So you have gone through the home buying process and your offer has been accepted on a house! Now the closing process begins. It typically lasts about 30 days but can be more or less.
Before the closing process starts, an offer needs to be accepted. This happens after a seller has accepted, signed, and returned an offer to purchase, aka a purchase agreement. Your purchase agreement probably had a few different contingencies in it. These contingencies can either be something you decided on, or they are required by your lender. The contingencies give you as the buyer the opportunity to back out of a deal. Each one represents a different milestone in the closing process.
Underwriting
Underwriting is a procedure that happens in the background during the closing process. During this time, the lender is checking, double-checking, and even triple-checking to make sure you are truly qualified to pay this loan. They want to be as sure as they can be that you will repay them for the money they are lending you.
They will be calling your place of employment to verify that you are in good standing. Your tax reports will all be pulled and they will check to make sure you have been paying your taxes. You may need to provide more documents to your lender and answer more questions as they come up.
Turn in Earnest Money
Immediately following the offer acceptance you, as the buyer, will need to send in your earnest money. In some cases, the earnest money is a percentage of the purchase price. The earnest money is deposited into an escrow account held by the real estate agent or the title company. The earnest money will be applied to the downpayment and closing costs on the day of the actual closing.
Earnest money is basically a deposit that shows the seller good faith that you will go through with this transaction. If the deal falls through for no fault of your own, the earnest money is then returned back to you in full. If you, however, back out of the deal, the seller gets to keep the earnest money. Each state handles earnest money differently, so be sure to talk to your real estate agent and title company to gain a better understanding!
Property Disclosure
Early on in the closing process, you will receive a property disclosure from the seller. The property disclosure is to inform the buyer of certain conditions and information concerning the property that is actually known by the seller. The seller may or may not have lived at the property, but either way, they need to disclose all the known conditions.
This includes things like previous or current leaks in the house, issues with any appliances, when the roof was replaced last, and even things like boundary line disputes. It is important to remember that this disclosure does not guarantee that nothing else is wrong with the property.
Fun Fact: If you are buying a property that was used as a rental property, the seller may not know the condition of the property well. Especially compared to someone who may have lived in a house for 30 years.
Inspection
In most contracts to purchase there is an inspection contingency. This gives the buyer the right to have the home inspected before purchase. As the buyer, you will want to make sure you aren’t about to buy a money-pit. So you will schedule an inspector to go check the property for structural problems or any other issues. They will put together a very long detailed report with photos and notes on everything they found. You will then have to decide what to do if they find damages to the house that you are not willing to deal with (or pay for!).
After the inspection is done, you will want to look over the report. You will have 3 options from that point.
- Accept the property as it is
- Renegotiate
- Back out of the deal
If you choose to renegotiate, you can ask the seller to fix any of the problems you are not comfortable with or ask for a credit for the work.
In the case that you are not comfortable with the condition of the property, you can back out as well.
Inspections range in price, but you will typically pay between $300 to $600.
Fun Fact: A lot of inspectors offer a range of inspection packages. With your general home inspection, you can add on things like termite inspections, radon inspections, mold samplings, sewer scopes, and more.
For more information on renegotiating the terms of the deal check out this article.
Appraisal
Later on, in the closing process, you will have an appraisal done on the property. The appraisal is very similar to the inspection, but instead of looking for problems in the house, the appraiser will go around and asses the actual value of the home.
They will walk around and take pictures of the rooms and the exterior. The appraiser will take into consideration the current condition of the home and the features that give it value.
After walking the property and taking notes, they will pull comparables on recently sold properties, and properties that are currently for sale in the area. The comparables will be properties that are similar in style, size, and features.
Then they will go through and compare each of those homes to the house you have under contract. Based off of that information, they will come up with an appraised value of the home. This will come in a big report that they write up for you.
The appraised value is important.
If the appraisal comes in under you offer price, your lender may not fund the deal. But that is the worst-case scenario! In the Denver market, I would say that I typically see properties appraise for the offer price. This is common, and not necessarily a good or bad thing. Though the best-case scenario, the appraisal comes in over your offer price. This means you are buying a house with some equity!
Addendums
Throughout the closing process, it is common to receive a few addendums to amend something on the purchase agreement. This could be simply to correct the spelling of someone’s name. However, an addendum can also amend the closing date or even the date for one of the contingencies.
For example, if you have a difficult time scheduling the inspection to happen because every inspector is busy, you may need to push back the inspection contingency. Or, if the property you are under contract for is occupied with tenants, getting the appraisal scheduled with them may be difficult. If they aren’t cooperative you may have to push back the closing date! (Which, by the way, are both situations that happened to us in our most recent closing.)
So don’t be surprised if your real estate agent throws an addendum your way!
Closing Disclosure
Just before you actually close on the house, you will be sent a closing disclosure. This will have all the information on the money you need to bring to the closing. The disclosure will break down all the costs associated with the closing. I would recommend that you read through all of it and make sure that all the numbers look right! Don’t be afraid to ask questions on it. It is important that you look through all of the document because you are basically signing it to say that everything is correct.
Final Walk-Through
Typically, a day or so before you close on the property, you and your agent will go through and do a final walk-through of the property. This walk-through is important if you asked for the seller to repair any maintenance issues that were found during the inspection and agreed upon in the post-inspection addendum.
Take a close look at the property to make sure nothing has changed since the last time you viewed it. When we purchased our recent rental property a tornado came through town only a week before we closed on it! Our agent went by a few days before we closed to verify that there was no damage to the property.
Closing Day!
Now the last step in the closing process is actually CLOSING! You should have been given a date for the closing, all you need is to verify the time and place.
On closing day, you will need to bring two things:
Your ID and the closing costs.
The closing cost is the actual money you will need to bring with you. The amount was given to you in the closing disclosure. Closing costs need to be given in a cashiers check or money order so be sure to do that before-hand.
On the day of your closing, you will be signing tons of papers. It may feel like a never-ending stack of papers to sign, but you will get through it!
At the end of the closing, you will officially own the property!
