Contract through Closing – “ATM”
by Attorney William Bronchick
Once you have your property under contract, you can proceed towards closing. Three things need to happen before you can close. First, the buyer’s lender must produce the funds. Second, your mortgage, or any other lien on the title, needs to be paid off. Third, once the title is clear, you can take the final step and sign it over to the buyer. Then you’ve closed on your house. So is it that simple? Not really. You need to understand what happens between contract and closing, often referred to as “escrow”.
Basically, there are three things that happen between contract and closing, which can be remembered by the acronym, “ATM”. This should be easy to remember because it is like going to the ATM machine when you close and get your money.
- All contract contingencies must be met
- Title searches and title commitment prepared
- Mortgage must be paid off, and a new one must be approved for your buyer
All Contract Contingencies Met
If the contract calls for an inspection by the buyer, this should happen immediately, especially if there is an inspection deadline. The buyer will probably employ a professional house inspector. For about $350 in most areas, a house inspection service will prepare a detailed report and a list of things wrong with the property. A home inspector will check the complete exterior of the house – the chimney, roof, flashings, gutters, and downspouts. He will also check the foundation and the grading of the lot to be sure it is pitched away from the house. A buyer may also require an engineer’s inspection of the property, particularly if the initial inspection reveals problems with the foundation or any other major issues with the property.
The inspector will then write a complete report with photos and a narrative of all of these items, as well as a punch list of things that need work. The buyer will likely use this list to her advantage to negotiate a lower price or cash back at closing (called a “concession”). The buyer can also use the inspection clause to kill a deal that turned out to be buyer’s remorse on her part. If the seller will not agree to make the necessary repairs or adjustments to the price, the buyer can cancel the contract and receive her earnest money back.
You must anticipate these issues, but don’t be in a rush to fix everything that is wrong the property. For example, if you know the furnace is 20 years old and has an average life span of 20 years, your buyer will likely insist on some credit for a new furnace. In my part of the Country, a forced-air furnace costs about $2,500. If it is replaced before closing, the total cost is $2,500. But, if the furnace is in working order and otherwise safe, the buyer may accept a $1,500 concession at closing. The point is, don’t rush to fix EVERYTHING before you put the house on the market, but rather consider the cost of doing so versus the cost of a concession. Fix the items that relate to safety that won’t scare off a potential buyer. In addition, fix the things that are the cheapest ways to create visual appeal and will sell the house.
In some parts of the country, a separate inspection will be done for termites and other pests. If you suspect that there is termite damage in your property, take the step of having it inspected before you place the property on the market. Take a screwdriver in the basement and poke around to see if there are any problems. Use a sharp pick or screwdriver to test for damaged beams, joists, and sills. If you see what you think are termites, make sure they are not just ants. Ants have elbowed antennae and narrow waists while termites have straight antennae and thick waists.
Title Search & Commitment
The contract will usually provide that it is contingent upon proof of a marketable title by a certain date. The seller is usually required to provide the buyer a copy of a title report or a title commitment showing that the title is insurable. Even if the title report shows problems with the title, the contract is still in force if the seller can cure the problems before the closing and deliver a marketable title. For example, the existence of an existing mortgage lien or judgment is not fatal, because it can be satisfied by the seller from the proceeds at the closing.
Paying off Your Existing Mortgage
Before closing, you have to pay off your existing mortgage, unless you are doing an owner financed transaction or a lease/option. You can use the buyer’s funds from the sale of the property to pay off the existing mortgage and release the mortgage lien (or deed of trust) from the property before you deed it to the buyer. Contact your lender (or lenders if you have a second mortgage or home equity line) and ask them to fax a payoff statement for the loan. You’ll want to make sure the payoff statement is good through at least the closing date, with per diem (daily) interest listed on the statement in case your closing date gets postponed.
Buyer Getting a New Mortgage
The one contingency that usually makes or breaks a deal is the loan approval. The way a typical contract is written, a buyer may cancel the agreement and receive his earnest money back if his lender does not approve his loan. A buyer must make all reasonable attempts to obtain financing, but his lender can find 100 reasons not to fund his loan.
While getting a loan is primarily the responsibility of the buyer, it is also your problem, too. What if they can’t qualify for the loan and don’t have another lender lined up as a backup plan? In other words, you have to take charge of the situation to make sure the loan gets closed. Have a provision in your contract that gives you the right to communicate with the buyer’s mortgage lender during the process so you can keep tabs on what is going on and what documents or lender requirements have to be taken care of. The appraisal is one of the things that always seems to get held up, so get that scheduled as soon as possible.
At the closing, the buyer tenders the balance of the purchase price for the property (less a credit for his earnest money). If the seller is taking back any owner financing, the buyer will sign a note and mortgage or deed of trust as collateral. The buyer will also sign his loan documents for his new lender. The seller and buyer will sign a variety of other disclosures and closing forms, as well as a settlement statement called a “HUD-1” form (HUD stands for U.S. Department of Housing and Urban Development, a federal housing agency). The HUD-1 form spells out all of the math for both the seller and buyer.
Once the paperwork is complete, you walk out of closing with your check (hopefully a big one), and the buyer walks out with the keys. It is customary for the buyer to do a final walkthrough of the property the day of closing or the day before closing to make sure the condition of the property has not changed and that the seller has vacated the property and left it clean. If you are planning on moving out, make sure the property is in “broom clean” condition and that everything is still in good and working order.
Understand the complete process from contract to closing and stay in control of the transaction so it goes as smoothly as possible. Consider owner financing or lease/option as a backup plan if the buyer is not able to get his loan financed.