Five Ways to be a Smart Purchaser at a Residential Closing
Although the residential real estate market has cooled to some extent, we still have been handling a good number of home closings. Unfortunately, I notice that some people view closing as an intimidating, confusing, or stressful event. Many people are overwhelmed to the extent that it appears they will sign whatever closing documents are put in front of them. Others are surprised by the content of the documents they have to sign. But it doesn't have to be that way. Between your lender and attorney, so many things are put in front of you that it might seem impossible to digest or understand all of the things you have to do or agree to. However, I believe that if you prepare for and grasp these five items related to the legal side of your transaction, you will be more confident and at ease about the whole process:
- Request a copy of the title commitment from the closing attorney's office
If you are borrowing money to buy your home, your lender would never lend money on a house without understanding the title situation of the property that will secure its loan. Neither should you spend your money or take on debt if you don't have a clear picture of the title you are buying. Just because someone deeds you property does not mean that they are giving you a clear title, and even a "good" title might include exceptions like covenants, easements, or other restrictions. The title commitment, if you're getting title insurance, is the lawyer's and title underwriter's commitment to insure title to the property, subject only to the matters disclosed on the commitment. A deeper discussion of how to read title opinions or title commitments is something I intend to provide soon.
- Get and review the survey of the property you are buying
I have made it a practice at closings to give purchasers a copy of the most recent survey of their property, and I am surprised by how many people are seeing it for the first time at closing. When you get a deed to your property, it will have a legal description that may seem like it is in Greek. Legal descriptions can be hard to understand, even for real estate professionals, and often the only way to understand them is to reference an incorporated plat. If you have seen the survey of the property and confirmed that it actually matches what you think you are buying, you will be in a better position to understand the closing documents that you are signing related to your real property. The deed that the seller signs should reference and incorporate a survey that you are satisfied with. If you haven't seen the plat of survey, you are taking your chances that you know what you're getting.
- Get a copy of the closing disclosure/settlement statement as soon as it is available
The closing disclosure or HUD settlement statement provides a picture of the money changing hands at closing, including purchase price, closing costs, tax prorations, payoffs, etc. It should be consistent with your purchase and sale agreement and the bottom line shows what the buyer and seller are bringing to or taking away from the table. When you get to the closing table, it is often impossible to change the figures on this without delaying or jeopardizing the deal. Requesting and reviewing this document days in advance of closing can avoid last minute surprises and possibly provide an opportunity to reconcile any mistakes or misunderstandings.
- Be clear on your loan terms
In addition to being clear on the numbers disclosed on the closing disclosure or settlement statement, the other most important documents that the buyer in a financed transaction signs are the Note and Deed to Secure Debt. The Note spells out your loan terms, such as loan amount, interest rate, dates of payment, payment amount, maturity date, late fee amounts, and events of default. Most lenders use a standard note form with commonly used terms, but you need to be clear on the loan amount, interest rate, and monthly payment amount to ensure that the note you sign is what you have agreed to with the lender. The terms of your note will be incorporated into a deed to secure debt, which is a document you sign deeding a security interest in your newly purchased property to your lender. In short, if you default on your note after executing a customary deed to secure debt, you have given the lender the power to sell your property at foreclosure after proper notice without any court intervention at all. Giving the lender this great power makes the deed to secure debt, in my opinion, the most important document that you sign. Therefore, it is super important that you understand your loan obligations and that you listen to the closing attorney's explanation of the effect of executing these most important documents. At closing, these terms are almost never negotiable, but you should at least be comfortable with what you are signing up for.
- Think ahead about how you are going to make your down payment
In most cases, the Buyer has to bring some amount of money to the closing table. These funds go through an escrow agent which, in Georgia at least, has to be a Georgia attorney. However, you can't just bring a personal check to closing. Because sellers expect to be paid shortly after they sign their closing documents, and certain other parties need to be paid immediately also, the closing attorney will need "immediately available" funds to deposit in their trust account. (Personal checks take days, or sometimes a week, to clear). For amounts less than $5,000, appropriate funds may be in the form of a cashier's check from a recognized bank, but for any larger amount, a wire is required. It is not always convenient or easy to send a wire, and therefore waiting until the last minute can result in frustration for multiple parties. Figuring out the logistics of how to send a wire well in advance of closing and getting it initiated as soon as you are provided with your bottom line out-of-pocket amount due can cut down on a lot of stress at closing.
This is certainly not an exhaustive list, but if you take care of these items ahead of time, you can be more prepared and at ease at closing, making the realization of your home purchase much more fun.
Is it Worth it for a Buyer to Get Owner's Title Insurance
I referenced above that buyers should ask for a copy of their title commitment before closing, assuming that they are buying title insurance. Unfortunately, some home buyers don't see the value in title insurance and see it as an unnecessary expense. However, if the buyer cares about the marketability of their property in the future, they would be wise to realize the types of risks that the buyer could be assuming. I made a video (embedded below) several months ago discussing seven of the risks, but there are of course more than that. If you sell your home or investment property ten years from now and an old title issue is discovered, it's possible that your closing attorney could be out of business and won't be around to remedy a mistake they missed, which could cost you an untold amount. But if you have title insurance, that won't matter so much because you're insured by a large, stable insurance company, not a single attorney who might not be around to fix or pay for your problem.