Learn the ins and outs of the home closing process so that you can benefit if you are a first-time homebuyer or seller…
Caution: 20 minute read. This discussion is not to be taken as legal advice as publisher is not a licensed attorney.
In the current economy, with rising interest rates and a less-than-ideal home buying market, many want to know more about home buying and the best approach to take when they ultimately decide to purchase or sell their home.
In this discussion TheWealthIncreaser.com will go over key points in the home buying process from “contract to closing” so that you as a buyer or seller are aware of potential pitfalls prior to your home purchase (or sale) so that you can mitigate or avoid them altogether where possible.
It is important that you know that a lot can happen from contract to closing–and it is not always positive.
Key Contract to Closing Concerns:
Due Diligence
The due diligence period is the time that is outlined in the contract to do an inspection on the property and ensure that you want to continue with the purchase. If done in a timely manner and you decide not to purchase, you will generally be entitled to the earnest money that you submitted with the offer contract.
If you decide to proceed with the purchase, “after” the due diligence period the closing attorney will coordinate with a title examiner who will go to the courthouse and verify ownership of the property (in Georgia they usually go back 50 years). If there are defects or a cloud on the title the attorney will attempt to remedy these issues prior to closing.
Some mortgage liens that show up can be released by operation of law. Other liens can be negotiated with the attorneys and the parties that are owed where they come to agreement on the terms and amount of the lien settlement or satisfaction of lien prior to closing. In rare instances, an attorney may have to pursue “quiet title action” or address “adverse possession” claims by squatters that could take months or longer to clear up in many instances.
Parties to Contract
The parties to the contract are you the purchaser, the seller. selling agent (and their brokerage) and listing agent (and their brokerage), lender and closing attorney generally speaking.
In the closing cost calculations all of the parties will be compensated for their services or receive proceeds from the sale of the property they own. The attorney, lender, sales agents, listing agents and their brokerages will all be compensated as a result of a successful closing.
You, if you were the purchaser (grantee), would receive a warranty deed from the seller (grantor) showing your interest in the property. If you paid all cash that could be recorded and if you received a loan the promissory note or mortgage lien would be recorded in addition to the warranty deed.
Coordination with Lenders
You, the attorney, your buyer’s agent and others will all coordinate with the lender to ensure that the loan closes within the time frame outlined in the contract. You want to ensure as a buyer that you get the loan commitment as early as possible as there is usually a time limit period where you can back out of the contract if the financing contingency is not met within the stated time period in the contract.
Your “buyer’s agent” if you utilize one, will want to ensure that you as the buyer apply for your loan and get the loan commitment from the lender in a timely manner and also do inspections and title searches in a timely manner to ensure that the closing occurs as scheduled.
You want to ensure that you have the down payment and monthly reserves needed for the type of loan that you are applying for. You definitely want to ensure that the interest rate and terms are what you outlined in your offer contract have not materially changed. If you are in the fortunate position where you can pay “all cash” for your home, you would have no coordination with lenders, however you would have to coordinate with closing attorneys to ensure a timely closing according to the terms in the contract.
Title
It is important that you understand the importance of title insurance as your lender already knows the importance–as they require the purchase of title insurance as a condition for providing you the loan as it provides protection for them if there is a title defect.
The purchase of title insurance by you is optional, but highly recommended as it will protect you in the event of faulty chain of ownership issues, including forged documents, past ownership issues and the like. Title insurance coverage amount generally covers what you paid for the property (your purchase price) and what will be covered will be outlined in the coverage that is provided to you.
The documents are very important and even though many have given them cursory looks in the past on a number of home closings that I have participated in, you want to make sure of what is covered and safeguard them in case you need to file a claim–even though filing of claims are rare (2 to 3 over the past 20 plus years that I am aware of).
If title issues are discovered prior to closing, the closing, attorney(s) may perform quiet title action and if adverse possession is occurring on the property take appropriate action so that the closing can take place in a timely manner based on the circumstance.
Title insurance can also protect you from fraudulent actions of a spouse or others who tries to sell “your” property!
In order to purchase your home from a seller, the title must be clear, therefore if liens arise as a result of the title examination, they must be cured prior to closing as the lender will not authorize the funding if liens are not fixed prior to closing. If the property that you decide to purchase is titled in your name only, it will be difficult to sell without your approval unless forged documents and coordination among a number of parties occur.
If you have a need to file a claim after your home purchase, most reputable title insurers will not give you a lot of hassle when you file a valid claim. Title insurance, along with your warranty deed and promissory note (if applicable) should all be stored in a safe place physically and scanned and saved in a secure file for added protection.
