Closing on a House: Step by Step Guide and Checklist
Have you wondered what happens after your offer is accepted?
In this article, I’ll go over everything that needs to be done from the time the contract is ratified, i.e. signed by both parties, and the time you sit at the closing table. Here is a checklist you can download. (Below is our video if you prefer to watch rather than read)
What happens from offer to close is related to what type of contingencies are included in the offer. I will list the most common ones.
But first, let me explain what is a contingency.
If a contract is an agreement between two parties then the contingencies can be called conditions to this agreement.
Here are some typical contingencies:
- Financing – This contingency is usually in every standard contract. It allows the buyers to back out of the contract and get their deposit back if they are not approved for a loan. It’s a good idea to specify what kind of a loan and at what interest rate.
- Home inspection – If the buyers are not happy with the inspection report or the repairs are above the repair limits mentioned in the contract, they can walk away from the sale.
- Appraisal – This is also a standard contingency. Unless this is a cash sale and even if it is not, the buyer can cancel the contract if the home doesn’t appraise.
- Sale of the home of the buyer – More popular in buyers’ market, this condition allows the buyer to cancel the sale if they can’t sell their current home. Note that this works with private sellers only, few banks will agree to this contingency.
- Repairs – If after the home inspection some repairs are needed, a contingency could be in the contract to make sure these repairs are completed before closing.
- Short sale contingency – Virtually unknown until 2008, this contingency was used very heavily during the last market crash. It makes the contract contingent upon the lender approving the sale.
The above contingencies are common but any condition can be a contingency – from removing the dead cat in the yard to getting spouse or attorney approval.
Contingencies either have to be removed in writing for the closing to occur or they have to be self -executing, in other words, contain language that removed the contingency automatically.
While contingencies are great protection, including too many especially when multiple offer situations exist can hurt the chances of your offer being accepted.
What happens after the contract is signed?
The seller or the buyer selects the title company and orders the title.
The contract should mention who picks the settlement company.
To order, email a copy of the contract and contact information for all parties involved to the title company.
Note that some states require real estate lawyers to be involved.
In the real estate contract, there is a timeframe for the buyers to apply for a mortgage. This process should be started as soon as possible to avoid any delays and the possibility to have to ask for extensions. If you are the buyer have your lender ready and apply immediately after the contract is signed.
This contingency is usually a part of every real estate contact. Here are the things you should know as a buyer or a buyer’s agent.
- What is the deadline to perform an inspection?
- What is the deadline to report any defects to the warranted items?
- What are warranted items? They are usually listed in the contract. These are the items the seller says are in working condition.
- Does the contract include self-executing clauses? Here is an example ” Unless buyer timely reports such defects, the buyer shall be deemed to have waved seller warranties as to defects reported”
- If the Self-executing clause is not included, the contingencies should be removed in writing, which can be done by addendum or changing the contract provision, initiating it, and writing “condition accepted as satisfactory”
What if defects of the warranted items are found?
Within the timeframe specified in the contract send the listing agent or the seller if unrepresented, a list of all defects found and the inspection report addressing these items.
If your contract is “AS-IS” you can walk away from the sale or renegotiate the price, ask the seller to pay at closing for the repairs or to fix the items before closing. You can have an addendum signed by all parties, forward it to the title company so that they know what to include in the HUD statement.
WDO, Mold, Radon, Septic Inspections – These inspections are optional in most states but they may be required in some.
WDO or “termite inspection” as is commonly called is customary or required by law only in some states. Lenders, including FHA and VA, do not automatically require WDO. However, if the appraiser sees evidently of termites then the inspection may be required.
The appraisal is ordered by the lender and if you are not using financing, an appraisal is not required. If the property doesn’t appraise at the contract price then this contingency gives you an option to walk away from the contract.
The title company orders the survey when instructed by the lender.
Next, the Buyer should pick and pay for Hazard Insurance, also called Home Insurance. If the seller is contributing towards the buyer closing costs and pre-paids then the seller will pay for it at closing.
The walkthrough is the final inspection of the property. It’s usually done on the day of closing. the reason for the final walkthrough is to check if:
- The house is in the same condition as when the buyer agreed to buy it
- The inspection items have been taken care of.
What Happens on a Settlement Day?
Closing or settlement can happen either in person or by mail. The title companies call this a “mail away” closing. The settlement company mails all the documents to the buyer and the seller and they get them signed in the presence of a Notary.
You can choose to do mail away closing either if you are out of town or if you are busy. It takes a lot less time than in-person closing, which can last a couple of hours.
Keep in mind that the Notary will not be able to answer any of your questions at closing so if you want an explanation of what you are signing, it’s best to do it in person.
When the closing takes place at the title company or the real estate lawyer’s office, both parties and their agents are usually present to sign the settlement statement which is also known as ALTA, used to be known as HUD-1.
If the buyer is using financing, they should have been given a Closing Disclosure by the lender, 3 days before closing as required by law
The Closing Disclosure breaks down all the fees and costs and the buyer’s total expenses.
ALTA settlement statement itemizes the charges and credit for the seller and the buyer. It includes the sale price, loan amounts, prorated taxes, HOA fees, and other pertinent information.
There are four different types of ALTA statements:
- ALTA Settlement Statement Combined – shows the settlement fees and changes for both the seller and the buyer.
- ALTA Settlement Statement Cash – used for cash transactions.
- Settlement Statement – shows the buyer side only.
- Seller’s Closing Statement – show all changes and credits as they pertain to what the seller will make.
The ALTA statement that’s most commonly used is the ALTA Settlement Statement Combined. It shows credit and debit for both the buyer and the seller. If you want to learn more, watch my video on this topic.
Q&A on Closing on a House
What is title insurance and why it’s necessary?
Title insurance protects against defects of the title and errors in surveys and public records, existing liens against the property, encroachment issues, title fraud, and error. Title insurance is necessary to protect against losses that might occur if there is a defect in the title.
Do I have to purchase title insurance?
No, but if you are financing the property your lender will require lender’s insurance to protect their collateral.
If the seller is paying for owner title insurance, why do I have to pay a lender’s title insurance?
The owner’s title insurance and the lender’s title insurance have different coverage. The owner’s title insurance protects the owner’s interest and the coverage is usually the amount paid to purchase the property.
The lender’s title insurance protects the lender’s interest and it’s issued in the amount equal to the loan amount.
Do I need a lawyer if I am using a title company?
In some states, it’s a requirement in others it’s not. If you don’t understand what you are signing consult a lawyer. Title companies facilitate the transaction, they don’t represent anyone.
I am a new real estate agent. What is my responsibility in the closing process?
You can review the HUD statement and make sure it accurately reflects the agreement between all parties, schedule the final walkthrough, and give the keys to the buyer.
Should the listing agent be present at the inspection?
The inspection is for the buyer’s benefit. The only people present should be the inspector, the buyer, and the buyer’s agent.
Who should schedule the inspection and pick the home inspection company?
If you are the buyer, chose your own inspection company. There are a lot of bad ones out there. Don’t choose the cheapest one. Your buyer’s agent can schedule the inspection with the seller or listing agent.
Is home inspection necessary for new homes?
Because most large builders have several inspections during the building and they offer a warranty, many buyers chose not to have an inspection performed on a new home. However, if you are dealing with a very small builder it may be a good idea.
Can closing on a house be done electronically?
Yes, the title companies refer to the as mail away closing. In today’s environment, it’s probably the best way to close on a house.
Can you delay closing on a house?
Yes, you can if the contract is still valid. If the contract expires on the closing date then all parties have to agree to extend it.