportation, and zoning may affect the property’s future value.
Your lender will not loan you more than a given percentage of the value of the property (called the “loan-to-value ratio”). Usually, the amount of your loan can be no more than 95% of the appraised property value or 95% of the sales price of your home, whichever is less.
TIP: If the appraised value is less than the purchase price you have agreed on, the amount of your mortgage may be smaller than you anticipated, and you will have to come up with a larger down payment or renegotiate the home price with the seller.
B) Examine Your Credit Report
- Your lender orders a credit report on you and your co-borrower to verify information you’ve already supplied on your application and to see how you’ve handled past debt and credit accounts. A credit report supplied by a credit reporting agency can tell the lender how much you owe, how often you borrow, and whether you pay your bills on time.
Your lender may ask you for a written explanation of any problems that appear on your credit report. Even one late payment on just one account may require an explanation from you.
TIP: In recent years, many lenders have been more flexible about this than you might expect, and a few credit problems may not bar you from a loan, particularly if you’ve revealed them frankly at the outset.
C) Verify Your Employment and Assets
- Your lender will verify information about your jobs and savings and checking accounts. Usually, the lender sends forms to your employers asking about your job history and current salary and to your banks asking about your assets.
D) Verify Your Housing Payments
- If you currently rent, your lender will send a Rental Verification Form to your past landlords to inquire about your rent payment history. If you currently have a mortgage, the lender will send your current mortgage lender a Request for Mortgage History Rating.
E) Obtain Approval of a Mortgage Insurer
- If your down payment is less than 20% of the purchase price of your home, your loan generally will require mortgage insurance, in which case the loan will also have to meet the underwriting standards of the mortgage insurer. If you are obtaining a Federal Housing Administration (FHA), Department of Veterans Affairs (VA), or Rural Housing Service (RHS) loan, the loan must also meet those standards.
Your mortgage loan file is designed to provide information your lender needs to evaluate the risk involved in lending you money – the likelihood that you will or will not repay the loan.
Lenders look at the “four Cs” of credit:
- Capacity: Can you repay the debt?
- Credit history: Will you repay the debt?
- Capital: Do you have enough cash for the down payment and closing costs?
- Collateral: Will the lender be protected if you default on the loan?
Lenders also follow industry guidelines that specify how much of a mortgage you can qualify for. These guidelines are flexible and may be increased somewhat, depending on your situation and the type of loan program you apply for.
TIP: Under those guidelines, your monthly mortgage payments should be no more than 28% of your gross monthly income and your monthly debts (including your mortgage) should be no more than 36% of your gross monthly income.
Lenders are required to explain in writing their decision to deny credit and have 30 days from the submission of your completed application to tell you if and why your loan was not approved.
Perhaps your loan application was rejected on the basis of a credit bureau report. Or perhaps the lender’s qualifying formula shows that you have insufficient income or too much debt to afford the house you want.
In either of these cases, there are steps you can take to remedy the situation. For instance, if you are refused credit because of a poor credit rating, you are entitled to a free copy of the report from the credit reporting agency. You can then challenge any errors and can also insist that the credit reporting agency include your side of any unresolved credit disputes in its reports. If your credit history is not accessible, you should start repaying debts to get current. Once you have improved your credit profile, you may be in a better position to apply for a loan.
Many lenders have a second level of review for denied loans. You should also consider the following:
- Investigate other affordable housing loan loans: If you have insufficient funds for closing costs and a down payment, or insufficient income to afford the house you want, you should investigate alternative financing arrangements. Fannie Mae® offers a wide range of loan products for low- to moderate-income borrowers. These affordable loan products allow for a lower down payment, more flexible underwriting ratios, and a nontraditional credit history.
- Seek outside home counseling help: If you have credit problems, seek the help of a nonprofit credit counseling agency. These agencies can help you develop budgets and arrange repayment plans that are acceptable to you and your creditors. Find credit counselors in your area online or call 1-800-7FANNIE (1-800-732-6643).
The next step in the process is closing the transaction…
The day on which the property actually changes ownership is known as closing (or settlement). Although, the procedure varies considerably from one part of the country to another, the same things are accomplished. As you and your REALTOR® approach this final step in the process, you will need to understand:
The mortgage loan closing (or settlement) is the formal meeting at which you take official ownership of the property. Actual possession of the property varies according to local practice and the terms of the contract. In some areas, possession is given to the buyer on the day of closing. In other areas, this occurs a day or two after.
