Whether you’re a first-time homebuyer, looking to purchase a second home, or downsizing after a life change, you can’t move into your new house until you officially close on the property. Your closing day – the day you meet with the seller, your real estate agents, title or escrow agents, and possibly other parties involved in the transaction – is the day the property officially becomes yours.
However, the closing process begins right after the seller accepts your purchase offer. That’s typically 30 to 60 days before your actual closing date – assuming a loan underwriting snag, low appraisal, or major defect discovered during a routine home inspection doesn’t delay the deal. During this period, the sale of your home is said to be “pending.” If it’s customary in your market to make a substantial deposit (up to 10% of the agreed purchase price, in some cases) into an escrow account once your offer is accepted, you may also refer to the closing process as the escrow period – as in, “the home we’re buying is in escrow until our closing day.”
No matter what you call it, a lot needs to happen between the day the seller accepts your purchase offer and the day you sit down to make the transaction official. Here’s a look at the general sequence of events that occur during the residential real estate closing process, what and how much you can expect to pay before and on your closing day, and the documents and disclosures you need to understand and sign to make your real estate transaction official.
Key Closing Process Milestones
It’s important to remember that the customs and legal requirements governing real estate transactions vary substantially from place to place. While the following is a general timeline and description of what you can expect (and when) between the day you submit your purchase offer and the day you close on the property, your actual experience may vary. To learn more about how the process works in your particular market, consult an impartial real estate professional with experience in the area.
1. Accepted Purchase Offer
The closing process officially begins once the seller accepts, signs, and returns your purchase offer (also known as a purchase agreement). In most cases, the seller then deposits the buyer’s earnest money check – usually 0.5% to 2% of the purchase price – into an escrow account.
Customarily, the purchase agreement can be amended to reflect last-minute negotiations or contingencies, such as a problem uncovered during the home inspection, without sabotaging the deal. However, all parties involved in the transaction – the buyer and seller, their agents, the lender, the title or escrow agent, and possibly the buyer’s and seller’s attorneys – begin the closing process under the assumption that the purchase agreement is final.
In some states and markets, you’re required to make a 5% to 10% escrow deposit (toward your down payment and/or closing costs) shortly after the seller accepts your offer. Buyers working with legal representatives can typically wait until after their attorneys review the purchase agreement to make their escrow deposits.
If you’re not sure whether an escrow deposit is required in your market, ask your real estate agent far enough ahead of time to ensure that you have enough liquid funds in place to clear the deposit.
2. Buyer-Ordered Home Inspection
Within a few days of the seller’s acceptance of your purchase offer, you need to schedule a home inspection with a professional inspector. The goal of a home inspection is to look for minor and major defects, such as structural problems, nonworking appliances, and elements that may violate local building codes.
Many lenders require this as a condition of underwriting your mortgage loan. Even if yours doesn’t, there’s little downside to getting a thorough look at the home you’re about to buy. If the inspection uncovers a major problem that needs to be fixed before closing (or results in a reduction in the agreed purchase price), the standard $300 to $500 inspection fee will seem like a bargain.
3. Loan Origination and Underwriting
Once the seller accepts your offer, send it to your lender. At this point, your lender begins the time-consuming (and costly) process of originating and underwriting your loan.
Unless you’re buying an older home with a lot of physical defects, this is the part of the closing process most likely to produce delays or fatal errors that scuttle the deal entirely – particularly if you have an uneven credit profile or volatile income stream.
Originating and underwriting a loan involves a lot of work on your lender’s behalf. From your perspective, however, it basically boils down to one question: Will you, in the lender’s expert opinion, make good on your promise to repay the many thousands of dollars you’re asking it to lend you?
Though every lender is different, most subject mortgage applicants to intense scrutiny. Your lender is likely to send you a mortgage application totaling 30 or 40 pages and including forms such as a request to release your credit report from one or more credit reporting bureaus, requests for prior-year tax transcripts, and information about your previous places of residence.
Along with the application, your lender is likely to request proof of income and assets, such as the following:
- Your most recent tax returns (one or two years)
- Your most recent pay stubs (at least the past two)
- Your most recent W-2 statements (one or two years)
- Your most recent bank statements (one to three months)
If you received preapproval for your mortgage loan, which typically requires a credit check, your lender is likely to set (or “lock”) your loan’s rate around the time it sends out the application materials. If you’re applying for an adjustable-rate mortgage (ARM) or another type of loan without a fixed rate for the entire term, the lock may only apply to the initial rate.
Rates are typically locked at a level that factors in prevailing interest rates at the time, plus the borrower’s credit risk. The lower your credit risk, the lower your locked rate is likely to be.
If you’re not preapproved, your lender is likely to wait for the results of your application’s credit pull to lock your rate. This can occur at any time between your application date and a week before closing. In any case, the rate lock is good only for a fixed length of time – 30 to 60 days is typical.
Using the locked rate (or, if not locked, the lender’s best guess of your initial rate), the lender creates a loan estimate for you to review, sign, and return. The loan estimate is a plain-language document that summarizes what you can expect to pay for your mortgage and closing, and when.
It includes the following information:
- Loan Identification. This includes the loan’s unique identifying number, type (fixed-rate, adjustable-rate), term length (15 years, 30 years, 5/1), purpose (purchase, refinance), and rate lock duration.
- Loan Terms. Outlines your loan’s principal, interest rate or rate range, monthly principal and interest payments, prepayment penalty (if applicable), and balloon payment (if applicable).
- Projected Payments. Adds up the components of your total monthly payment, including estimated insurance, taxes, and principal and interest payments. May also specify how taxes and insurance are to be paid – for instance, out of an escrow account.
- Closing Costs. Includes a detailed accounting of your estimated closing costs and total cash to close (which includes your down payment). Also indicates which closing costs you’re permitted to shop for, such as title insurance, and which you’re not permitted to shop for, such as your lender’s appraiser.
- Comparisons. Contains a snapshot of how much you can expect to pay in principal and interest during the next five years, your loan’s APR, and total interest percentage – the ratio of your total interest payment to your total loan amount. This information is useful for comparing your loan against other lenders’ loans.
- Other Considerations. Includes important caveats and information, such as whether the loan can be assumed (transferred to a future buyer without changing the terms), whether the lender plans to transfer your loan to a servicing company, and penalties for late payment.
Prior to October 2015, most lenders used good faith estimate (GFE) documents to provide loan and closing cost estimates. GFEs and loan estimates contain similar information, but GFEs are formatted differently and have fewer plain-language explanations. Once the loan estimate is in your hands, your lender may set a preliminary closing date – contingent on a smooth underwriting, origination, and title search.