Real Estate Closing: FAQs
In a typical residential real estate transaction, a buyer offers to purchase property from a seller. After negotiating the price and terms, the buyer and seller sign an offer to purchase and contract, and the buyer gives the seller an earnest money deposit to show good faith in the transaction.
A Real Estate "closing" is the final step in the transaction. At closing, the buyer pays the purchase price to the seller, and the seller fives the buyer a deed transferring title to the property to the buyer. Also, funds are paid to an appraiser, home inspector, and/or other service providers, and to pay off banks or others who may have claims against the property.
- Does a "loan commitment letter" guarantee that I have a loan to buy the property?
- What happens if the property is damaged or destroyed after I sign the purchase contract but before closing?
- Who closes the transaction?
- What is a closing statement or "HUD"?
- I am being asked to put something on the HUD that is different than what I agreed to. Is that ok?
- What if I can't close by the time stated on the contract?
- If I'm a seller, when should I get my proceeds from the sale of my property?
- What is pro-rating?
- What are special assessments?
Does a "Loan Commitment Letter" Guarantee that I Have a Loan to Buy the Property?
No. The standard form Offer to Purchase and Contract requires you to use your best efforts to obtain loan before a specified date. If the seller requests it, you must give the seller a copy of your loan commitment letter within 5 days following the written request. A loan commitment letter does not guarantee that the lender will make the loan. It simply means that, based upon an initial review, your credit appears sufficient to qualify you for the necessary loan amount. After issuing the letter, the lender may refuse to approve your loan if there are any changes in your employment, creditworthiness, or other changes which might affect your ability to repay the loan. The lender reserves the right until the deed is recorded transferring title and the loan proceeds are actually disbursed at closing.
What Happens if the Property is Damaged or Destroyed After I Sign the Purchase Contract but Before Closing?
Typically, the purchase contract requires that the property be in substantially the same or better condition at closing as on the date you contracted to buy it. If the property is damaged or destroyed by fire or other casualty prior to closing, the risk of loss is on the seller. The buyer has the option to wait for the seller to repair or reconstruct the property or to terminate the contract and recover any earnest money deposit.
Who Closes the Transaction?
A real estate closing is completed when the seller conveys the title to you be deed, you give the purchase money to the seller and the appropriate documents are recorded with the Register of Deeds office in the county where the property is located. The closing will probably be handled by an attorney chosen by you. In many transactions, the attorney may also represent the lender and the seller. The seller may hire his or her own attorney or pay your attorney to prepare the deed to give to you. Make sure you know "up front" who the attorney is representing. Others involved in the transaction may recommend or offer you financial incentives to hire a particular closing attorney, but you have the final word. Prior to closing, the seller should give the closing attorney a copy of the deed to the property. Also, if there is an outstanding mortgage on the property, the seller should give the attorney any personal information needed to obtain a loan payoff figure so any existing loans can be paid off in full at closing. As the buyer, you will need to give the closing attorney a copy of your contract and contact information about your lender, any inspectors, or other persons who provided services in connection with the transaction.
What is a Closing Statement or "HUD"?
A closing statement is a document that summarizes all funds received by you and the seller at closing, and all funds paid by you and the seller for various expenses of the transaction. For all closings involving federally insured loans, the Real Estate Settlement Procedures Act (RESPA) requires that this information to be reported on a form from the federal Department of Housing and Urban Development (HUD).
I Am Being Asked to Put Something on the HUD that is Different than What I Agreed to. Is That Ok?
Probably not. The HUD should reflect the agreement between the parties and match the terms set out in the purchase contract. You may be committing loan fraud if you make a false representation to a lender on the HUD, the loan application or elsewhere in order to obtain a larger loan amount or a loan on more favorable terms that you otherwise qualified for under the lender's guidelines. Loan fraud is a federal crime punishable by up to 30 years in prison and $1 million in fines. If you are asked to do any of the following, refuse and immediately contact the North Carolina Real Estate Commission:
- Create a false gift letter for down payment funds.
- Make it appear you made a deposit when, in fact you did not.
- Give the seller a secret or even false or "forgivable" second mortgage
- Make payments outside of closing which are not disclosed on the HUD, such as additional fees paid to service providers, to the seller, or third parties.
- Make false statements that you will occupy the property.
- Give false personal information about yourself to the lender.
What if I Can't Close by the Time Stated on the Contract?
If your purchase contract states that "time is of the essence" as to the closing date and you fail to close on that date, regardless of the reason, you will probably be considered in breach of contract. Consequently, if your lender fails to provide the closing package in time for closing, you may unintentionally lose your chance to purchase the property. Likewise, if the seller cannot complete a major required repair prior to the stated closing date, the seller may lose the sale.
If I'm a Seller, When Should I Get My Mroceeds from the Sale of My Property?
The closing attorney may disburse funds immediately after the closing has been completed, the title has been updated, and the documents have been recorded. Often, time may not permit the closing attorney to record the documents, update title, and disburse funds, or the lender may not be able to wire the loan proceeds, all in the same day. When this happens, a "dry closing" is sometimes held with the funds being disbursed the next business day. If you are a seller, you should discuss the timing of disbursements with the closing attorney in advance so you can be aware of any possible delays. If you are a buyer, be aware that the seller may not be willing to give you possession of the property until he receives his proceeds for the sale.
What is Pro-Rating?
Certain items are prorated at closing. "Prorating" occurs when you and the seller are each responsible for a portion of an expense. For example, property taxes are assessed as of January 1st, but not normally payable until the end of the year. The seller is responsible for his share of the property taxes from January 1st until the closing date. The buyer will be responsible for the remainder of the year. Review the contract carefully to be sure you know what items, if any, will be prorated at closing.
What are Special Assessments?
Local governmental units can assess property owners for certain improvements to their property such as sidewalks, sewer lines, street repairs and drainage systems. Since these assessments run with the property, you should verify with the closing attorney before closing that there are no existing special assessments.