Today I will go over the 3rd and final part of the Road to Home Ownership series -from Contract to Closing.
As the name says it, we first need to have a Purchase & Sale Contract in place. All of the steps between a contract and the closing are dictated based on the terms of the actual contract.
Here how it generally happens:
Step 1 - Earnest Money
Earnest Money is the sum of money, usually about 1% of the Sales Price, that you pay at the time of making your offer as a promise to the seller to buy, assuming all conditions of the binding agreement are met, so they can take their home off the market.
If you make it to the closing table, the earnest money is credited back to you at closing. If the contract is terminated prior to closing and you came to mutual agreement in writing about the earnest money disbursal, the holder of it will disburse based on the Termination & Release Agreement.
In the event when you and the seller don’t come to an agreement, the Holder of the Earnest Money gives an opportunity to each party involved to give their explanation why they think they should be entitled to it, and after a thorough review, the Holder makes a decision, notifies all parties, and makes the disbursement.
You should deliver your Earnest Money check to whoever is named as the Holder of the Earnest Money on your contract and based on the terms and conditions of the contract. It could be the closing attorney, your broker, the seller’s broker, or even the seller. All parties should have agreed in writing.
Your agent will be able to guide you, so you don’t miss time deadlines. If you do miss the deadline, you’ll be in breach of the contract between you and the seller.
Step 2 - Due Diligence
Due Diligence is the time when you should inspect and investigate everything about the property you are purchasing.
During this time, you can choose to not buy the home for any reason. After this period is over, you will lose your earnest money if you don’t or can’t purchase, unless there are other contingencies into the agreement such involving financing, appraisal, etc.
The Due Diligence period is always negotiable but the common practice is about 10 days from the Binding Agreement date.
Keep in mind that all of the days in the Purchase & Sale Agreement are calendar days and the day ends at midnight.
What you could and should inspect during this period?
- Review the Seller’s Disclosures.
- Review The Community Association Disclosures (if any).
- Investigate if the property is located in a Flood Zone. Any covenants or easements? Is the property covered under a Termite Bond or do you need to have it covered later? How old is the roof?
- Inspect Your Home: General Inspection, Mold, Radon, Lead Paint, Termites, Pests, Structural, etc.
- Investigate: the school zone, if a school bus comes to the neighborhood, and the bus stop locations. It’s good practice to order a survey even if most lenders don’t require it, and make sure to make the contract contingent on it in the event there are some wrong discoveries that will make you back out, so you don’t lose your earnest money.
- Investigate the Neighborhood. It’s your duty to investigate the neighborhood. This is what the contract most brokers use in the State of Georgia is says about it:
After you do all of your homework, your agent will prepare an amendment in which you’ll address your concerns, if any.
This is the time you can renegotiate the terms of the contract, if needed. After the Due Diligence ends, if you decide to not go to closing based on any of the above, your Earnest Money is not protected anymore.
This is the time when you address all of your concerns about the property In Writing.
Keep in mind that it’s your responsibility to pay for all of the inspections out of your pocket, so budget about $450 for General Home Inspection, $200 for Mold, about $350 for Radon, $100 for Termites & Pest, and a Survey will be probably about $400-500.
I know it can add up, but it’s better spent the money upfront and do your homework instead of buying a few hundred thousand dollar home and discovering the problems afterwards.
Step 3 - Appraisal
Alright, you are moving on with the purchase!
The next step will be to see what the appraisal value will be. If you are going with financing, your bank will require you to have an appraisal done to justify the amount your lender is lending to you.
Usually the cost of the appraisal is collected prior to ordering it. If you can, have your lender wait to order it until the end of the Due Diligence period. This way, you’ll know that you are moving forward with buying the home. It might save you a couple of hundred dollars in the event you decide to terminate the contract during the due diligence period.
A good agent will make sure to negotiate a fair amount of time for an appraisal to be completed, so the contract is contingent upon it, and you won’t jeopardize your Earnest Money.
Based on your financing type, some appraisal reports might call for some repairs to be done.
If you have an appraisal contingency inside your contract and issues are found during the Due Diligence period, you can go back to the negotiating table and see how you can make it work for you and the seller.
Your agent is there to guide you and help.
Step 4 - Title Work
Another condition that must be met is for the seller to provide you with a Marketable Title. That means that a title examination will be performed to make sure that there are no liens against the property at the time of you purchasing.
Even the title company is making the best effort to examine a property, Title Insurance is a must. If you are financing the home,, the lender will obtain a Lenders’ Title Insurance Coverage to protect them in case something occurs in the future.
An Owner’s Title Insurance is not required to purchase in the State of Georgia at the time this blog post is written, but is STRONGLY RECOMMENDED. It’s paid once at the time of closing, and it protects you from losing your home in the future from unknown risks like cases of fraud. Please protect yourself and buy one at closing. Consult yours or the closing attorney and seek explanation and advice if you need to know more and/or justify your purchase.
Step 5 - Homeowners Insurance
Get at least 3 quotes for homeowners insurance. The lender will require you to have the quote of the insurance you’ve decided to go with as a part of the final loan approval.
Usually, the insurance company that you have your car insured with may give you additional discount, but get quotes from several companies before you decide on one.
Step 6 - Final Underwriting and Clear To Close
Once your lender has all of the above and other conditions from your personal portfolio satisfied, you’ll hear the words: “Clear to Close.” This means that your loan is fully approved and you are good to go.
Please refrain from: applying for new credit lines, buying furniture, buying a new car, changing jobs, depositing random checks to your bank account prior to closing, as this will change your loan to value ratios.
The lender is verifying credits, employment, etc. even at the day of closing.
First close and then go shop! Do it after you get your keys.
Step 7 - Schedule Movers
Schedule your movers ahead of time. Keep in mind sometimes they need 3-4 weeks in advance for you to be scheduled on the day of closing.
Have some kind of back-up plan (a storage unit or a friend's garage) in case your closing date needs to be delayed to a later date. Even if you do all of the steps I am talking about here, a lot of times it’s out of your control or your agent’s control, especially if you are obtaining financing, you are at their mercy.
Step 8 - Transfer Utilities
Make sure your agent and the seller’s agent are on the same page about when the utilities are disconnected/connected. You don’t want to move into a home only to find out that there is no power and water.
Most home buyers move on the weekend and there is no one to call on the weekend, you would need to wait till Monday. Plan ahead!
Step 9 - Close on Your Home
You're almost there!
Once you hear the words "Clear to Close" in Step 6, the closing attorney will prepare the final closing disclosure. The Closing Disclosure will be a break down all the fees, credits, the purchase price, etc. Everything will be spelled out and disclosed. There is a line at the bottom of the disclosure where you will see "Buyer Funds to Bring to Closing". This is the Final Amount you need to wire to the closing attorney's office ideally one day before closing.
This amount includes your down payment, your part of the closing costs, prepaid items, your earnest money should be already credited here, any credits that the seller is giving you for prorated items such as property taxes, homeowners association dues etc. Everything must be listed there.
Step 10 - Get Your Keys
Once you sign all of the documents and about 1 hour of signing, the closing attorney will send the signed paperwork for final approval and get the loan funded.
90% of the time the loan gets funded during the time you are sitting at the closing table chatting with the seller and eating candy (if you have an awesome closing attorney like mine!)
Once funded, the house is all yours. The seller will give you all the keys and remotes...and...
Congratulations!!!! You are now a Homeowner!
Welcome to home ownership!
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