By Shobhit Seth
Closing a property deal can be a long and stressful exercise that involves lots of steps and procedural formalities. Closing 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 provides important guidelines for a property buyer that must be followed during the closing process from the moment your offer is accepted to the moment you get the keys to your new home.
1. Open Escrow Account
Escrow is an account held by a third party on behalf of the two principal parties involved in a transaction. Since home sale involves multiple steps which takes the time that can span weeks, the best way to mitigate the risk of either the seller or the buyer 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. Once all procedural formalities are over, the money and documents are moved from the custody of the escrow account to the seller and buyer, thereby guaranteeing a secure transaction.
2. Title Search and 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 collecting agency which wasn’t paid its dues. 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, are on the property. If there are any claims, those 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 and protects both real estate owners and lenders against loss or damage occurring from liens, encumbrances, or defects in the title or actual ownership of a property.
3. Hire an Attorney
While getting legal aid is optional, it is always better to get a professional legal opinion on your closing documents. The complex jargon often mentioned in the property documents is difficult to understand even for the well-educated individuals. For an appropriate fee, opinion from an experienced real estate attorney can offer multiple benefits, including hints of any potential problems in the paperwork. In some states, an attorney’s involvement may eventually be required by law to handle the closing.
4. Mortgage Pre-Approval
While getting pre-approved for a mortgage is not necessary to close a deal, it can help you close the deal quicker. In turn, being pre-approved can give you more bargaining power when negotiating as it signals to the seller that you have strong financial backing. Getting pre-approved for a mortgage also allows you to know the limit up to which you can go for purchasing a property. It helps in saving time and effort while searching for the properties that fit into your budget.
5. Lock Your Interest Rate
Interest rates, including those offered on the mortgage, can be volatile and subject to change. A 0.25 percent rise in interest rate can significantly increase your repayment amount, repayment tenure or both. It is advisable to lock the interest rate for the loan in advance, instead of being at the mercy of the market fluctuations which can be a big risk if the rates rise before you finalize your property purchase.
Pre-approved mortgage offers the facility to offer you a rate lock, which means that you can secure a favorable interest rate for the loan. Though chargeable rates are subject to multiple factors, like applicant’s credit score, geographic region, property and the type of loan applied for, attempts to lock in at favorable rates can be beneficial.
6. Negotiate Procedural Costs
Right from an escrow account to real estate attorney, all involved services and entities cost money and can snowball into a big amount. Many such services take advantage of consumers’ ignorance by charging high fees. Junk fees, a series of charges that a lender imposes at the closing of a mortgage and is often unexpected by the borrower and not clearly explained by the lender, are a big cost.
Junk fees include items like administrative fees, application review fees, appraisal review fees, ancillary fees, processing fees and settlement fees. Even fees for legitimate closing services can be inflated. If you’re willing to speak up and stand your ground, you can usually get junk fees and other charges eliminated or at least reduced.
7. Complete the Home Inspection
A home inspection, a physical examination of the condition of a real estate property, is a necessary step to not only know about any problems with the property but also get a look and feel of the 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 or pay for you to have it fixed (as long as your purchase offer included a home-inspection contingency).
8. 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, like termites or carpenter ants. The pest problem can be devastating for properties made primarily of wooden material, and many mortgage companies mandate that even minor pest issues be fixed before you can close the deal.
Even a small infestation can spread and become very destructive and expensive to fix. Wood-destroying pests can be eliminated, but you’ll want to make sure the issue 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. Pest inspections are legally required in some states and optional in others.
9. Renegotiate the Offer
Even when 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. Though you may not have much scope to demand repairs or a price reduction in case 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 it.
10. Remove Contingencies
If your real estate agent helped you draw up a good purchase offer, it should be contingent on several things which include:
- 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
As a part of active approval, such contingencies must be removed in writing by certain dates which should also have been stated in your purchase offer. However, in some purchase agreements, contingencies are passively approved (also known as constructive approval), if you don’t protest them by their specified deadlines. It, therefore, becomes important for buyers to understand the approval process and abide by taking necessary actions by the mentioned dates.
11. Timed Funding Requirements
You most likely deposited earnest money when you signed the purchase agreement, which is a deposit made to a seller indicating the buyer’s good faith, seriousness and genuine interest in the property transaction. If the buyer backs out, the earnest money goes to the seller as compensation. 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. Since the original earnest money deposit is generally applied towards the down payment, it is important to arrange for the various payments required at different times, before the deal is closed. Failure to offer the required money in time can lead to the risk of the deal getting canceled, earnest money going to the seller, and you still being charged for the various services you availed.
12. 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 since your last home inspection, required fixes have been applied by the seller, no new problems are found, and nothing has been removed that is included in the purchase.
13. Understand the Papers
Paperwork forms the most critical steps of closing a property deal. Despite there being a stack of papers filled with complex legal terms and jargon, it is highly recommended to read it yourself. In case you don’t understand certain terms or portions, one can look them up for explanation on the Internet or consult a real estate attorney. Your agent will also be helpful in making sense of this complex legal language.
Although you may feel pressured by the people who are waiting for you to sign your papers—like the notary or the mortgage lender—read each page carefully as 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 all other agreed terms, like no prepayment penalty, is clearly mentioned. 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 may appear off.
The Bottom Line
Owing to the high costs, property purchase often remains once-in-a-lifetime activity for many individuals. It may seem like the closing process is a lot of complex work, it is worth the time and effort to get things right instead of hurrying up and signing a deal that you don’t understand.
Be wary of the pressure created to close the deal fast by the involved agents and entities who are there to help you for their cut, but may not be really responsible for the problems you may face in the long run from a bad deal.