At closing, the buyer requires that the seller prove the title (ownership) is complete and free of anyone else’s claims. Technically, two separate closings occur at this time: the closing of your loan and the closing of the sale.
The closing meeting is typically attended by the buyer and seller (and their attorneys if they have them), both real estate sales professionals, a representative of the lender, and the closing agent. The meeting takes about an hour and is usually held at the closing agent’s office. In addition to a number of other activities, you’ll be required at that time to review and sign various documents relating to the mortgage loan and pay closing costs.
The final days and weeks before closing can be a stressful period for both buyer and seller. For example, you may worry that something will happen prior closing to prevent the sale. The following activities must be performed in the final weeks before closing:
A) Review the Commitment Letter
- Be sure you understand all conditions of the loan offer stated in the lender’s commitment letter.
Check to see if all conditions have been met before closing. For example, if the home you are buying has been found to be in violation of a building code or zoning regulations, the lender may specify that those problems be corrected before the closing. You need to make sure the work is finished and done properly before closing.
B) Set the Closing Date
- An estimated closing date is usually specified in the sales contract. After your mortgage loan is approved and the commitment letter is accepted, a firm closing date needs to be set. You need to be sure that closing takes place before the lender’s commitment expires and while the interest rate lock-in, if there is one, remains valid. You should request from your closing agent a statement confirming the date, place, and time and a list of items you need to bring to the closing meeting.
C) Select an Attorney
- Because the loan closing is a legal transaction, you may want to hire an attorney early in the application process. Your attorney will review your sales contract before you sign it and represent you at closing. Your personal attorney’s fee is not part of your actual closing costs, so you will need to budget for this expense separately. If you seek a personal attorney, ask questions such as these:
- Does the attorney have substantial experience in real estate transactions?
- What is the attorney’s charge for reading sales contracts or other documents and giving advice about them?
- What is the attorney’s charge for being present at closing?
D) Select a Closing Agent
- You’ll need a closing or “settlement” agent to coordinate closing activities, such as preparing and recording the closing documents and disbursing funds. The types of services provided will depend on the closing agent you hire. Usually the closing is conducted by title companies, escrow companies, or attorneys, but it can be held at the lender’s or real estate professional’s office. Your real estate sales professional, lender, or a recent home buyer should be able to give you some recommendations.
E) Title Search
- You need to make sure that a title search on the property has been made and that you have obtained title insurance before the closing meeting. A title search is required to prevent fraudulent sales. Lenders want to be sure the seller is indeed the owner of the property. The title search also attempts to uncover any liens (legal claims against a property on the title). Any claims against the property must be paid before (or often at) closing.
F) Title Insurance
- Title insurance is required as further assurance that the seller is giving you a “marketable title.” A lender’s policy protects the lender in the event a flaw in the title is detected after the property has been bought. The owner’s policy protects you. You should get both types of policies. Obtaining a combined lender’s/owner’s policy will save you some money. You may also get a price break if the title company that previously insured the title will give you a “reissue” policy. The buyer typically pays for the title search and both types of title insurance. Your closing agent will coordinate both title services before the closing meeting.
G) Order a Property Survey
- The lender may require a survey, or plot plan, of the property. This is done to confirm that the property’s boundaries are as described in the sales contract. Usually the buyer pays for the survey and the lender orders it. You may be able to save some money by requesting an “update” from a surveyor who has surveyed the property previously.
H) Order a Termite Inspection
- In many locations, homes must be inspected for termites before they can be sold. You need a certificate from a termite inspection firm that states that the property is free of both visible termite infestation and termite damage. Usually the seller pays for this and the seller’s real estate sales professional orders the termite inspection. But you will want to make sure that the original certificate is delivered to your lender at least three days before closing.
