Congratulations! After weeks of searching, you have finally found that special place to call home, three bedrooms and two baths located in a great neighborhood. We at Wallethub.com would like to share some vital information about the closing process before you start selecting window accessories.

Think of the closing process as the finale before moving into your new neighborhood. This process can take anywhere from 30- 50 days[1]. The closing process includes two periods: escrow and closing. This article will discuss these steps in detail and provide examples of common pitfalls that buyers fall into that delay the closing process. Lastly, there are housing counseling agencies approved by the U.S. Department of Housing and Urban Development (HUD) that can help you learn the homebuying basics and evaluate your financial situation[2]. Take advantage of this free service.

1) Open an Escrow Account

To ensure there is no delay with closing, the buyer should have an escrow account. The escrow account protects the buyer and the seller by protecting both their assets. Without an escrow account, the buyer risks losing time and money. Regulations covering mortgage escrow accounting procedures were implemented in 1995 and revised in 1998. The rules have increased payments for some borrowers, resulting in some borrowers opting out of the process. If requested by borrowers, lenders may waive the escrow requirement as long as the lenders reserve the right to resume collection of the escrow if there is nonpayment. Second mortgages do not require escrow accounts[3].

2) Title Search and Insurance

One of the ways to slow down a closing is to get to the end of the process only to find that the home is under another buyer’s name and is unavailable. For this reason, the buyer must do a quick title search of the house in question.  

During the housing crises of 2007 and 2008, reports that borrowers did not know about the terms of their mortgage loans began to surface. To limit the buyer’s exposure to unscrupulous sellers and agents, the buyer should purchase title insurance. 

There are two types of title insurance: lender’s title insurance and owner’s title insurance. The seller will insist that the buyer have lender’s title insurance, while the buyer needs to insist on owner’s title insurance. Owner’s title insurance protects buyers from financial loss due to defects in a title to a property. The most common claims filed against a title are back taxes, liens, and conflicting wills. 

The buyer may receive pushback, but buyers should advocate for owner’s title insurance to prevent possible delays.

3) Hire an Attorney 

Even though some of the paperwork may seem straightforward, buying a house is like walking through a land mine. The seller and agent are all smiles, and they cannot wait to get the buyer into the home of their dreams. However, their smiles could conceal explosive information that could destroy a buyer’s credit, raise the agreed-upon monthly payment, and place the buyer into foreclosure. The Real Estate Settlement Procedures Act (RESPA) of 1974 demands disclosures about residential mortgages’ settlement or closing costs[4]. The Department of Housing and Urban Development (HUD) provided changes to RESPA designed to facilitate a better understanding of mortgage terms and enhance borrowers’ ability to shop for better terms. However, in 2010 HUD’s responsibility for enforcing RESPA ended when the Dodd-Frank Wall Street Reform and Consumer Protection Act transferred the responsibility of RESPA to the Consumer Financial Protection Agency[5].

There are pages of small print that the buyer may want someone with experience to read on their behalf. For example, a Federal Trade Commission (FTC) study asked 819 consumers to explain what they know about current mortgage cost disclosures and loan terms, as well as their ability to avoid deceptive lending practices. The FTC’s findings were worrisome. 

The authors found that both prime and subprime borrowers did not understand essential mortgage costs. Some borrowers had difficulty picking out the annual percentage rate (APR) for their loans. Borrowers had trouble understanding why the interest rate and APR of a loan would differ. In addition, borrowers could not understand loan terms for a mortgage, such as optional credit insurance, interest-only payments, balloon payments, and prepayment penalties. Borrowers could not determine whether balloon payments, prepayment penalties, or up-front loan charges were part of the loan[6].

For these reasons, to avoid delays, the buyer should hire an attorney.

4) Negotiate Closing Cost

For many people, the word negotiate conjures up feelings of worry and malcontent. Nevertheless, buyers will find themselves dazed and confused if they do not take the time to understand and negotiate the closing cost, which may delay the closing. 

Many borrowers do not understand that even if they are made aware of the costs, they can still obtain less affordable mortgages over the entire loan term. There is a concern that lenders are not doing enough to provide affordable mortgages, so it is best if borrowers shop diligently for the best credit terms. 

While it may be hard to hear, it is the buyer’s responsibility to be aware of every fee and understand why those fees exist.  

5) Complete Home Inspection

According to recent data, 20% of winning home buyers waived their right to an inspection in June 2020[7]. That is up 13% from a year earlier. Remember, removing the inspection contingency means that a buyer will not ask for repairs. The buyer is trusting the agent and the seller. Remember the land mine we spoke of earlier? 

Many lenders will not offer financing on a home without an inspection. Waiving the right to an inspection could have grave consequences in the future, which can delay your closing. The buyer could be moving into an asbestos- or termite-ridden home. It might mean hidden flood damage, mold, mildew, pest infestations, or other costly repairs and concerns. The house could have some structural issues or, worse, has some safety issues.

It might be tempting but do not skip this step. 

