After what seems like an Olympic 400 meter sprint, you have finally found the perfect house! This house has everything you need at the price you can afford, and possibly even has some bonus features that are very meaningful to you. You and your agent pour over the sold data and come to a fair price, and terms that will benefit both parties. The contract is written and you leave excited about the house, but exhausted. That night, your agent submits your offer to the seller's agent.
That night you are very anxious about the offer and review every last detail about it. Was the offer too little? Were my terms not favorable enough to the seller? What if we encounter multiple offers? Will this home really be the perfect home for me?
The next morning, your agent calls you and tells you the good news: Your offer was accepted and the sellers are agreeing to your terms! In just a few short weeks, you will be the proud owner of a home! However, before that can happen, the transaction moves in to the phase known as the contract-to-close. This phase is a critical phase because it allows everyone to go through a discovery period in preparation for closing. In contrast to the initial sprint, the contract-to-close phase is more like a marathon with sprints during the first and last weeks.
For the sake of simplicity, let's talk about this phase from the perspective of someone purchasing a home with a mortgage. Throughout the entire contract-to-close process, it is normal to expect a flurry of emails and phone calls between your agent, the title company representatives, the lenders, their underwriting department, and any contractors involved in this process. This phase involves five different parts:
Part I - Executing the contract
After the contract has been accepted by the sellers, your agent must verify that you have signed off on any counter offers presented by the sellers. All of the changes must be initialed by all parties in the contract.
After the last person has signed the contract changes, the agent modifying it last must decide on an executed date, which is typically that day's date. This date becomes the basis for all other dates of performance in the contract.
Next, either the listing agent or the seller's need to receipt the option money on the contract, if there is one. Finally the contract needs to be turned into the title company and one of their representatives will receipt the contract and deposit.
At this point, the buyer should be provided with a Seller's Disclosure Statement and a survey. The Seller's Disclosure Statement is a notification to the buyer about the condition of the home from the perspective of the current owner. It should not substitute for a full inspection.
The title company will open a file number for deposits and closing costs which will be used later. The title company also prepare the certification of title on the home.
Part II - The Option Period
In Texas, whenever someone buys a home, they have the right to purchase an exclusive right to terminate the contract, or the option period. It is customary to purchase an option period for 7-10 days and pay a nominal amount ($150-250) for the privilege of doing so. During the option period, it is the buyer's duty to have the home inspected, negotiate repairs, interview contractors, measure for furniture, etc. If the inspector discovers major repairs that the buyer is not comfortable with and the seller refuses to make, then the buyer has the option to cancel the contract and receive their deposit back.
Part III - Lender Approval
This phase, while necessary, can be very intrusive to buyers. Most lenders will wait until after the option period has ended before beginning this phase since they may not want to spend resources vetting a borrower until then. Lenders will want to verify the following items at the minimum before committing to a loan:
- Employment verification
- Assets and liabilities
- Last two months of bank statements from all cash or asset accounts
- Borrower’s debt-to-income ratios
- Previous two years of tax returns
- Borrower’s credit profile and FICO scores
- Last 30 days of pay stubs
The borrower’s documents are submitted before loan preapproved and then the credit is checked again a few days before closing to confirm that there are not any changes in the borrower’s debt-to-income ratios. Once you are under contract, please do not change jobs, take on any new credit lines, significantly change your financial status, have any unusual unaccounted for cash inflows or outflows until the loan closes, funds, and clears the bank. I have seen this happen countless times where someone changes their financial situation once under contract and the loan falls apart because the bank refuses to lend.
Once the borrower has cleared credit approval, the lender's appraiser will appraise the house with an even stricter eye for detail than the inspector. They will prepare a report for the lender documenting the relative condition of the home you are purchasing compared to other similar homes in the neighborhood. The purpose of this is to determine the value of the home to the lender. Sometimes, depending on type the loan, the lender may demand that repairs are made to the home before closing.
Part IV - HUD-1
Hopefully a few days before closing, the title company will provide the HUD-1. The HUD-1 is a simple document required in every real estate transaction in the United States of America. The purpose of it is to make sure that all of the money on the buyer's side is accounted for, and that all of the money on the seller's side is accounted for. Both you and your agent should check this for accuracy and check that it matches the terms on the contract.
Part V - Closing
After what has seemed like the longest and stressful marathon of your life, you and your home have cleared final underwriting approval. Your lender's underwriting department has issued a clear-to-close. You have received the HUD-1 and it has been triple checked for accuracy, and you have also received loan documents from your lender. Please review all of your loan documents for accuracy, and verify that the lender is giving you the terms you agreed to.
Once everything has been verified, your title company will coordinate schedules between all parties involved and schedule the closing. The date and time of your closing occurs. You arrive at the title company's office, and munch on some cookies and have some coffee. You are called in and meet your escrow officer, loan officer, and possibly the sellers. Everyone is in a good mood and are joking around, and then you presented with your final loan documents for signatures. You sign, and sign, and sign some more until it feels like you are signing your life away.
Finally, you receive the keys to your very own home! Everyone shakes hands, exchanges pleasantries, and you leave to spend the first night sleeping in your own home, relieved that the process is finally over!