Be prepared to hear a whole lot of closing-related terminology that sounds like “alphabet soup from another language” when you’ve reached that stage of closing a home and about to sign on the dotted line.
Don’t just let your real estate attorney or a representative from your lender, and your trusted Realtor® nearby explain the things to can’t understand, you don’t want to look so innocent, right? So now, we’re here to help you with some of those confusing terms and acronyms you could encounter when you close on a home.
You may hear this from your lender or agent. This acronym stands for “Close of Escrow.” It essentially means that a real estate transaction has been completed and that the sale is final. The seller of the property transfers all the document to the escrow agent, who holds them until the buyer transfers the money for the sale to the agent who ultimately transfers it to the seller. Once it is done, it completes the transaction and is known the closing of escrow.
The closing agent handles all vital documents involved in the close of the sale, including insurance receipts, deposits, and closing cost payments. The closing agent is also responsible for registering the mortgage and deed with the appropriate courts. Once the closing session has been successfully completed, the deed of the property is updated with the new seller’s name and is given to the lending institution financing the transaction. The fulfillment of this transfer is known as the recording process. Once it is done, the escrow agent releases monetary funds and the buyer becomes responsible solely to the lending institution, the escrow has been closed. “But what is Escrow?” Please read on.
This is the holding area for essential funds and important documents. It is a financial instrument held by a third party on behalf of the other two parties in a transaction. The funds are held by the escrow service until it receives the appropriate written or oral instructions or until obligations have been fulfilled. If there are conditions to the sale, such as the passing of an inspection, the buyer and seller may agree to use escrow. In this case, the buyer of the property will deposit the payment amount for the house in an escrow account held by a third party. This assures the seller – in the process of allowing the house to be inspected – that the buyer is capable of making payment. Once all of the conditions to the sale is satisfied, the escrow transfers the payment to the seller, and a title is transferred to the buyer. There are many variations of escrow accounts, depending on the specifics of your deal. Let the pros explain the relevant points of yours.
This is the acronym for “Earnest Money Deposit.” This is the money/funds buyer put down to prove to sellers that they’re serious about their offer. The amount of the EMD varies by state but is typically in the range of 2-5% of the purchase price. The sellers can’t rush out and cash this check right away – in fact, the check should be made out to the escrow company, not the seller. But the seller may get to keep the money if you pull out of the deal for a reason that wasn’t allowed under the purchase contract. A good example of this is if you simply change your mind, or perhaps got lazy about taking steps to finalize your loan, as opposed to legitimately refusing to remove the inspection contingency after inspections revealed dry rot.
Having a deposit on hold acts as a disincentive against buyers who file foolish offers, and ultimately compensates a seller who has to put a house back on the market. As a practical matter, the escrow can’t turn the money over to the seller without both the buyer and seller agreeing to allow that. Make sure to check your contract before you sign it to make sure you’re satisfied with how it disposes of the earnest money in the event of a dispute. So if the deal goes ahead as planned, the earnest money is normally applied toward your down payment. But sometimes there are legitimate reasons to back out, which leads us to…
These are conditions included with an offer on a home that must be fulfilled before the deal can close. If a buyer or seller is unable to satisfy a contingency, then the offer on a home may become void. Contingencies usually include time frames in which a buyer can get his earnest money back if the contingency isn’t fulfilled before the deadline. For example, if a buyer schedules an inspection within the time specified in his contract and decides that he needs to make too many repairs, he can withdraw his offer and get his earnest money back. Here are the most common contingencies.
Financing Contingency: the buyer must get approved for a mortgage loan to be able to buy the home. He will have a set amount of time to receive a loan commitment letter from a lender to confirm the approval of his loan application.
Inspection Contingency: this gives the buyer the right to get the home inspected and negotiate further if there are repair issues. The inspection usually happens 5-7 business days after mutual acceptance. Unfortunately for REOs, the banks rarely pay for any repairs, buyers should still get an inspection, but they’ll need to cover any repair costs.
Sale Contingency: the success of the offer on a home really depends on the sale of the buyer’s current home.
Title Contingency: the offer depends on whether the title of the home that documents the history of ownership is clear of any liens/claims. This contingency grants the buyer the right to review a title report.
Appraisal Contingency: the success of the offer depends on an appraisal confirming a value for the home that is equal to or greater than the buyer’s offer amount.
