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As you consider making an offer on a property, you may be interested in learning about the process that leads to a successful closing. This article provides valuable information to prepare you to make the offer to the seller and help you understand the process as you reach the closing table and then move into your new home. Some specifics may vary based on your location as well as local laws and customs, but the basic principles remain the same.
OFFER
Sometimes referred to as the “purchase agreement”, “offer to purchase”, or simply the “offer”, a legal document is presented to the seller specifying your offer amount and additional terms and conditions for the seller to consider. The offer is usually several pages long and includes the address of the property to be purchased, the proposed purchase price, an estimated closing date, and any contingencies such as financing, home inspection, or an appraisal. When your offer is presented to the seller, any one of these three options is possible:
- Acceptance
If the offer is accepted by the seller, you are legally bound by the provisions in the offer, and the next phase of the offer process begins. You will most likely deposit earnest money into an escrow account after the purchase agreement has been accepted and signed by both parties. This shows the seller you are serious about purchasing the home and, if you wish to back out of the contract without legal justification, the earnest money is for the seller to keep. - Rejection
If the seller rejects the offer, it could be for one or more reasons. Some of these may include:- The offer price was too low to be taken seriously;
- The type of loan you wish to obtain may send cautionary flags (some government loans have more strict inspection requirements);
- Another offer was more appealing;
- The seller simply doesn’t wish to sell anymore.
Regardless of the reason, your offer was not satisfactory to the seller and you can either try again with a new offer or look for another property.
- Counter-Offer
If the seller is not completely satisfied with your offer but wishes to continue negotiations, the seller will likely come back with a counter-offer. A counter-offer, technically speaking, is a rejection of your original offer with a new offer back to you. At this point, you are no longer under any obligation based on the original offer you made and, if you decide not to proceed any further, you can simply reject the counter-offer from the seller. Otherwise, you can accept the counter-offer or counter-offer back to the seller with further revisions to either your original offer or the seller’s counter-offer.
You may find some useful information in another article titled “Writing a Solid Offer That Gets Attention” if you want to write an offer that is less likely to be rejected or result in a counter-offer with conditions that would be unacceptable to you. Once an agreement is reached, your earnest money deposit is held in an escrow account until closing. The earnest money will be counted toward your down payment and, if the transaction is not completed, you may or may not be entitled to the return of the earnest money amount, depending on the circumstances. You will be advised at the time what the options are, if any, for a refund of your earnest money.
CONTINGENCIES
Mortgage
There will be a mortgage contingency clause within the offer that describes the type of mortgage you wish to obtain. If a mortgage is required, you will be required to obtain mortgage approval within a prescribed amount of time so that the seller knows you will have the necessary funds for closing. It is always helpful to provide a letter of pre-approval with the offer so that the seller knows you have already started the mortgage process. “Know Your Purchase Power” contains useful information about some of the factors considered in a mortgage approval. During this time, it is important that you don’t change your financial situation! To understand why, you may wish to read “What Not to Do Before Closing on a Home“. Of course, if you do not require a mortgage, this contingency will not apply in this instance.
Home Inspection
A lender will require a home inspection to identify any potential issues with the house. You can negotiate repairs or a price reduction with the seller if problems are found. If an agreement can’t be reached in one of these situations, either party will likely be able to walk away from the agreement. Again, always make sure there is a contingency clause covering home inspections in your offer to protect yourself.
Appraisal
A lender will require an appraisal of the property to be sure the property is worth the amount being financed. For more information, you may wish to review “What Buyers Need to Know About Appraisals“. If the appraisal comes in below your offer price and you don’t want to make up the dollar difference in your offer, you likely will be able to walk away from the agreement. Like a home inspection, you should always make sure to include the appropriate contingency clause in your offer to protect yourself.
Title Search & Insurance
A title company will need to conduct a title search to ensure no outstanding liens or issues are associated with the home’s title and that a clear title transfer can occur at closing. For more information about choosing the right companies to help address contingencies, you may wish to review “After the Offer: How to Choose Required Services“.
Final Loan Approval and Clear to Close
Once all conditions and contingencies in the purchase agreement are met, the lender will approve the final loan and issue a “Clear to Close” statement which means the closing can proceed. At least three business days before the closing date, you should receive a “Closing Disclosure” document that details the loan terms, the closing costs, and the exact amount you will need to wire or bring with you to closing. Review this document to be sure everything makes sense and matches what you agreed to. Read “How Much Cash Do You Need for Closing” if you would like to get an idea of the associated costs.
CLOSING
Arrange Service Providers
A homeowner’s insurance policy will need to be provided to the lender as proof of insurance. The transfer of utilities and other necessary services to your responsibility for the new home will also need to be scheduled. To better understand what services may be required and how to choose them, review “After the Offer: How to Choose Required Services“.
Final Walk-Through
Just before closing, usually within a day or two of the scheduled closing, you should conduct a final walk-through of the property to ensure that it’s in the condition agreed to in the contract.
Closing
At the closing table, the buyer and seller sign all necessary paperwork together or in separate sessions. You will need to wire funds or bring a cashier’s check for the remaining down payment and/or closing costs. Once all documents have been signed, the keys are handed over, the closing company will record documents, and all funds will be distributed to the appropriate parties.
Remember! Having a real estate professional guiding you through what may seem like a complex process is essential during the offer, contingencies, and closing process. Because many closings don’t go exactly as planned, it is important that you have a strong advocate on your side who knows the options and solutions for each scenario. I can make that happen for you!
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