ultimate first-time homebuyers guide
Part 5: In Contract
You’ve now written and submitted an offer, and hours or days later the phone rings. It’s your Realtor giving you the good news— your offer has been accepted! Take this moment and enjoy it, as it’s a big step toward owning your home. It’ll also be the last quiet moment for a little while.
Now comes the part where the machine fires up and starts moving. You will start getting requests from a bunch of different people for various things. Here are the next steps in the process, and how you’ll be interacting with them.
Escrow: On the first active day of the transaction, the listing agent will open escrow with a title company. The title company has two intertwining roles in the transaction. They will handle escrow— meaning they’ll oversee all deposits, payments, and settlements as a neutral party— and they will insure title to the home. More on that in a bit.
Earnest Money: Your earnest money deposit will be due within 72 hours. The escrow company will reach out to you to arrange payment. Earnest money can be provided by personal check.
Mortgage Application: This is the point at which you will formally apply for a loan. Reach out to your lender to begin this process. You will also find out at this stage what interest rate you’ll be paying. Have a discussion with your lender about whether to lock the rate now (meaning it can’t be changed later) or allow it to be changeable. Note that with a rate lock, many lenders will still allow a one-time “float down” option, in the event that rates do drop while you’re in contract.
Your lender will send you a Loan Estimate, which is a required-by-law document that details all of the pertinent loan details. This includes your interest rate, payments, and closing costs (loan origination, appraisal, discount points, taxes, etc.) If you have questions about any of them, ask.
Tip: Discount points are a way to prepay interest so that your rate will be lower. One discount point usually costs about 1% of the loan amount and will typically lower your interest rate by 1/8%-1/4%. Run the math: divide the up-front cost of the discount points by the monthly savings and you’ll see how many months it takes for the points to pay for themselves.
Inspection: If you’re doing third-party inspections, your Realtor will discuss arrangements with you and recommend some home inspectors. Depending on the size of the house and the add-on services being offered, this inspection can range from $500 to $1500 and will generally take 3 to 5 hours. You don’t need to be there for the entire inspection, but it’s wise to be there for the last thirty or so minutes to discuss findings directly with the inspector.
Tip: Two add-on inspections are commonly offered: radon testing, and a sewer scope. These are both highly recommended. Radon is a health hazard (which can be relatively easily mitigated when discovered), while sewer lines can have very expensive problems that aren’t apparent to the naked eye.
Preliminary Title Report: Ultimately, the title company is going to issue title insurance (one policy for your lender— which the lender will require and you’ll pay for— and one for you, which in Oregon is customarily paid for by the seller). While most insurance covers events that might happen in the future, title insurance covers events that happened in the past. This insurance kicks in when, after closing, title defects are found. These could be outstanding liens or judgments against the house, conflicting ownership claims, or undisclosed easements, among other things.
The preliminary title report is a record search of all pertinent details about the property and the sellers. Any known title defects will be uncovered, and these will need to be cleared by closing as the seller is required to convey a clear title to you.
Tip: While title claims are rare, the cost of them can be enormous. Think of it as you would any other catastrophic insurance policy, and the good news is you only pay for it once.
Insurance: Welcome to the world of homeowners insurance. It’s recommended to reach out early to insurance companies to get quotes for coverage, as you may encounter some costs you weren’t expecting based on the condition of the house. Also, your lender will require you to have coverage. Start with whoever provides your auto insurance as there will probably be a discount for bundling, but don’t be afraid to go out and get multiple quotes: insurance companies have differing assessments of risk, and therefore different pricing for those risks.
The above items are most of the events you’ll face in the first week. Once the ball gets rolling, things start to get quieter. The reason why it typically takes 4 to 6 weeks to close a transaction is that the lender is in their underwriting process. Let’s take a deeper look at that.
Underwriting: This is the lender’s process for vetting both you and the house, since after all they’re lending you hundreds of thousands of dollars and want to be sure that they’re making a safe bet. Regarding your qualifications, they’ll be taking a deeper dive into your finances, credit, employment, and anything else that they deem necessary to determine if you’re a good risk. They will also look at the house (price and condition) to make sure it’s good collateral, and that they’re not lending too much for it.
Appraisal: About that last part… this is where the appraisal comes in. Your lender will (most of the time) require that the home be appraised by a licensed appraiser. This appraiser, who works independently of the lender, will study comparable sales and visit the home to assign it a value. If this appraised price comes in at or above the price you’re paying, no further action is needed. If it comes in below, you’ve got some decisions to make, as the lender will only lend against the lower of the appraised price OR the purchase price. If you planned to borrow $400K but the appraisal comes in $25K below the price you offered to pay, that $25k needs to be covered either by you or the seller in some way (or somewhere in the middle). The standard purchase agreement does include a finance contingency that protects you here, giving you the right to terminate the transaction if the appraisal falls short.
The appraisal process is slightly different if you’re using FHA, VA, or USDA financing. In those cases, expect more stringent standards when it comes to the condition of the property.
You’re now several weeks into the transaction. At this point you’ve gotten through inspections, the appraisal came in, and the lender has finished underwriting. If everything has gone correctly, you now get to hear three magical words: “clear to close.”
Clear to close means that the lender is all done and you’re approved for the loan. This is the last step before they send your file to the title company for the actual closing. The lender is also going to send you a Closing Disclosure, which is a document that looks similar to the Loan Estimate you received earlier. Check to see if most of the numbers match— they should. By federal law, the Closing Disclosure must be sent to you at least three days before closing, so that you have ample time to review.
Tip: Although rare, there are still ways for the loan to be denied after you’re clear to close. Don’t lose your job, make any large purchases, or put large deposits into your bank account. Lay low until closing.
Once the title company has all of the loan documents, it will schedule a signing appointment for you. Chances are, the sellers have already done their signing (less paperwork for them) so you won’t be seeing them at closing. Prior to closing, it’s always advisable to do a final walk-through of the house to make sure all conditions have been met and the house is clean and empty of personal belongings.
The signing process will be you and whoever else is on the deed signing A LOT of papers with a notary, probably at the title company’s office. You’ll have arranged for the down payment and other closing costs to be paid (typically by wire), and once you’re done with the mountain of paperwork the title company is going to request the lender’s funds. When everything is hunky-dory— within minutes or hours— they will record the deed with the county and BOOM! You’re now a homeowner. Congratulations! You will arrange for delivery of the keys with your Realtor.
Tip: Be extremely careful when wiring funds so that you’re sending them to the title company and not someone pretending to be. Always get wire instructions directly from the title company- on the phone or in person, NEVER by email or text.