Do you know for sure that a home seller really owns the place free and clear? Getting a title insurance is one of the standard steps home buyers take before closing on a home purchase. This is crucial for a home buyer because it protects you and the lender from the possibility that your seller doesn’t – or previous sellers didn’t – have free and clear ownership of the house and property, which therefore can’t rightfully transfer the full ownership to you. Even though the chance of calling on the insurance for coverage is relatively low, the value on what you stand to lose if you go without coverage is high – you could, in fact, lose the house itself. Your escrow or closing agent will launch the process of getting you a title insurance soon after your purchase agreement is signed. Usually, your closing agent or attorney will choose your title insurer for you, from one of the five major U.S. title insurance underwriters. There’s a minimal fee for this of course which the seller traditionally foots the bill. The process is all very standard and likely to go through without a hitch. Title insurance is typically a combination of two policies: a lender’s policy and a borrower’s policy. Why do you need both policies? No preliminary title search, no matter how complete, can predict when a long-lost relative or heir will turn up or whether paperwork buried for years under a misspelled name will reveal a claim concerning the property. The lender’s policy will kick in to defend such claims and, if all goes well, might resolve the matter against whoever brought it up. The “title search” should be the first task of issuing the policy.
This is not your ancient music format. The term is “Closing Disclosure.” This is a five-page form that provides final details about the mortgage loan you have selected. It includes the loan terms, your projected monthly payments, and how much you will pay in fees and other costs to get your mortgage (closing costs). The lender is required to give you the Closing Disclosure at least three business days before you close on the mortgage loan. This three-day window allows you time to compare our final terms and costs to those estimated in the Loan Estimate that you previously received from the lender. The three days also gives you time to ask your lender any questions before you go to the closing table. Use this time wisely, if you see something that looks amiss, now is the time to ask your attorney or Realtor®.
Cash to Close
Cash to close is the amount a home buyer needs to close the deal. This includes money for closing costs like appraisal fees, title insurance or attorney fees, as well as the down payment and pre-paid items like escrow funds. Cash to close is the entire amount you will need on the day of closing your mortgage loan. It’s typically 3 to 6% of the price of the home. You’ll be informed of the exact amount needed prior to signing your final loan papers at the escrow office.
One common type of math calculation that you will make as a real estate agent is called a proration. Proration is simply the portion or percentage that the buyer and seller pay/owe for various items at closing, such as HOA fees, taxes and fuel.
Prorating can make a big difference to closing costs to a buyer and seller. Checking the sales contract before signing on the dotted line is the crucial first step to understanding how or whether prorating will be calculated. If nothing is mentioned of the term is in the contract, ask for it to be added or clarified, or verify state law dictates how it is handled. Finding out what the rules are after you are already committed to a contract is definitely the kind of surprise you want to avoid.
If you are selling a home, there is a good chance that you will encounter a buyer that requests a closing cost credit. Your immediate reaction may be an irritation. Why, after all, should you pay for the closing costs? But it is important to understand that a closing cost credit doesn’t necessarily mean that you are losing money or paying the buyer for buying your home. It’s just a way for the buyer to have more cash on hand for initial repairs and other necessities after buying. It could also be for just that – the actual closing costs.
Understanding how closing cost credit work, and how they affect your home sale, is necessary for today’s real estate market. This understanding will help you navigate the process of selling your home a little more comfortable, and will allow you to get on with selling your property.
“So how do closing cost credits benefit me?” you might be asking yourself. Closing cost credits are designed to give buyers a bit of breathing room right after they purchase a house. Closing on a house can be expensive and can leave buyers with nothing left over to take care of all the things that need taking care of after one becomes a home owner. Additional home buying expenses that come after closing can include upgrades, repairs, purchasing furniture and more. In fact, knowing these expenses are on the horizon can prevent potential buyers from entering the market, and from buying your house. Closing cost credits are also good for sellers. While at first, it may look like you are footing the bill for the buyer’s closing fees, what you are really doing is giving the buyer the opportunity to purchase your home in the first place. This is especially true if you have a house that needs any type of repairs or upgrades to make it desirable. The buyer is going to need some way to bring the home up to standard, and the closing cost credit is one way to accomplish this.
It’s time to celebrate! This means you officially own your new home!
Recording is the act of putting a real estate document into the official records at the County Recorders or Recorder of Deeds Office. Usually the types of documents that are recorded affect title to real property such as a deed, mortgage, easement, judgment, lien, foreclosure, or request for notice of default. These types of documents should be recorded with the recorder’s office in the county where the real estate is located. The purpose of recording a document is to provide a traceable chain of title to the property. Thus, recording property interest in the public records effectually gives notice of ownership to the general public. In fact, recording helps to resolve disputes between multiple claimants.
Source: realtor.com, mortgage101.com, Investopedia.com, nolo.com, redfin.com, consumerfinance.gov, basictrainingforrealestate.com, maxrealestateexposure.com, legalmatch.com, activerain.com, mikelembeck.com, swfloridatitlefirm.com, 4ez.com
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