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Buying your first home is a huge accomplishment that should be celebrated; however, the process can be stressful, especially for first-time homebuyers who are unfamiliar with the real estate closing process. Although the closing process is slightly different for each deal (and may vary significantly in certain instances), first-time homebuyers can prepare for a smooth transaction by understanding the customary requirements to close on the purchase of a new home that are shared below.
Purchase Contract. When the buyer and seller agree to the terms of the transaction, these terms are memorialized in a purchase contract. At a minimum, this contract clearly identifies the subject property, lists the purchase price and anticipated closing date, and any contingencies. These contingencies may include the homebuyer’s ability to obtain reasonable financing or the home being subject to a satisfactory home inspection. Additionally, for the contract to be effective, the homebuyer is generally required to make a payment that is deposited into an escrow account. This payment is generally referred to as “earnest money” and will apply against the purchase price due at closing or will be otherwise released in accordance with the terms of the contract.
Title Search. Once the contract is in place, a title attorney will conduct a title search on the property and ultimately prepare the deed that transfers ownership from the seller to the buyer. If the buyer is financing the purchase by securing a mortgage loan, the title attorney will work closely with the lender and the title insurance company to ensure that the chain of title is satisfactory to pass ownership to the buyer and that all parties have been provided with adequate assurance of such fact (such as a title opinion).
Home Inspection. Although not legally required, most homebuyers (and nearly all mortgage lenders) will require that a home inspection be performed on the property. The home inspection will reveal the physical conditions of the property that may not be readily seen or understood by the average homebuyer. The homebuyer and/or lender may also require the performance of other inspections as well, such as a pest inspection or radon inspection. As mentioned above, many contracts will include contingencies that the home inspection meets the satisfaction of the homebuyer; in these transactions, if the home inspection produces unsatisfactory results, the homebuyer may terminate the contract. Oftentimes, the buyer and the seller renegotiate the terms of the contract as a result of the home inspection. For example, the seller may agree to make certain repairs prior to closing or to reduce the purchase price by a reasonable estimate for such repairs. Any such re-negotiated terms will be memorialized in writing.
Appraisal. If the homebuyer is obtaining a mortgage loan, the lender will order the performance of an appraisal on the property. Typically, the purchased property serves as collateral to the lender that secures the mortgage loan, and the appraisal is intended to confirm to the lender that the amount of the mortgage loan is aligned with the fair market value of the home. If the home appraises for less than the contract purchase price, the lender is unlikely to approve the loan or will only approve an amount consistent with the appraisal. In these instances, the homebuyer will be required to finance a portion of the purchase with a different source of cash or, if the buyer had appropriate contingencies listed in the contract, may be able to terminate the contract.
Final Pre-Closing Steps. Assuming the above steps have yielded satisfactory results, in the final days before closing, the closing documents will be finalized for signing. The closing documents will include the deed, finance documents from the mortgage lender (if applicable), and a financial disclosure statement setting forth an itemized list of all monetary adjustments to the agreed-upon purchase price. Additionally, the homebuyers will do a final walk-through of the home to ensure that the home is in satisfactory condition and all required repairs are complete.
Closing Day. On the date of closing, the parties sign the required transaction documents, the purchase price is provided to the seller and the keys to the home are provided to the buyer. Then, the transaction is complete, and the first-time homebuyers are now first-time homeowners!
By understanding the steps set forth above, first-time homebuyers can begin the purchase process with realistic expectations. They can also ensure a smooth transaction by enlisting the services of experienced professionals – real estate agents, closing attorneys, and mortgage lenders are accustomed to working together and go to great lengths to eliminate any stress of the transaction from both the buyer and the seller!
The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information, content, and materials are for general informational purposes only.
