The real estate contract puts into writing the agreement between the home owner (Seller) and the home buyer (Purchaser). The agreement between these parties outlines the price, mortgage terms, closing date, possession date and other agreements reached between the parties. The written contract is basically the roadmap that guides you through to your closing.
The contract also provides statutory requirements, such as disclosures regarding property condition, lead paint, and mold. These documents are legally necessary for the completion of the closing.
The contract is usually prepared by the real estate agent, if the seller employs one, or the seller's attorney. The terms of the closing are clearly written in the contract and then signed by the Purchaser and the Seller. Once signed by both parties, the deal is sealed and a timeline to closing begins.
- Attorney Review and Inspection Contingencies
The first deadline of the usual real estate contract is the time for the parties' attorneys to review the contract and for the buyer to obtain an inspection. The time period for these two events is usual five business days after Seller's signature (Acceptance) of the contract.
Purchaser may obtain a professional inspector's services to inspect the property for any material deficiencies. This is important to the Purchaser because a professional inspection should detect any problems with the roof, foundation, plumbing, electrical and mechanical systems, as well as indicate the life expectancy of appliances and systems that bear watching even though they are currently in good repair. Many times inspectors find deficiencies that sellers are unaware exist because they do not usually inspect their property. A good inspection allows a Purchaser and Seller to go through to closing without worrying about unknown problems popping up.
Attorneys review the contract to make sure that it reflects the parties' agreement. If a party has forgotten to add or subtract something from the contract, their last chance to correct the agreement is during attorney review.
- Earnest Money
The second deadline outlined in the contract is the time for Purchaser's deposit of the earnest money. The earnest money is an amount paid by the Purchaser to confirm the agreement. The earnest money guarantees Purchaser will close on the purchase, or else lose the money. The earnest money is usually deposited one or two days after attorney review and inspection. The money is held in escrow by the real estate agent, if there is one, or else by seller's attorney.
- Mortgage Contingency
The next deadline outlined in most real estate contracts is the time by which the Purchaser has to obtain the mortgage financing approval. This part of the agreement determines the type, amount and costs involved in the Purchaser obtaining their mortgage approval. It also contains the agreement between the parties as to what would happen if Purchaser is unable to obtain their mortgage approval in the time specified.
- Closing Date
The next, and usually final, deadline provided in the real estate contract is the closing date. This is the date where all the parties, the attorneys, and the lender meet at the office of the title insurer. During the closing the Purchaser signs all their mortgage documents, the seller signs all their documents transferring ownership and the title company representative makes sure all the documents meet the requirements of the lender and the title company to insure transfer of good title and insuring that title.
The essential document of the closing is the Closing Statement, also known as the HUD or RESPA, so named for the federal statute that created the format of the document. The closing statement contains all the figures of money to be paid by the parties to each other or to providers of essential services for the closing. The base figures are derived from the contractual agreements between the parties, including the purchaser price, the earnest money, the credit for the taxes, and credits for Seller prepaid items such as association assessments or prepaid water bills. The final figures tell the Purchaser how much money he needs to bring to closing and the Seller how much he will be receiving at closing.
Prior to closing, the attorneys are busy preparing all the documents necessary for the closing, described below.
- Possession Date
The final act of any closing is the giving of possession, in the form of the keys to the property, to the Purchaser. Usually, this takes place at the end of the closing transaction after all money has been paid and received. However, by agreement, the parties can delay the possession date to aid seller in their move. If parties agree to delay possession after the closing date, the Seller will usually pay the Purchaser an amount per day of use for rent. This amount usually equals the Purchaser's principal, interest, taxes and insurance (PITI) per day. However, it can be whatever daily amount the parties agree to. In addition to this amount, the Seller is usually required to deposit money into a Possession Escrow at closing. The Possession Escrow guarantees the the Seller will deliver possession on the date agreed or forfeit a percentage of the escrow amount for each day of the delay.
While the Purchaser is working with his lender to obtain his mortgage approval, the Seller's attorney is generally preparing documents for the closing, according to the requirements of the contract. These documents include: title, survey, seller's mortgage payoff statement, realtor's fee statement, state, county and local transfer requirements and all transfer documents.
- Title Insurance
The real estate contract usually requires the Seller to provide proof of good clean title prior to the closing. The Seller's attorney will order a title commitment from a title company that he has regularly worked with. This commitment is a snapshot of any liens or encroachments against the property as of the date given. It discloses any current real estate taxes that are due and payable, as well as a history of any past taxes due. It discloses the names of the parties in title as well as any mortgages or home equity loans placed against the title. It shows matters of survey such as property setback lines, easements for utilities or other matters of public record. Finally, it discloses any judgments or liens placed against the property or against either the Seller or Purchaser. The title commitment is then cleared of all the objections prior to closing so that title can be insured to the Purchaser and Purchaser's lender.
Every lender and title company require a recent survey at closing so that survey title matters may be clearly insured. The contract requires Seller to provide this survey as proof of good clean title. Survey requirements vary by contract, but essentially the survey must show the lot lines, corners, setbacks, easements and any encroachments against these things. For example, if your neighbor's fence is on your property, it encroaches on the property. Survey matters are cleared when clearing other title objections.
- Mortgage Payoff
Most properties have one or more mortgages recorded against it. These must be paid at closing in order to deliver an unencumbered title to the Purchaser. Seller provides his attorney with all his mortgage information so the attorney can obtain a payoff statement from each lender. Included in the payoff statement from the lender is the promise to release the mortgage within 30 days of payment in full of the statement amount. The title company relies on this document to pay off the mortgages properly and insure good title to Purchaser and Purchaser's mortgage company.
- Local Ordinances
The state and counties all have transfer taxes that Seller will pay as a part of closing and execution of the state and county transfer declarations are required of all parties at closing.
However, many municipalities have their own transfer requirements which may require preparation of a declaration, payment of transfer fees and inspections of the property or the documents or both. Seller's attorney works closely with the parties and the real estate agents and Purchaser's attorney to ensure that all local requirements have been fulfilled prior to closing.
In addition, local homeowner associations or condominium associations also have requirements which must be met prior to a closing statement will be issued for the closing. These statements are necessary for title clearance.