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 (and often stressful) day arrives, a long list of things have to happen. This article will explain what you can expect during the closing process from the moment your offer is accepted to the moment you get the keys to your new home. (To learn about the things that can go wrong during the process, read 10 Hurdles to Closing on a New Home.)
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. (If you haven't submitted your purchase agreement yet, be sure to read 10 Tips for Getting a Fair Price on a Home.)
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. (For more, see 10 Hurdles To Closing On A New Home.)
3. Find an Attorney
This is an optional step if you want to get a professional legal opinion on your closing documents. Even most well-educated people can't completely understand their closing documents; an experienced real estate attorney will not only understand them, but also know where to look for potential problems in your paperwork. (To learn more, read The Benefits Of Using A Real Estate Attorney.)
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. (Learn more in Watch Out For "Junk" Mortgage Fees.)
5. Complete the Home Inspection
A home inspection is not required, but you'd be stupid not to have one performed. 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). (For more on this subject, read Do You Need a Home Inspection?)
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. (For more on the art of negotiation, see Getting What You Want.)
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. If you have a good lender, it will watch interest rates closely for you and tell you when rates are at a low point so you can lock then. 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. (For more, check out How Will Your Mortgage Rate?)
9. Remove Contingencies
If your real estate agent helped you draw up a good purchase offer, your offer should be contingent upon 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. Funding Escrow
You most likely deposited 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).
11. Final Walkthrough
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. (Before you've moved in, make sure to read 7 Smart Steps Every New Homeowner Should Take.)
12. 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%.
It may seem like the closing process is a lot of work, but perhaps the worst part is the waiting. Most of the time, you'll just be sitting on your hands, waiting for someone else involved in the transaction to come through. So find something enjoyable to occupy your time and distract you while you wait, and feel secure in the knowledge that you've done your research and know how to make your closing process go smoothly.