You’ve found the right home, you’ve made an offer that the seller accepted, and now you’re heading into closing with your head held high—you’re about to be a homeowner! But before you start choosing paint swatches and purchasing furniture, you’ll have to successfully make it through the closing process first.
The closing process occurs at the end of a real estate transaction when the ownership of a home is transferred from seller to buyer. On closing day, buyers and sellers sign a bunch of paperwork signifying the transfer of ownership, but closing requires more than just signing on the dotted line.
As a buyer, there are many things that you have to coordinate before you can successfully close on a home. Let’s go over the responsibilities and the common pitfalls of closing—and what you can do to prevent any hiccups in the process.
What Are the Steps in the Closing Process?
The average time it takes from contract to close is about 30-50 days. Although the steps in the closing process will vary slightly depending on what part of the country you’re in, you can expect the following to occur:
- You will have a fully executed contract. Before you can close, you will need to have a purchase and sale contract that’s agreed upon by both the buyer and seller. Often, your real estate agent will deliver you the final contract to review. Once both parties are satisfied with the agreement, and have signed it, the closing process can commence.
- You will open an Escrow account. Escrow is a neutral third-party account that works on behalf of both the buyer and seller in a real estate transaction. Having this account open will ensure that the buyer and seller are protected financially in the transaction.
- Earnest money from the buyers is sent to Escrow. An earnest money deposit is a “good faith” deposit. It is essentially showing the seller that the buyer is serious about the sale and that they should move forward. The amount of the earnest money deposit usually is a percentage of the home sale price and may also depend on the market you’re in.
- You will schedule and complete a home inspection. Before you buy, you need to know what’s lurking beneath the pretty walls or under the sink (if anything). As soon as you’re in Escrow, you’ll need to order an inspection from a licensed home inspector. They can tell if there are any major problems with the foundation, plumbing, electrical wiring, etc. If there are any red flags that pop up on the inspection (there are usually a few things), then the buyer can negotiate to ask the seller to fix any items. If there are major problems with the home (i.e. the structural integrity of the home, electricity, or plumbing), then the buyer can ask for inspection credits, repairs, or they can feel free to walk away from the transaction. Depending on the language of your contract, you may or may not be able to get your earnest money back.
- Your lender will schedule an appraisal. Your lender will need to know the true value of the home before they lend out the money for it. They will hire an appraiser to walk through the home and give an estimate of its value.
- You will have a final walkthrough. Before you can sign on the dotted line, you’ll need to know if everything in the home is still as you saw it during your initial showing. The final walkthrough allows you to verify that’s the case.
- You will sign the closing paperwork. On the day of closing, you’ll sign the paperwork, which will likely include the loan estimate, the settlement statement, the closing disclosure, the promissory note, the deed of trust, and initial escrow disclosure. You’ll also need to actually transfer the money officially so that the deal can go through. Depending on where you live, you will need to wire the money for the down payment and closing costs to the title company or bring a certified check for the total to the closing (this final number should be provided to you by your lender). You will also need to be sure to bring official identification so that the signed documents can be notarized.
What Can Go Wrong? And How Do You Prevent Mistakes?
During a real estate transaction, you never can tell what might happen. Although sales generally happen without much incident, there are some common mistakes that buyers can make which might prevent the sale from going through.
The main responsibility a buyer has throughout the closing process is to ensure that their finances and their job remain stable. You don’t want anything to rock the boat during this period.
“The worst thing a buyer could do is go out and buy a new car or open a credit card. It immediately drops their FICO score,” says JoAnn Dickinson, a realtor in Lake Arrowhead, Calif. “That’s probably the biggest deal killer because of the drop in their FICO score. Their debt to income ratio will change and they could be just barely qualifying. One move of purchasing anything could destroy their credit to be able to close with.”
Another thing that can sink the deal? A buyer who is slow to act, particularly on the inspection. When going through the closing process, you should be proactive and answer all of your phone calls and emails from your agent, your lender, and your inspector.
“The main thing is that you don’t want to hold up the home inspection,” says Dickinson. “If they’re dragging their feet with the home inspection it puts everything behind.”
On the other side of the aisle, sellers who go into a transaction with the mindset that they won’t provide any repairs can also slow things down. In some cases, this position can lead to an impasse in negotiations. At the same time, buyers should refrain from creating an unreasonable laundry list of items for the sellers to fix after the inspection.
“I tell my buyers to ask for the safety issues. The water heater has to be strapped and the heating unit has to be operative, otherwise the lender won’t loan. You really can’t have any safety issues, trip factors, or fire factors,” says Dickinson.
Above all, communication is key to ensuring a successful closing. If you have a motivated buyer and a motivated seller, the transaction should be more or less seamless if each person is holding up their end of the bargain.
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