In the 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
(or the sellers agent) an earnest money deposit
to show good faith in the transaction.
A real estate closing
is the ?nal step in the transaction. At closing,
the buyer pays the purchase price to the seller
(usually with the proceeds from a loan), and the
seller gives 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.
focuses on questions frequently asked about residential
real estate closings. The questions raised are of
special concern to real estate purchasers. Consequently,
they are posed from the standpoint of the purchaser.
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 a loan before a speci?ed 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 suf?cient to qualify you for
the necessary loan amount. After issuing the letter,
the lender may refuse to approve your loan if there
any changes in your employment, creditworthiness,
or other changes which might affect your ability
to repay the loan. The lender reserves this right
until the deed is recorded transferring title and
the loan proceeds are actually disbursed at closing.
What kind of inspections do I really need to have
to find out about the condition of the property?
A number of inspections are highly
recommended. They should be provided for in the
purchase contract, even if they are not required
by the lender. Remember, the standard Offer to Purchase
and Contract states that closing shall constitute
acceptance of the property in its then existing
condition unless provision is otherwise made in
writing. In other words, once closing is completed,
you may be found to have accepted the property in
its existing condition. The most important inspections
The most important inspections are:
A home inspector typically examines
the condition of the property, including the plumbing,
heating, cooling, and electrical systems, and the
structural components. In North Carolina, professional
home inspectors must be licensed. Read the home
inspection report carefully, and be sure to ask
the seller to complete all repairs permitted in
the purchase contract. Not having a home inspection
may save you money up front, but it
could be very costly if you ?nd after closing there
is a major defect in the property. You may also
need additional inspections performed by a specialist,
such as an electrician, heating and air conditioning
contractor, or a structural engineer.
Wood-Destroying Insect Inspection
Have a licensed pest control operator
perform a pest inspection prior to closing. It should
reveal evidence of wood-destroying insects, if any,
that could adversely affect the structure.
A survey provides accurate measurements
of the property; its precise total area; the location
of buildings and other improvements to the property;
and any encroachments, easements and possible setback
violations. You are typically responsible for paying
for the survey. Examine the survey prior to closing
to make sure the acreage and other conditions of
the property match what you were told by the seller
or real estate agents and what is shown in the purchase
contract. You should also be aware that the title
insurance company may exclude from coverage problems
shown on the survey which are not resolved before
Virtually all lenders will require
you to pay for an appraisal of the property to determine
if its market value meets or exceeds the purchase
price. Review the appraisal report prior to closing
to make sure the value of the property, its square
footage and features match what you were told by
the seller or real estate agents and what is shown
in the purchase contract.
Wells and Sewage Disposal Systems
If you are buying a property served
by either a well or a septic system (not city water
or sewer), you should have them inspected prior
to closing. A well inspection and separate water
test should be done to determine whether there is
an adequate amount of water and water pressure for
the property and if there are any harmful contaminants
in the water. An examination of the septic system
should determine if it is adequate to support the
property and is properly performing. Repairs to
these systems can be very expensive.
Radon is a radioactive gas that can
be found in homes all over the United States. Any
home can have a radon problem, regardless of its
age or condition. Therefore, you should have the
property tested for radon to make sure that any
detectable radon is at or below EPAs guidelines
for an acceptable level.
What is title insurance?
The lender will probably require
you (the borrower) to purchase title insurance to
protect its interests from potential title problems.
Before issuing a title insurance policy, the title
company will require the closing attorney to perform
a title search to discover any problems with the
title to the property. Problems found during the
title search (such as unpaid udgments, taxes, mortgages,
etc. on the property) must be corrected before closing.
For a few dollars more you can
also purchase your own title insurance policy to
cover you from title problems with the property
which may not have been discovered prior to closing.
If a problem covered by your policy is discovered
after closing, the title insurance company will
help clear up the problem or compensate you for
any losses you have sustained. Like any insurance
policy, there may be exceptions in your coverage,
so it is critical that you carefully read your policy
and refer any questions to the closing attorney
What if the seller wants to give me a nonwarranty,
or quitclaim deed?
