Your Essential Guide to Closing a Real Estate Transaction
Closing escrow is the culmination of many different steps and actions. It is a process filled with paperwork, inspections, underwriting, timelines, and waiting. We have put together an essential guide to help you through the steps of closing a real estate transaction.
General Timeline of the Closing Process
Once a buyer and a seller have agreed to terms and fully executed a purchase contract, the closing process commences. This puts several processes and actions into motion for both parties. The first step in the closing process is for the buyer to officially open escrow by submitting their earnest money to the escrow company. Here is a general timeline of all the major processes that take place from offer acceptance to closing.
Here’s a general overview of the steps to closing:
- Acceptance of Terms. The buyer and seller have agreed to terms and executed the contract.
- Deposit earnest money and open escrow (1-3 days)
- Perform all inspections and negotiate any repair requests (1 – 2 weeks)
- Submission of mortgage application and subsequent loan underwriting (2 – 3 weeks)
- Mortgage application and underwriting (5-20 days)
- Appraisal (1-2 weeks)
- Acquire homeowner’s insurance and title insurance (1 day)
- Get loan approval, commonly called “Clear to close” (1 day)
- Buyer wires monies for the downpayment, closing costs, and escrow expenses.
- Loan is funded
- Do a final walkthrough (1 day)
- Escrow Closes and the deed is recorded
- Possession of the home is exchanged
Common Challenges that can Delay The Closing Process
When all of these steps are completed and everything goes smoothly, a financed transaction should close in five to six weeks. It is important to know that there are common challenges to the process that can cause delays. The keyword here is common. Don’t worry, if you experience any of these challenges, it is unlikely they will derail your transaction. If you are working with an experienced real estate pro, they will help you navigate these common issues with ease.
According to the National Association of Realtors, in 2020, 24% of closings experience delays before a successful result. Additionally, 6% of contracts are canceled before the deal closes.
Let’s take a look at the top challenges that delayed the closing process in the first quarter of 2021.
Issues with Buyer Financing
The buyer’s loan contingency is an agreement within the purchase contract that allows the buyer a specified amount of time to secure loan approval. The standard amount of time is about 21 days. If the buyer is unable to obtain their financing during that time, they can cancel the contract and still retain their earnest money. This limited number of days, keeps the buyer’s lender working hard to expedite the loan approval.
Unfortunately, there may be unforeseen issues that arise during the loan process that will cause delays. Lending issues can often be corrected with additional documentation, or by making small changes to the loan. As long as the buyer and their lender are on top of things, these delays shouldn’t cause a major delay.
A Low Appraisal
A lender won’t finance more than what a given home appraises for. This protects the lender from investing money that they have little chance to recoup in case the homeowner defaults on their loan. When the home does not appraise for at least what the buyer is financing, the lender will not approve the loan. There are a few ways for low appraisal issues to be remedied.
The seller may be asked to lower the selling price of the home if the appraisal comes in low. That is an unpopular method for obvious reasons; especially in seller leveraged markets. Low appraisals can also be disputed by the buyer and their agent. An appraisal dispute will trigger a review of the appraisal or a request for a second appraisal to be completed. One other common remedy to a low appraisal is for the buyer to increase their downpayment to cover the difference.
Home Inspections and Repairs
Home inspections will often be performed within the first week of opening escrow. The inspection will cover all aspects of the home’s functionality, structure, and aesthetic. Once the inspection report is produced, the buyers and their Realtor® will review it. If there are any major defects to the structure or functioning systems of the home, they are entitled to request the seller to make repairs or renegotiate the sales price.
Major defects that can jeopardize the sale:
- Structural Issues
- Water Damage
- Electrical Issues
- Roof damage
- Plumbing related problems
- Insect or pest infestation
- The presence of mold or extensive dry rot
In most cases, the presence of defects in the home can be overcome. The remedy is often to have the seller provide a credit back to the buyer through escrow. The buyer and seller negotiate the amount of the credit. It essentially provides the buyer with a discount on the purchase price at the time of closing. It is then up to the buyer to either make the repairs once they are in possession of the home or to just pocket the money and deal with the repairs later on in the future.
Tips to Keep your Closing on Schedule
There are so many things happening non-stop during the process of closing a home. There will also be many different people handling the different aspects. It will be important for everyone to stay on top of outstanding tasks and any issues that arise in order to keep things on schedule.
Here are a few tips for keeping your home sale on track.
Make sure financing is strong
This is a tip for the buyer and the seller. As a buyer, it is important to make sure your finances are well lined up when buying a home. Firstly, make sure bills are paid, debt balances are low, and monies are available (for down-payment and costs). Secondly, don’t make any major changes to your finances or credit during the process. For the seller, you can vet the buyer’s financing before you accept their offer and open escrow. Having the buyer cross-qualify with your preferred lender is a great idea. Moreover, doing this will provide a second opinion about how strong the buyer’s financing is. You will save yourself time and headaches later on.
Complete documents and requests ASAP
There will be many requests for documentation and action during the closing period. As a buyer, it will be extremely important to provide your lender with all the needed information right away. Completing your inspections and due diligence quickly is also key. As a seller, respond to the buyer’s “Request for Repairs” (if applicable) right away. There may be a bit of a negotiation that takes place in regard to this request. Handling the “Request for Repairs” quickly will allow for the escrow to move forward quickly.
Communication is Key
With so many moving parts, communication about what is going on is paramount. Constant communication between the agents, escrow officer, lender, and principals will assure that everyone is on the same page. Proper communication will help the closing process to move forward as smoothly and expeditiously as possible.
Closing day: How long is the final step of the closing process?
Once you have successfully jumped through all of the hoops and hurdles, it’s time to close the transaction. You can finally breathe easy knowing that you are at the end of the process
One of the last steps of the escrow process in California is for the deed to be recorded with the county recorder in the name of the new owner(s). This is what officially transfers ownership from the seller to the buyer.
After the escrow office receives confirmation that the deed has been recorded, all proceeds will be paid to the seller, and possession of the home is given to the new owner.
The last few steps of the closing process are usually completed within a day or two after the buyer’s loan has funded.