If there was a rollback and re-assessment of taxes “after” you purchased your property and you had title insurance (a list of all that is covered would be listed in your policy) that covered this–you would be protected and would not have to pay out of your pocket.
Any taxes not yet assessed would be protected by title insurance if your title policy stated so as part of your coverage. Also be aware of “exceptions” that may be in your policy!
If a builder did not purchase the lot (or properly purchase the lot) that your house sits on, that too could possibly be covered by title insurance. Title insurance is a cost-effective way of giving you “more peace of mind” after the purchase of your home.
Loan Estimate & Closing Disclosure
You will get a loan estimate 3 days before closing and this estimate should be fairly accurate, but could be off if taxes, and other fees were significantly off.
The Loan Estimate was previously called the Good Faith Estimate prior to 2015.
The TRuth In Lending Disclosure (TRID) contains important information for any home buyer who is considering taking out a mortgage loan. The LE breaks down the various costs associated with a home purchase into line items. The information is like that of the GFE; however, the format is more easily understood.
Loan Estimates are required to include estimates for:
*Type of loan, such as conventional or FHA
*Interest rate for the loan
*Total monthly payments, including breakdowns by year if it is an ARM loan
*Balloon payment if applicable
*Total closing costs
*Property taxes
*Insurance costs
*Pre-payment penalties, if applicable
Lenders must include certain information in a prominent place on the first page of the three-page document, including the total monthly payment and estimated cash to close. This requirement aims to make the most pertinent information readily available and obvious to consumers to enhance their decision making and make comparison loan shopping easier.
It’s important to note that a loan estimate is not the same as an official loan approval!
An estimate is just that, an educated guess about what the lender predicts your terms would look like. After you provide more details about your income and debts, you may see some changes to the terms.
It’s in the best interest of a lender to make the estimate as accurate as possible, as they know a borrower may walk away if the terms change drastically between an estimate and an official offer.
The Good Faith Estimate is still required by law for reverse mortgages and this document will give you an estimate of all the costs contained in closing your loan.
It is wise to ask for your loan estimate “before” you make loan application. It does not make good financial sense to apply for a loan (and obligate yourself financially) before you know what your costs are.
Ask for a written guarantee that the final costs will not vary by more than 10% of the amount stated on the Loan Estimate.
Also, if you have a written commitment, you can compare it to other lenders (you should have 3 or 4 lenders or mortgage brokers) so that you can put yourself in position to choose the loan that is best for you and your family.
Did you know that the Homeowner Protection Act of 1998 gives consumers the right to cancel Private Mortgage Insurance (insurance that is required if you put less than 20% down)—if certain conditions are met?
Other questions to ask your loan officer:
If interest rates go down between the original Loan Estimate (LE) and the lock-in period—who should benefit?
Me the client, you the loan officer, or both of us?
Asking intelligent questions is the best way to communicate that you are a savvy consumer, and you won’t be easily taken advantage of!
Always state (and be true to it) to loan officer that you have all your paperwork handy and will be easy to work with.
Ask for a statement (or guarantee) in writing that says that the mortgage company’s final cost will not vary by no more than 10%—at the most.
The loan estimate and good faith estimate documents share many details and can help borrowers more easily understand and compare their options before proceeding with a mortgage application.
The Loan Estimate helps provide borrowers the ability to more effectively comparison shop a mortgage.
Generally provided 3 days before closing and is the best estimate of what your closing costs will be. Non-loan items may change by a certain percentage. One day before closing you will get closing disclosure and that should be more accurate than the LE.
The Good Faith Estimate (GFE) was designed to encourage consumers to shop and then compare fees from various lenders before choosing a mortgage provider. Its original purpose was to help consumers understand what services they could shop for—so they not only received the lowest interest rate and best terms but saved significantly on closing costs, as well—and the Loan Estimate is designed to enhance the process even more for potential home buyers.
Again, the GFE has been replaced by the Loan Estimate, and the HUD-1 by the Closing Disclosure, however many veterans in the industry still used the old terminology.
If you purchased a home after October 3, 2015, you should have received a Loan Estimate and a Closing Disclosure!
The new document is very similar to the original. Let’s further look at what they cover so you have an even clearer understanding.
- In Closing Disclosures, fees can’t increase from the estimate more than the tolerance level of that category unless there is an allowed trigger event.
HUD provides specific criteria for what constitutes a complete loan application.
