Buying your first home is an exciting and life changing event. It is also daunting and requires many moving pieces to come together all at once. Each step of the home buying process must be navigated with extreme care, precision and skill. If you are financing the home purchase with a mortgage or other lender financing, there are additional steps that are involved that must be worked into the home buying process. This guide is a general overview of the process.
Once an offer on a home is made by a buyer and accepted by a seller, the next step is for the house to “go into contract.” This means that the seller’s attorney prepares a purchase contract which essentially memorializes the understanding of the parties with respect to the transaction. Key provisions of a contract of sale include the identity of the buyer and seller, the address of the premises being purchased and sold, the purchase price and amount of downpayment that the buyer will put down on signing of the contract as well as the amount being financing, if any. In addition, one of the most critical points in a purchase contract is called a “financing contingency.” A contingency means that there is a specific condition to the buyer being obligated to consummate the sale
The most widely used contingency is the financing contingency which means that the buyer’s obligation to close the deal and purchase the house is conditioned on the buyer obtaining a mortgage from a lender. This clause states the obligations of the buyer to apply for financing and typically includes a requirement that the buyer promptly and diligently apply to an appropriate lender and provide truthful and accurate information to the lender. Frequently, a seller will not entertain any offers from a buyer who does not show a prequalification letter from a lender. That is, a buyer needs to give a seller some comfort that if the buyer applies for a mortgage, that the buyer will indeed be successful in obtaining the financing. If a buyer intends to finance the house purchase with outside financing, the inclusion of a financing contingency is critical in a purchase contract. Specifically, if the buyer follows all of the obligations to seek financing and acts in good faith but is still rejected by a lender, the buyer does not forfeit the downpayment. The buyer’s right to a return of its downpayment in the event that financing does not pan out is extremely important as the downpayment is a sizeable amount, sometimes ten or more percent of the purchase price. Of course a buyer who intends to purchase the house without third party financing may not require such a financing contingency and the deal becomes an “all cash” deal. In this case, the buyer is obligated to consummate the deal unless there are any issues with seller’s title to the property.
The negotiation of the purchase contract is done between the buyer’s and seller’s attorney and involves a discussions and exchanges between the parties of various terms and provisions that are important to the parties. In addition to terms relating to financing, the parties discuss what items remain in the property, whether the seller is allowed to occupy the property following closing, and any other special terms that are of particular importance to the parties. Each deal is unique and requires a careful consideration of the details involved.
Prior to signing the contract, a wise buyer should strongly consider hiring a licensed inspector to inspect the prospective property and provide a full report on any possible issues that arise from the inspection. While not every issue may be obvious, the inspector will still pick up on important points such as the roof, floors, flooding, etc. A buyer can then use the inspection to make an informed decision of whether the buyer wants to move ahead with the property and whether the price is acceptable.
The execution of a contract involves a buyer signing a final version of the contract that has been agreed on by both the buyer’s and seller’s attorney, and sending the signed contract along with the required downpayment to the seller. The seller than accepts the buyer’s offer by accepting the downpayment (which is to be deposited in the seller’s attorney escrow account for safekeeping until closing) and counter signing the purchase contract and returning it to the seller. At this point, the parties are now “in contract.” The seller cannot back out on the deal and solicit other buyers and the buyer is obligated to immediately and diligently pursue financing (if there is a financing contingency). Once the deal is under contract, the buyer’s attorney must also order a title search from a reputable title company in order to ensure that the seller has clean title to the premises. In addition, the buyer begins to work closely with the lender to fulfill the lender’s requests for information and documentation which is frequently an intense and time consuming process.
The title search results in a full title report and indicates whether any other party has a prior recorded lien on the property as well as any violations on the property. Generally, the seller must satisfy any open liens and close all violations prior to consummating the sale. Lenders and any wise cash buyer will insist on clean title with a clear chain of ownership and no open violations. Both attorneys must review the title search and be comfortable that the property is being conveyed with good title.
Once a lender has obtained all requirement information and documentation of a buyer, the lender will issue a “commitment.” Basically this is a promise on the part of the lender to fund the deal provided that certain standard conditions are met. The commitment contains an expiration date by which the closing must take place in order for the borrower/buyer to be eligible for the terms that the parties agreed to. This expiration date is critical as the buyer must take all actions necessary to close prior to the expiration of the commitment. The buyer’s need to close prior to the expiration date in the commitment may be at odds with seller’s timing as seller has other issues to be reckoned with such as an unwillingness or an inability to move prior to a certain date. A properly negotiated purchase contract may address this scenario or the parties may simply agree to cooperate.
Once the parties set a closing date, the attorneys on all sides-buyer, seller and lender-shift into high gear to start preparing the documents and information needed for closing. Proper representation for all parties is critical to ensuring a smooth, successful and stress-free closing and transaction. An attorney who is knowledgeable, patient and diligent is the best recipe to ensure success on all sides.