For first-time homebuyers, a house closing can seem like a mysterious process. People throw around all sorts of terms, and they assume you understand. But, it’s okay if you have questions. As such, people often ask me: Ryan, what is the process of closing on a house?
A house closing is the formal process of moving from a signed contract to officially completing a home purchase. At the end of the closing process, the seller has formally sold the house to the buyer. This process involves several steps, with minor differences for investors and owner-occupiers.
I’ll use this article to dive into the details of each step in the house closing process. Specifically, I’ll cover each of the following topics:
What is a House Closing?
- House Closing, Step 0: Loan Pre-Approval
- House Closing, Step 1: Placing Property Under Contract
- House Closing, Step 2: Inspection Period
- House Closing, Step 3: Home Appraisal
- House Closing, Step 4: Loan Conditions and Lender Due Diligence
- House Closing, Step 5: Loan Underwriting
- House Closing, Step 6: Document Generation, Signing, and Submission
- How Long Does It Take to Close on a House?
What is a House Closing?
Investors and homebuyers throw around the term “closing” regularly. But, for first-time homebuyers, what does this actually mean?
Simply put, a house closing is the process of going from a contract to buy a house to actually completing the sale. As such, the closing process begins when a seller accepts a buyer’s offer. And, it concludes once the buyer has officially purchased the home.
For investors and owner-occupiers, the closing process remains largely the same. Some minor differences exist, though, and I’ll mention those differences in the below sections.
House Closing, Step 0: Loan Pre-Approval
Technically, loan pre-approval can occur before the closing process, which is why I list this as Step 0. However, it’s also extremely unwise to not seek pre-approval prior to making an offer on a property, for a couple reasons.
With a loan pre-qualification, buyers provide lenders some general information about their financial situations. Based on this information, lenders tell borrowers what size loan they qualify for, assuming the information is accurate. With loan pre-approval, lenders actually verify the information submitted by borrowers during the pre-qualification process.
This lender verification gives pre-approval far more weight than pre-qualification. Armed with a pre-approval letter, buyers A) know how much of a loan the lender will issue them, and B) appear far more committed to sellers. In fact, many sellers won’t even consider an offer from a buyer without a pre-approval letter, which is why I highly recommend completing this step before beginning the closing process.
House Closing, Step 1: Placing Property Under Contract
The first official step in the closing process entails putting a property under a contract. After a buyer has looked at houses, he or she will make an offer to purchase a home. Typically, the seller will counter, and the two parties will negotiate terms via their real estate agents.
Eventually, if the seller and buyer can agree on purchase terms, they sign a sales contract. For residential real estate transactions, people generally use a standard contract, updating it with the information unique to that particular deal (e.g. seller and buyer info, sales prices, closing date, etc.). But, despite using a boilerplate contract, buyers and sellers have the ability to add any additional terms via contract addenda.
Once this contract has been signed by seller and buyer, the parties are “under contract.”
House Closing, Step 2: Inspection Period
Most buyers include—and I highly recommend this—an inspection contingency clause in the contract. This clause provides the buyer a set period of time to inspect the property. And if major issues arise, the buyer can exit the deal while keeping the earnest money deposit.
For owner-occupiers, this typically involves hiring a professional home inspector. This person will inspect the property, systems, and appliances, providing a detailed report that will include any major issues. Oftentimes, lenders will state that major issues need to be fixed before closing, and sellers and buyers negotiate who will complete these repairs.
For experienced investors, you may not need to hire a home inspector for this process. If you have enough experience, you can do it on your own. Or, if you work regularly with a contractor, he or she can do a walk-through with you, saving the expense of an inspection. But, for new investors, I highly recommend paying for a home inspection, as it’s a great way to learn about A) your new property, and B) real estate, in general.
House Closing, Step 3: Home Appraisal
After the inspection, lenders require a home appraisal. This involves a professional appraiser determining the home’s current market value. Mortgage lenders will not lend more than a home is worth, so this step can derail a purchase. If a home appraises for less than the contract price, either the buyer needs to pay the difference in cash, or the seller needs to lower the price. If not, the deal will fall apart.
Of note, investors conducting a home rehab will typically need to complete an after-rehab value, or ARV, appraisal. Hard money lenders issue their loans based on the ARV, not current value, so appraisers need to look at contract bids to estimate what a property will be worth after the rehab period. ARV appraisals typically cost more and take longer.
House Closing, Step 4: Loan Conditions and Lender Due Diligence
Once the property appraises, lenders will issue a number of conditions that must be met before the final closing. This is often referred to as the due diligence period, as the lender outlines all of the necessary items to close a loan in accordance with lender guidelines.
While not a comprehensive list, here are some of the major conditions lenders will verify during this period:
- Most recent borrower financial information (e.g. pay stubs, tax returns, account statements, etc.)
- Hazard insurance policy for the property
- Flood insurance (if in a designated flood zone)
- Title insurance (one-time purchase)
- Any other lender-requested documents
- Termite inspection
- Lender-required repairs (as identified during the inspection process)
House Closing, Step 5: Loan Underwriting
During loan underwriting, lenders review all the information submitted during the due diligence period. Basically, this is the final review, with lenders making sure everything looks good to finally approve the loan. As such, it’s common for buyers to receive last-minute requests from lenders during the underwriting period. When loan underwriters go down their checklists of loan approval requirements, they’ll inevitably realize they’re missing something, and borrowers need to provide this missing information before they receive a clear-to-close notice from the lender.
House Closing, Step 6: Document Generation, Signing, and Submission
Once lenders complete the underwriting process and approve a loan closing, they need to actually generate all the paperwork for the closing. In a standard purchase, this can include hundreds of pages of documents. And, lenders will work with a closing agent—either a title/settlement company or real estate attorney—to put all of this paperwork into a package for the seller and buyer to sign.
Once all parties have signed these closing packages, the closing agent will submit copies to the relevant parties. Upon submission, any funds that have been held in escrow (e.g. earnest money, down payments, etc.) gets released. At this point in time, the closing process is complete.
How Long Does It Take to Close on a House?
On average, buyers and sellers can close on a traditional mortgage in around 45 days. While lenders can close more quickly than this, they generally need to wait on information from other parties, slowing the process.
For investors using hard money loans, a typical closing takes around 15 days. Once again, though, this will depend on all parties providing the lender necessary information as quickly as possible.