According to HUD a complete loan application should include:
- The borrower’s name, income, and Social Security number
- The property address
- The estimated value of the property
- The loan amount
- Anything else the lender deems necessary or that was agreed upon with the buyer
The Loan Estimate is now standardized and lists services for which you are allowed to shop.
You may not be able to shop for an appraisal fee or a credit report fee, but you could be able to shop for a land survey and title insurance.
It is important to note that lenders will vary in their requirements and what are considered closing costs will vary from lender to lender.
All lenders must provide consumers with the exact same document. Loan charges, third-party fees, and other costs must be displayed uniformly.
The older Good Faith Estimate had no such uniformity requirements!
The Loan Estimate encourages you as a consumer to “loan shop” by issuing a standardized loan estimate in a specific time frame.
Furthermore, HUD states that prior to the issuance of a loan estimate, lenders can only charge potential borrowers a fee to cover the expense of a credit report!
The relatively low cost of credit reports ($20–$40) results in a consumer’s ability to comparison shop among many lenders at a minimal cost.
Your “comparison of home loans” has been made much easier than in the past as the process is less cumbersome. Therefore, as a potential borrower you want to compare the rates and fees among several lenders if you have a desire to obtain the best or optimal rate possible on your home loan.
The Closing Disclosure
Lenders are held accountable for their quotes. Prior to October 3, 2015, each section in the GFE would directly correspond to a section of the HUD-1, which you would receive upon closing.
This was a standardized document that listed every expense involved in a real estate or refinancing transaction.
The HUD-1 has been replaced by the Closing Disclosure, which designates fee tolerance levels. What this means is that a fee cannot increase from the Loan Estimate more than the tolerance level set for that fee category, unless there is a permitted triggering event.
There are three different tolerance categories to be aware of—0%, 10%, and no tolerance.
- The zero-tolerance category includes fees for the services for the creditor, broker, or any business affiliates of anyone involved in the process. These fees cannot change.
- The 10%-tolerance category allows for a 10% variance of recording fees, title documents, and services for which the buyer must shop from an approved list, such as a home inspector.
- The no-limit-tolerance category allows for unlimited changes in fees for services not required by the creditor or not on the creditor’s approved list, such as a septic inspection or a property survey. This category also includes prepaid interest and any property taxes and insurance paid into escrow.
In summary, the Loan Estimate improves on the older Good Faith Estimate by enabling homebuyers to compare loan options and ensure their final loan fees conform closely to their original quote. Both the Loan Estimate and Closing Disclosure documents were designed to hold realtors, brokers, and lenders accountable and provide greater transparency for you—the consumer.
Ownership Types:
Tenancy in Common & Joint Tenancy with Right of Survivorship
You want to be aware of how you can title your property after your home purchase on the front-end, not after you close on your home. Don’t be shy about asking the closing attorney questions or concerns that you are having so that you can clear up your understanding whether it is title concerns or any other closing concern.
1) Sole Ownership
2) Tenancy by the Entirety
3) Joint Tenancy with the Right of Survivorship
4) Tenants in Common
5) Community Property
If you title your property in Joint Tenancy and not with the right of survivorship, you and the other owner would own a proportionate share and if you or the other owner were to transition, the property would have to go through probate that could be time consuming and not what you wanted to occur. A personal representative would have to be appointed in order to convey your share of the property to the right person after you transitioned.
- Joint tenancy allows each owner to have an undivided interest.
- Tenancy in common on the other hand, specifies the proportion of the property each person owns.
Joint Tenancy is not the same as Tenants in Common!
Joint tenancy with rights of survivorship may be best if you want the property to “automatically pass” to the surviving owners.
However if you wish to “apportion ownership” to reflect the equity you’ve built, tenancy in common may work better for you.
Therefore, it is “important and imperative” that you title your property properly based on the goals that you have in mind or your future wishes that you want carried out.
Joint Tenancy with the Right of Survivorship (JTROS) provides you the opportunity to own the property with your spouse (or other joint tenant) and if you were to transition the property would not have to be probated and by operation of law would go to the other living tenant whether your spouse, daughter or other designated joint tenant on the deed.
It is important to note that there are general warranty deeds, special warranty deeds, bargain and sale deeds and others, and they all convey varying interest of previous owners of the property (grantors) to those who receive the deed (buyer) and you want to be aware of the type that you receive as the grantee when you purchase your property.
If you purchase a property through foreclosure sale or a bank sale (REO property), you would likely receive a special warranty deed (sometimes called a limited warranty deed) as the selling entity would not be able to warrant ownership prior to obtaining property.