I) Obtain Homeowner’s Insurance
- Your lender will require that you purchase homeowner’s or “hazard” insurance, which protects you and the lender from loss in the event the house is damaged or destroyed. Coverage must be equal to at least the replacement costs of the property. Most home buyers purchase a homeowner’s package of insurance that includes personal liability insurance (in case someone is injured on your property), personal property coverage (which covers loss and damage to personal property due to theft and other events), and dwelling coverage (which protects your actual house against fire, theft, weather damage, and other hazards). If you live near a body of water, you may also want to get flood insurance as part of your homeowner’s protection. Lenders typically want the first year’s premium to be paid at or before closing. Your lender may add the insurance cost to your monthly mortgage payments and keep this portion of your payments in an escrow account (or reserve). Then, the lender pays the insurance bill when it is due each year.
J) Inquire about Mortgage Insurance
- Private mortgage insurance (PMI) helps protect the lender in case of a foreclosure (the legal process in which a lender takes ownership of your home if you fail to make your monthly payments). Typically, the lender will require this insurance if your down payment is less than 20% of the purchase price of the property. The lender orders PMI from a mortgage insurance company after your loan is approved. You may be required to pay the full first year’s premium at closing. Renewal premiums will be added to the monthly mortgage payments you make to your lender after closing and will be put into an escrow account. Many PMI companies offer programs that require no up-front payment at closing, but they may require a slightly higher monthly payment.
K) Obtain Well and Septic Certifications
- If your property is not served by public utilities, you will need local government certification of the private water source and sanitary sewer facility before closing. Usually the county government performs the certification.
L) Inquire about a Certificate of Occupancy
- If you are buying a new house, a certificate of occupancy needs to be provided at closing. The builder obtains the certificate, usually from the city or county. An inspection may also be required to see if the property meets local building codes.
M) Go on the Final Walk-Through Inspection
- Your sales contract should have included a clause allowing you to examine the property within 24 hours before closing. This is your opportunity to make sure the seller has vacated the house and left behind whatever property was agreed upon. You will want to check that all lights, appliances, and plumbing fixtures are in working order. You will also want to make sure that all conditions of the sales contract have been met. If you observe major problems, you have the right to delay the closing until they are corrected, or you could ask that the monies be placed in an escrow account at closing to cover major repairs to be completed.
Although the closing process varies from state to state-and even within the same county or city, certain activities are standard. It is to your benefit to understand the many activities that need to occur during, and after the closing meeting.
First, the closing agent reviews the settlement sheet with you and the seller and answers any questions. Both you and the seller sign the settlement sheet.
The closing agent then asks you to sign the other loan documents, such as the mortgage note and Truth-in-Lending statement. If it wasn’t previously given to the lender, evidence of required insurance and inspections is also presented.
If everyone agrees that the papers are in order, you (and the seller) submit a certified or cashier’s check to cover the closing costs and the balance of funds due (if applicable). And, the check from the lender covering the mortgage amount is submitted to the closing agent.
If the lender will be paying your annual property taxes and homeowner’s insurance for you, a new escrow account (or reserve) is established at this point.
You receive the keys to your new home.
After the meeting, the closing agent officially records the mortgage and deed at your local government clerk’s office or registry of deeds. This legal transfer of the property may take a few days.
The closing agent usually will not disburse the funds to everyone who is owed money from the sale until the transaction has been recorded. It is at the point of deed recordation that you become the official owner of the home.
TIP: If you live in an area where there is not a formal closing meeting, an escrow agent will process the paperwork, arrange for all documents to be signed, and collect and disburse the required funds. This step in the process is called closing of escrow.
No later than three business days after your loan application was received, your lender should have delivered or mailed to you a “good-faith estimate” of the total charges due at closing and a copy of the government publication “Settlement Costs: A HUD Guide”. Then, one business day before the closing meeting, your closing agent must allow you to review a copy of your two-page settlement form-called the HUD-1 Settlement Statement.
The good-faith estimate is based on the lender’s typical loan origination costs for the area in which your home is located. So the estimate usually changes between application and closing and will show the actual amount of money you’ll need to bring to closing. Remember that you’ll need to pay your closing costs in the form of a certified or cashier’s check. Personal checks usually aren’t accepted.
Closing costs vary widely depending a variety of factors, including price and location. Overall, you can expect your closing costs to amount to between 3% and 6% of the sales price.
Your lender, real estate sales professional, and closing agent will be handling many pre-closing activities, but you still need to be aware of them and know who typically arranges and pays for each activity.