6) Renegotiate the Offer

According to the Mortgage Bankers Association, as mortgage rates fall, homeowners are missing a new chance to refinance and save[8]. For this reason, the buyer must leave room to renegotiate the offer or risk the delay of their closing or simply overpaying. Simply put, the buyer should review every fee on their mortgage agreement to ensure that they understand every charge.

Every three years, the Federal Reserve Board compiles information on the assets, liabilities, and demographic characteristics of approximately 4,000 U.S. families. One of the reasons for this study is to see if borrowers with similar risk characteristics pay similar rates for their loans. The responses to the survey questions make it possible to identify whether homeowners were exhibiting behavior consistent with obtaining an affordable mortgage loan rate. The findings suggest that less than a third of the homeowners admit to shopping aggressively for the best credit terms[9]. By not renegotiating the offer and shopping around, the homeowner is leaving money on the table. 

If a buyer is uncomfortable with negotiating, they can invest in an attorney. However, do not skip this step.

7) Lock-in Interest Rate

The buyer wants to limit the number of surprises in the future. Stability is the magic word here. By locking in the interest rate, the buyer can protect themselves from the volatility that seems to marry itself to interest rates: a geographic region, property type, type of loan applied for, and credit score can lead to volatility. For this reason, the buyer wants a “mortgage rate lock.”

The rate in effect on the day the buyer applied for their loan may not be the rate available weeks later when their loan is approved. A mortgage rate lock binds the borrower and a lender to a set of contingencies. The agreement guarantees the borrower a specific interest rate on a mortgage. 

The Federal Reserve Bank of Chicago estimates that between 2007 and 2010, there were approximately 3.8 million foreclosures in the United States[10]. One in four people in the United States admits to not knowing their interest rate on their mortgage[11]. 

A fundamental step for any buyer is understanding how much to pay and when. No buyer should skip this step.

8) Remove Contingencies 

If there were a word to define contingencies for the buyer, it would be the word great. Contingencies are clauses in the buyer’s contract that provide them “an out” if something unforeseen arises or if the seller does not meet specific requirements. Simply put, contingencies protect the buyer, so, understandably, sellers do not like them. If a buyer is looking to close on a house quickly, they will want to remove contingencies. 

There are two types of contingencies: primary and two-tier contingencies. Examples of primary contingencies are disclosure, inspection, loan approval, and appraisal. The buyer will only move forward with the purchase if the seller meets the primary contingencies’ requirements. Examples of two-tier contingencies are selling the buyer’s current home, homeowners’ insurance, and homeowners association. If a seller is fielding offers from multiple sources, it is doubtful that they will want to bother with a buyer’s two-tier contingencies. 

Removing two-tier contingencies is a great way to quicken the closing process. However, the buyer should keep the primary contingencies. 

9) Meet Funding Requirements 

If the buyer wants to save time and money, they may want to familiarize themselves with earnest money. Earnest money is a deposit a buyer places on a home they wish to purchase. Earnest money deposits can be anywhere from one to ten percent of the sales price, mainly depending on market interest. 

Remember, this contract does not obligate the buyer to purchase the home. However, to keep from losing their money, the buyer and seller need to stipulate the acceptable reasons for a buyer to change their mind.  

Example:

Jason is buying a home from Kevin. Kevin agreed that he would move out of the house in eight months. Kevin does not move out of the home in eight months. Jason cancels the sale and gets his earnest money. 

10) Final Walkthrough

This step is one that far too many buyers gloss over. The buyer must look over the property one last time before closing. By giving the house one more look, the buyer can verify that the seller made the required fixes and ensure that the seller did not make changes to the purchase agreement. 

This step is an easy one. Do not skip this step. 

 11) Understand the Paperwork

There is a saying, “the cheap comes out expensive.” Invest the time to understand the paperwork, acquiring an attorney, and doing due diligence. Take the time to understand every word. How long does this process take? It takes as long as it needs to take for the buyer to feel comfortable with the agreement. Do not allow anyone to rush the process. Do not be afraid to reach out for help.

Your home is not only an investment for you. It is where you, your family, and your friends will create memories. Enjoy your new home.

[1] https://www.quickenloans.com/learn/closing-on-a-house-how-long-it-takes-and-what-to-expect

[2] https://myhome.freddiemac.com/docs/step-by-step_mortgage_guide.pdf

[3] https://www.hud.gov/sites/documents/DOC_19687.PDF

[4] https://www.federalreserve.gov/boarddocs/supmanual/cch/respa.pdf

[5] https://files.consumerfinance.gov/f/201503_cfpb_regulation-x-real-estate-settlement-procedures-act.pdf

[6] https://www.ftc.gov/sites/default/files/attachments/educational-materials/p025505mortgagedisclosurereport.pdf

[7] https://www.prnewswire.com/news-releases/20-of-winning-home-offers-waived-the-inspection-contingency-in-june-up-from-13-last-year-301100845.html

[8] https://www.mba.org/news-research-and-resources/newsroom

[9] https://www.federalreserve.gov/econres/scf_2004.htm

[10] https://www.chicagofed.org/publications/chicago-fed-letter/2016/370

[11] https://www.cnbc.com/2020/11/18/1-in-4-americans-dont-know-this-crucial-fact-about-their-mortgage-.html