You also want to be aware of the Quit Claim Deed as it is a legal document that transfers property ownership rights from one person (grantor) to another (grantee). A quit claim deed does not guarantee that the grantor has a valid interest in the property or that the property is free of liens or encumbrances. It is often used to transfer ownership between two trusted parties who want to transfer property quickly and with minimal legal protections.
In some areas a quit claim deed can be used to add a spouse to a deed.
Conclusion
Assuming you purchase your home properly on the front end by ensuring that you have the cash flow to manage home ownership and all that it entails, you purchase in a strong neighborhood with strong schools and local government and you properly maintain your home, you can possibly put yourself in position for a nice tax-free financial windfall when you sell (up to $250,000 Single or 500,000 MFJ) if you stay in your home for at least two years and meet other technicalities.
As far as the closing process, a closing that is all cash will generally go much smoother and faster than a closing in which a loan is involved. Even when paying all cash, taxes will be due annually and if you are unable or unwilling to self-insure–hazard insurance would be needed and that is normally paid with an annual policy–therefore you want to plan appropriately upfront–not after purchase.
If a loan is involved a “funding authorization” would be required in order for funds to be disbursed by wire. If you were a seller and had a first and/or second mortgage, they would be paid off before you, as seller would receive your proceeds from the sale of your home. If you owned your home free and clear you would receive all of the proceeds minus selling expenses and closing costs that you agreed to pay or was mandated to pay.
At closing you will be required to bring your driver’s license, state ID or passport whether you are the buyer or seller. If you are the seller you want to bring wiring instructions (routing number and account number) from your bank as the wiring RTN may be different from the electronic RTN that you may be more familiar with in other banking transactions–as a condition to have the funds deposited into your account.
If you were a buyer and you were paying all cash, you too will provide wiring instructions prior to closing or bring funds to close on the property that you are purchasing.
You may have to get your hazard insurance coverage for your home prior to closing. In addition, if you put less than 20% down you may have to pay PMI/MIP (insurance that protects the lender in case you default on loan) in your monthly payment in addition to your principal, interest, taxes and homeowner’s insurance (commonly called PITI in the real estate industry).
All of these costs combined (where applicable) would make up your monthly payment that you have planned for and budgeted for “prior to” your home purchase!
Also realize that taxes will be prorated from the seller ownership period to the buyer ownership period, and that process often causes confusion for some.
If taxes have been paid already, the seller may get a credit at closing, if taxes are yet to be paid and seller owned property for 5 months and you owned for 7 months (day of closing belongs to you) and the tax bill was due on November 1st and the tax bill was $2,400, you would owe $1,400 and the seller would owe $1,000, therefore you would owe $1,400 toward the tax payment on the closing document–and that would be based on the pro-ration of ownership of taxes between you and the seller.
At closing you will sign a lot of paperwork and affidavits stating that you agree to the terms and conditions and the documents will also outline what will occur if you fail to pay in a timely manner (basically your failure to pay puts you at risk for losing your home). After closing all of the required documents will be recorded and it is your responsibility to ensure that they were recorded properly.
If you are a current homeowner (or after you become a homeowner), you can check for fraud (fraudulent deed recording of your property) by visiting the courthouse, or you may be able to sign up to get automated notifications from your tax commissioners or tax assessor’s office when there is a change to your deed. In some jurisdictions you can perform these actions online.
If you are fairly certain that fraud has occurred in relationship to your property, you may want to contact a qualified “real estate” attorney and notify the proper authorities to look into the matter further.
If you own your property free and clear you are potentially more at risk for deed fraud than if you have a recorded lien such as a mortgage or HEL or HELOC on your property. If you have a mortgage-lien fraudsters will have more hoops to jump through (the lender will also fight for you) and will likely look elsewhere to find an easier fraud target.
You want to ensure that the title and most recently recorded deed information is the one you are a party to when you go to verify the recording of your deed and other documents. In addition if you don’t receive your tax bill, be sure to inquire as that can be a sign that someone else has recorded a deed on your property.
If you own vacant land or a second home you want to know that you are a primary target for fraud as technology such as artificial intelligence and other advances make it lucrative for fraudsters to commit more acts of fraud more efficiently with this new technology.
In closing, with warranty deeds and other closing documents, you want to ensure that they are safely handled and stored by you, recorded properly and you stay aware of the possibility of fraud by being keenly aware that fraudsters are all around you and you want to be alert for warning signs early in the process where possible!
Also realize that all closing situations are unique and there can be unexpected twists and turns that can occur and will hopefully be worked out in your favor or to the benefit of all parties involved.
All the best to your home closing and wealth building success…
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