The deed transfers the sellers
interest in the property to you. There are many
different types of deeds. The best one the
general warranty deed contains the sellers
warranty that good title is being conveyed to you.
A quitclaim (or non-warranty) deed contains no warranties
at all; therefore, you accept title from the seller
as is. A special warranty deed contains
limited warranties from the seller. If you are given
anything other than a full or general warranty deed,
immediately consult with your attorney.
What is a homeowners association?
If you buy in a residential subdivision
or planned community, it is likely you will be joining
a homeowners association. A homeowners
association is a group of property owners that acts
like a private local government, providing services
or bene?ts to its members such as a clubhouse, pool
or trails. Members pay for these bene?ts in accordance
with the associations bylaws. Homeowners
associations may also regulate the use of common
areas, paint colors fences, outbuildings, etc. By
exercising their voting rights, members have input
If you are purchasing property
in a subdivision or planned community, prior to
closing you should obtain documentation as to any
dues, assessments, covenants, rules, restrictions,
and services provided. If the real estate agent(s)
or closing attorneys do not give you relevant documentation
prior to closing, ask them for the most current
copy and review it before you close.
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 (normal wear and tear excepted).
If the property is damaged or destroyed by ?re 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
Who closes the transaction?
A real estate closing is completed
when the seller conveys the title to you by deed,
you give the purchase money to the seller, and the
appropriate documents are recorded with the Register
of Deeds of?ce 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 attorny. s representing. Others involved
in the transaction may recommend or offer you ?nancial
incentives to hire a particular closing attorney,
but you have the ?nal 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 ?gure so any existing loan(s)
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.
Since closing involves several
complex phases (examination of the title, completion
and explanation of legal documents, and resolution
of any possible title problems), you should carefully
consider having an attorney assist you throughout
the process and during the closing. Also, read each
closing document so you fully understand each step
of your real estate transaction.
If a non-attorney is handling
your closing, that person may render only administrative
services related to the transaction not give
you legal advice.
What is a closing statement or HUD-1?
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
(real estate agent commissions, loan payoffs, fees
for inspections, property taxes, etc.). For all
closings involving federally insured loans, the
Real Estate Settlement Procedures Act (RESPA) requires
that this information be reported on a form from
the federal Department of Housing and Urban Development
(HUD) a HUD-1 form.
must pay a portion of the property taxes, the cost
of all inspections, and all costs associated with
the loan, title search and closing. These costs
include the appraisal fee, survey, pest inspection,
lender fees, fees to establish an escrow balance
for homeowners insurance, taxes and any required
private mortgage insurance, attorney fees, title
insurance, and recording fees. The seller normally
pays the balance due on any existing loans, his
portion of the taxes, commissions to real estate
agents, fees for deed preparation, cancellation
of existing liens, and revenue stamps payable to
the state. In most transactions, payment of these
fees is negotiable between the parties. However,
if you are getting a VA or FHA loan, the lender
may require the seller to pay particular closing
costs, such as the pest inspection.
I am being asked to put something on the HUD-1 that
is different than what I agreed to. Is that ok?
Probably not. The HUD-1 should re?ect
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-1, the loan application,
or elsewhere in order to obtain a larger loan amount
or a loan on more favorable terms than you are otherwise
quali?ed for under the lenders 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
create a false gift letter for down payment
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-1, such as additional fees
paid to service providers, to the seller, or third
make a false statement that you will occupy
give false personal information about yourself
to the lender.
What is prorating?
Certain items (real estate
taxes, some utility bills, occasionally special
assessments, etc.) 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 1 but not normally
payable until the end of the year. The seller is
responsible for his share of the property taxes
from January 1 through the closing date. You 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 (either pending or
If Im a seller, when should I get my proceeds
from the sale of my property?
The closing attorney may disburse
funds immediately after 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 from the
What if I cant close by the time stated on
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 the 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 the contract does not have
a time is of the eessence provision
and the party who is having trouble is making a
good-faith effort to close, courts have allowed
the contract to remain viable for a reasonable period
of time after the designated closing date.
Consequently, buyers and sellers
who are considering including a time is of
the essence provision in the purchase contract
should consult with their attorney to be sure they
understand its full impact.