If you've never bought a home before, it would be easy to assume that the closing process is just a formality. Once your offer is accepted, what's left except to shake hands with the seller and take possession of the keys? It turns out that there are still quite a few steps to take.
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If you have bought a home before, you know that the closing process isn't quite that simple and that lots of processes are often happening at the same time in order to close the deal. Having your offer accepted is just the beginning of a complicated and sometimes frustrating journey, usually — but not always — leading to a home sale. Plenty of things can go wrong along the way during the closing process, so it's important to have a road map before you get started.
1. Open an Escrow Account
When buying a house, you typically have to put down earnest money, which is usually between 1 and 3 percent of the asking price. Earnest money, also known as a good faith deposit, shows the seller that you're a serious buyer.
The earnest money is then placed in an escrow account, opened by either the buyer's real estate agent or the seller's agent. The escrow account is managed by a separate third-party company until the closing process is finalized to ensure that the transaction is secure. Don't worry — the earnest money counts toward the final down payment, so you won't lose it unless you choose to voluntarily walk away from the sale without good reason (such as a bad inspection or a low appraisal).
The earnest money is paid within three days of the buyer and seller signing a purchase contract, and the buyer can pay the amount via a cashiers' check or a wire transfer.
2. Hire a Title Company
One of the key steps in the closing process is conducting a title search on the property, which will essentially prove that the seller does indeed have the right to sell the property. A title search is conducted right after the seller has accepted a buyer's offer and takes anywhere from a few hours (on a brand-new home) to a few weeks (on an older home with a complex history). The title search usually costs between $75 and $200.
During the title search process, the title company will investigate the home's title and ensure that there are no possible issues, such as other possible owners (like an heir that was supposed to take ownership), contracting debts or child-support liens.
Although title issues are rare, it's still necessary to check for them and get them cleared up so the deal doesn't fall through. Depending on the scenario, the seller can either pay off any debts to clear the title, the buyer and seller can negotiate on a deal or the buyer can walk away from the deal.
3. Schedule a Home Inspection
The inspection is one of the most important parts of the closing process. An inspection is one of a few contingencies of a real estate contract, and it gives the buyer the right to get the home thoroughly looked over by a professional within an allotted amount of time after signing the contract (typically it's five to seven days).
During the inspection, a professional home inspector will visit the home for a period of a few hours and investigate all the exterior and interior details, including the appliances, plumbing, electrical system and heating and cooling systems. The inspection usually costs between $200 and $600. The inspector will mark any red flags, which is information that you can then use to either call off the sale or negotiate with the seller for repairs.
For example, if the inspector discovers termites in the house, you can withdraw the offer, ask the seller to pay for termite removal or request payment for that service at closing. The inspection is one of the last opportunities to negotiate with the seller, so it's crucial to find an experienced home inspector and preferably one affiliated with professional organizations, like the American Society of Home Inspectors. After you move in, if you discover that the house has termites, it's now your problem and not the seller's.
4. Schedule an Appraisal
In addition to a home inspection, you'll also need to schedule a home appraisal during the closing process. Like a home inspection, a professional will be looking at the interior and exterior condition of the home, but the goal is much different. Instead of helping the buyer determine what needs to be fixed, a licensed appraiser is hired to walk through the home and give an opinion on how much the home is worth.
The appraisal will not only be based on the current condition of the home but also the comparable sales (often referred to as "comps") in the area, which are recently sold homes that have a similar square footage and features within the house. The whole idea of an appraisal is so the mortgage lender can ensure that the amount of money being loaned for the home isn't more than the property's value so that it can recoup its costs in case the borrower defaults.
An appraisal should only take a few hours at most to complete and should be completed within about a week after the inspector has looked over the home. Professional appraisals should cost around $300 to $400 depending on the area.
Though appraisals will typically be right on target of the purchase agreement or even over (lucky you!), occasionally they will come in lower. When that happens, the buyer can either make up the difference between the appraised amount and the purchase agreement in cash, appeal the appraisal or walk away from the deal.
5. Buy Homeowners' Insurance
Before the closing date arrives, you'll have to purchase a homeowners' insurance policy. This is a requirement if you're financing the home purchase but is still a good idea even if you're buying the house with cash. You can use the same company that you use for your car insurance — and many homeowners save money by bundling both premiums together — but you can also choose another company.
When shopping for homeowners' insurance, make sure to compare the same level of coverage so you get an accurate comparison. The cost of homeowners' insurance varies depending on the company and how much coverage you want. Some buyers choose to insure the home for the sale price, while others choose to buy more coverage. The cost to rebuild or repair a house is often more than the purchase price, so it may be wise to buy extra coverage.
Your lender will likely let you know when exactly during the closing process you'll need to procure homeowners' insurance and what minimum requirements the policy should meet.
6. Attend the Final Walk-Through
The final walk-through is usually held a day or two before closing day and ensures that the sellers have moved out and left the home in acceptable condition. Depending on what popped up during the inspection (and what repairs the homebuyer negotiated), the seller may be required to complete some repairs before closing, like repairing the vent stack on the chimney or fixing a rickety basement step.
The final walk-through is your chance to verify that these repairs have been completed and that the home is in the condition that it was when you agreed to purchase it (i.e., it hasn't been vandalized or a pipe hasn't burst). If the seller hasn't fixed the requested items or something else is awry, you should contact the seller and figure out a solution. These problems may delay the closing.
7. Pay the Down Payment and Closing Costs
You'll have to pay the rest of the down payment and closing costs on the actual closing day. Make sure to finalize the total amount with the lender but do the math yourself to verify that everything has been counted correctly. If you have any questions about the various and inevitable fees, ask your real estate agent for clarification.
To pay your down payment and closing costs, the lender may let you bring a cashier's check or certified check to the closing. You can get this from your bank. Some lenders, however, require the down payment to be sent via wire transfer. Verify the wire transfer instructions directly with the lender before submitting it. There are instances where the lender has been hacked, and emails with false wire transfer instructions go out to customers. Once you send money with a wire transfer, it's almost impossible to get it back.
Should you not have the funds ready at closing for whatever reason, this can delay closing, so be sure to have everything ready to go a day or two before.