Whether you are a first-time or repeat buyer, the process of purchasing real estate can be daunting. Following is a basic step-by-step primer of the components of closing on your new home.
When you are ready to begin looking seriously for a property to buy, it will be to your advantage to have a pre-approval letter in hand from a mortgage lender which verifies the purchase price you can afford and the amount of mortgage for which you will qualify. A pre-approval letter will make your offer more attractive to a seller since it affirms your ability to consummate the purchase. You may obtain a pre-approval letter from any mortgage lender, and while you are not then obligated to use that lender for your actual purchase, if you establish a relationship with a lender at an early stage, the loan officer can be an additional resource for you throughout the process.
Pre-approval letter in hand, you find the house of your dreams and you want to submit an Offer. Many buyers feel that this is the time to engage the services of a qualified real estate attorney; others work with the realtor and wait to hire the attorney until the Offer is accepted. The realtor or attorney will assist you in preparing an Offer, most likely on the standard "Offer to Purchase Form" customarily in use. The Offer will contain the business terms, such as price, amount of deposit, and dates, should include a contingency for satisfactory home inspection, and may also include contingencies for mortgage financing and other matters. The assistance of an experienced realtor or attorney is indispensable in preparing an Offer which contains all of the appropriate protections for a buyer. Negotiations may ensue until the parties come to agreement on the final terms and execute the Offer document.
In Massachusetts, unlike in some other states, the Offer to Purchase is a preliminary document which is later superceded by a more comprehensive Purchase and Sale Agreement. Do not, however, be fooled into thinking the Offer is not a binding contract; courts have enforced executed Offers to Purchase even in cases where the parties failed subsequently to enter into a Purchase and Sale Agreement. Most Offers contemplate a period of one to three weeks to finalize and sign the P&S. If you have not already hired an attorney, now is the time to do so. In the period between Offer and P&S, you should have the property fully inspected by a qualified home inspector. The inspector will give you a written report and flag any items of concern; you may then elect to negotiate price adjustments or repairs with your seller as a condition of closing. If you are not satisfied with the results of the inspection or cannot reach resolution with the seller, under the inspection contingency you have the right to terminate the Offer and recover any deposits paid to that point. It is important that you address any and all concerns regarding property condition during this time, and that any terms you negotiate with the seller be incorporated into the P&S. With certain exceptions, once you sign the P&S, you are essentially agreeing to accept the condition of the property "as is" and may not thereafter raise issues relating to property condition except to the extent that it represents a change since the date of the Purchase and Sale Agreement.
So you now have an executed Purchase and Sale Agreement – congratulations! If you have not already settled on a choice of mortgage lender, you should do that without further delay and submit a complete mortgage application by any applicable deadline in your mortgage contingency, if any. At the time of application, your lender should give you a Good Faith Estimate of Settlement Charges, setting out the closing costs you will expect to pay. That document, and the Truth In Lending Disclosure Statement, allow you to compare loan products among various lenders. Your lender will process your application and issue a Loan Commitment Letter. If you have a mortgage contingency deadline in your P&S, be sure you receive your written Loan Commitment Letter before that deadline expires.
In Massachusetts, closings are conducted by attorneys rather than by title or escrow companies. The attorney who represents the lender and acts as settlement agent may be your attorney, or it may be a different attorney selected by the lender. It is quite common that one attorney represents both the buyer and the lender, and although this does technically constitute a possible conflict of interest, this conflict is regularly waived by the parties because the interests of the buyer and lender are very much the same. For a buyer, I believe there are two advantages to having your attorney handle the entire transaction. The first is for peace of mind—you no doubt have shopped carefully for a qualified and recommended attorney to represent you, so it only makes sense to have that attorney handle the important roles of examining title, preparing documents, and acting as settlement agent. If the lender chooses another attorney for those responsibilities, you have no input on quality control. The second advantage is lower cost. One of the closing costs customarily paid by a borrower (unless you get a "no-closing-cost" loan) is the attorney’s fee for the lender’s attorney. If two attorneys are involved, there is a certain amount of overlap which is likely to result in some duplication of fees paid. If your attorney also represents the lender, you eliminate that duplication of effort, which results in a lower total legal fee. In selecting a lender, it is always worth requesting, or even requiring, that your attorney also be permitted to represent the lender and serve as settlement agent.
Once your loan application is submitted, you can take a bit of a breather, as most of the work from then on belongs to the attorneys. The one exception is that you must procure homeowners insurance coverage to take effect as of the closing date. You will be required to pay the premium for the first year in full, and to provide the lender prior to closing with an insurance binder evidencing the coverage and naming the lender as an additional insured.
Prior to closing, the attorney will arrange for a title professional to search and examine the public records for information related to the property's title. The attorney will notify the seller of any defects in title, and those must be dealt with before the property can change hands. Closing will not occur until title to the property is clear. The one exception is that outstanding current mortgages taken out by the seller from institutional lenders may be paid off out of sale proceeds with the Mortgage Discharge to be recorded after the closing. It is the attorney’s responsibility to attend to this and follow up to record the proper Discharges.
Finally the day of closing will approach. The settlement agent will prepare the HUD-1 Settlement Statement. The "HUD", as it is known, outlines all of the costs for both the buyer and seller associated with the closing. Your costs will include those items shown on the original Good Faith Estimate (with possible modifications), as well as costs originating out of the attorney’s office. You will be offered the option to purchase an Owner’s Policy of Title Insurance, which I do recommend (see previous blog entry on this topic). You will be provided with a copy of the HUD in advance of closing and asked to obtain one bank check for the total amount due. It will not be necessary to bring multiple checks to closing; instead, it is the job of the settlement agent to divide your funds and disburse them in accordance with the HUD.
On closing day, all parties will meet at the office of the lender’s attorney or at the applicable registry of deeds. You will sign a seemingly endless number of documents that will be explained by your settlement agent, including, most importantly, a Promissory Note, which is your promise to the lender to repay the funds being advanced, with interest, and a Mortgage, which puts a lien on the property to secure your obligations under the Promissory Note. The seller will deliver a Deed which transfers title to your name. Following signing of all documents, the attorney will arrange for the recording of the Deed and the Mortgage at the applicable registry of deeds. The recording of the documents is the final step in the process and represents the moment when everything is completed. Upon recording, you become the new owner of both a house and the debt that you incurred to purchase it. Welcome to the American Dream!
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