What is “Contract to Close”?
So you’ve finally found your dream home and want to make an offer on it. You and your REALTOR® write up the offer and submit it to the seller’s agent. It’s been accepted! Now the cash changes hands and the house is yours, right? Not yet! What’s to come is called the “contract -to-close” process, which is basically all the steps it takes to fulfill the contract and ensure the home is ready for transfer of ownership. This is often the most stressful part of buying a home, but don’t worry, your REALTOR® will be by your side, guiding you through the process and making sure every deadline is met.
Here are a couple of things to know as you read the following paragraphs:
- The day the last person signs the contract is known as the “Effective Date”.
- This discussion assumes that the contract you have signed is the Florida REALTORS® As-Is Residential Contact, which is what is most commonly used in Florida.
We are not attorneys, so any reference to the contract terms should not be construed as legal advice!
Let’s go over the steps!
Earnest Money Deposit
One of the first things you will have to do after the contract is signed, is provide an earnest money deposit to the company designated to hold the money in a special escrow account. Usually this is the same place as where the final transaction closing occurs (the closing company/agent). This earnest money deposit should not be confused with the down payment you are putting on the mortgage; those are two different things. The earnest money deposit will be returned to you at the time of closing on the “closing statement”. Essentially, this deposit will go toward your closing costs.
For cash buyers, the entire contract-to-close process is a lot simpler since you do not have to deal with a lender, meaning one less party involved. For everyone else, though, there are extra steps to get approved for a mortgage. A loan application must be made by a specified number of days after the Effective Date (usually 5). Your REALTOR® can provide some recommendations for local, reputable mortgage brokers.
After the effective date, the “inspection period” immediately starts. This is a period of time in which the buyer may back out of the contract and get their deposit for any reason. The duration of the inspection period is negotiated in the contract, but is usually 10 to 15 days after the Effective Date. As the name suggests, this is the appropriate time to have property inspections to make sure the home is in a condition that is acceptable to you. Your REALTOR® will provide you with a list of qualified inspectors. If the inspector(s) find problems that you didn’t anticipate when you were negotiating the price, then you can back out of the contract (during the inspection period) without losing your deposit. You can also ask the seller to fix the problem or to renegotiate the price; however, keep in mind that you signed an “as-is” contract which means that you were going to take the home “as-is”, so the seller was not planning to fix anything.
A professional appraiser is someone who is licensed to inspect your home, and use various methods to estimate its current market value. If you are working with a lender, the bank will order the appraisal to be done by one of their approved appraisers. If you are purchasing with cash then the appraisal is optional and if you decide to have one done, your REALTOR® should be able to give you a list of good, local appraisers.
Typically it takes up to a week after the appraiser visits the home for them to complete their research and provide you with the results. The final product of the appraisal includes a dollar amount. This is the appraiser’s calculation of the fair market value of the home. If you are receiving a mortgage, the lender will require that the home appraises for at least the purchase price. If the appraisal comes in for less, then either the price will have to be renegotiated, the deal will be cancelled, or you will have to put more money down in order to get the loan.
Most homes have had a property survey done, mapping out the size, structures and boundaries of the property. If the home hasn’t had a survey done in the last 10 years, or if there have been additions to the property (pool, shed, fence, etc.), the title company will likely require a new survey to be ordered. It’s the buyers’ responsibility to pay for the survey but the title company or your REALTOR® can help you get it ordered.
Once you’ve been approved for a loan, you’ll receive what is known as a “loan commitment” from your lender. This is basically the lender saying that you have officially qualified for a mortgage on the home. The contract will specify how many days that you have to get this approval; typically it’s about 30 days after the effective date of the contract. This is called “the loan approval period”. Receiving the loan commitment on time is crucial. If you are unable to get a loan approval, a clause in the contract allows you get out of contract without losing your earnest money deposit, but you must get out of the contract before the end of the loan approval period. Your REALTOR® will help you monitor the progress of the loan approval and make sure deadlines are met.
The title commitment is a promise from the title company that they will issue you a title insurance policy after the closing occurs. Owners’ title insurance will protect you from any possible problems if others later claim an ownership or lien on the property. Check out our blog that explains title insurance in more detail. Once you’ve received your title commitment, make sure to review it, ask the title company any questions you have, and, ideally, have your attorney review it. You’ll have 5 days to pose any objections to it.
Final Walkthrough and Closing
Within a day or two before closing, the closing company will provide you instructions of where to wire money (closing costs and down payment of the loan) and the exact amount required. Due to the prevalence of counterfeit cashier’s checks, those are no longer accepted at closing.
After everything is squared away and the closing appointment is set, your REALTOR® will schedule one last visit of the property with you. This is referred to as the “final walkthrough” and should occur the day before or the morning of the closing. The purpose of this visit is to make sure the property is still in the same condition as the day the contract was signed, or if the seller agreed to make repairs, that those repairs were completed.
Now that everything else is out of the way, you’ve finally reached the big day! Get your writing hand ready, because if you are getting a mortgage there will be a lot of signatures involved! Don’t worry, though, the process is not complicated, and your REALTOR® will be with you as the closing agent explains each piece of paper you are signing. Once the whole process is done, the keys will handed to you and the property will officially be yours!
Sometimes the entire contract to close process goes smoothly, but more often than not there are bumps and road blocks along the way. That’s why it is critical to have a REALTOR® by your side –it’s our job to make the process as easy and stress-free as possible for you!