Last week’s blog, “Buying a South Carolina Home – Term Defined: What is Escrow?“ explained what escrow is, why it’s necessary, and who is involved. Lots of details need to be addressed for a successful real estate closing to occur. Everyone like surprises at Christmas and their birthday but no one likes surprises at real estate closings. So let’s take a look at the nuts and bolts of escrow.
Let’s look at exactly what will happen and who will do what between contract and closing, specifically:
Part 1: Disclosures, Inspections, & Title
Part 2: The Mortgage Process
Part 3: The Closing Process
South Carolina’s home buying process is similar to other states where a settlement agent (who is usually an attorney or representative from a title company) is used to consummate the transaction and prepare all the closing documents. Like most states, a South Carolina buyer and seller usually consummate the transaction at the same closing table.
Part 1: Disclosures, Inspections, & Title
These are the initial tasks once a buyer is in contract, and are most often done in parallel to Part 2: The Mortgage Process:
- When an offer is made by the buyer and accepted by the seller, a contract is created, and the last person signing creates the effective date of the contract.
- Concurrently, a good faith deposit or earnest money is paid to an escrow agent, an attorney, or broker (never to the seller directly). The stronger your escrow check, the more likely your offer will be considered by the sellers if there are multiple offers on the home.
- The signed contract is sent to an attorney or title company to begin preparation of all documents related to transferring the title to the new owners and preparing the title commitment.
- The buyer will review and sign off on any disclosures. These disclosures vary based on property age and type but often include things like known flaws with the property, prior improvements or repairs, and potential environmental hazards. A mandatory form called a residential property condition disclosure statement is provided by the seller on or before the day the contract is signed. Though it’s mandatory, many sellers see this to their advantage. Since buyers build these pre-disclosed facts into the contract price, sellers are less likely to provide any credits for these defects.
- The buyer will perform inspections on the property if agreed to in the contract. All inspections must be completed by a certain date, which is usually called an inspection contingency date. Some contracts refer to the period between the effective contract date and the inspection contingency date as the due diligence period. The types of inspections vary by property type and situation (and locale), but in South Carolina, a home inspector generally inspects the home first, and other inspections and tests can be ordered if the home inspector’s report indicates additional special inspections are necessary.
- A wood infestation inspection is performed in South Carolina by a licensed pest control company and a Wood Infestation Report (also called a CL-100 letter or termite letter) is generated. Lenders require this letter at closing.
- Depending on the age of the property, it may be necessary to verify that no lead-based paint exists on the property. This lead-paint inspection and certification can come from the seller or by an independent inspector.
Based on the outcome of inspections the buyer may:
- a) walk away (in some cases evoking what’s called a termination right in the contract) or,
- b) ask for repair work, closing cost credits, or a reduction in the sale price due to flaws that were uncovered.
Sellers have three options:
- a) agree to all of the buyer’s requests,
- b) offer a modified solution back to the buyer, or
- c) decline to make any amends.
In response, the buyer can continue to negotiate, accept the seller’s position, or walk away. All of this, of course, is done in writing (usually via a standard form) and within the timelines defined in the contract.
- The buyer may also negotiate for a home warranty that covers major appliances from failure for a time period after the sale, typically a year.
Part 2: The Mortgage Process
Few buyers pay all cash for their homes. For those borrowing to purchase their home, the mortgage process is usually the most stressful and confusing part of the transaction. It’s best to start as early as possible and be ready to produce lots of documentation.
This process can be long, tedious, and sometimes seemingly arbitrary, but it is critical to the home-buying process. It is best to prepare all of this documentation in advance – to prequalify. Do not make any changes to your employment or credit until your transaction is complete (not just until you get a loan commitment letter). This means not switching employers even if it results in a higher income, as counterintuitive as that may sound. It also means not leasing or financing a car, opening a new credit card account, or anything that can affect your credit report.
The following is the general process in South Carolina:
- A buyer will submit a loan application to their lender, either directly or through a mortgage broker. See a sample: Uniform Residential Loan Application used in South Carolina.
- Within 3 days, the lender sends a “Good Faith Estimate” (GFE), to the buyer that is a breakdown of estimated closing costs. The final costs are likely to deviate from this estimate.
- Before the buyer is ready to write an offer, a pre-approval with a lender should be acquired. The buyer sends a series of personal financial disclosures to their lender. These vary by situation, but the most commonly requested documents are:
- Several months of statements for each bank account a borrower holds (including any investment accounts).
- Several months of statements for any outstanding loans, lines of credit, or other liabilities. This can also include documentation of rent payments.
- Up to two years of tax returns, released to the lender via an authorization submitted by the buyer using IRS form 4506-T.
- Recent pay stubs and contact information for each borrower’s employer. The number of pay stubs varies situation to situation.
- Any other disclosures that are material to a borrower’s financial situation. This includes but is not limited to marriage licenses, divorce settlements, child support, liens, bankruptcies, or judgments. If there’s something that affects how much money you have on hand that isn’t shown by simply looking at your salary, be prepared to document it.
- Explanation of any credit inquiries.
- Substantiation of any large deposits or cash gifts that aren’t regular income. In some cases, a large cash gift may look similar to a personal loan by a friend or family member, and lenders will require gift letters from those that gave you the cash gift, stating that the gift was not a loan. They may also ask for itemized deposit slips. The exact amount that triggers this requirement varies by situation (for instance, a $1,000 cash gift may be material to a single borrower that makes $35,000/yr but may not be material to a borrower that makes $350,000/yr), so it’s good practice to ask your lender if you suspect you might have a material cash gift or large deposit – so you aren’t surprised by this at the last minute.
- Repeated and updated documentation of any of the above. Keep in mind: to a lender, anything can happen to a borrower’s personal financial situation and credit during the escrow process. Thus, you may be asked more than once for the same type of document so that your lender has the most recent pay stubs, rent receipts, bank statements, or other disclosures that may change over time. Any material changes in these documents -or any element of your personal financial situation- may require the lender to reassess your eligibility for the loan for which you’ve applied.
- The lender renders an approval decision, and if approved, issues a loan commitment letter, stating its willingness to fund the mortgage provided certain conditions are met. These conditions usually include appraisal (so the lender can confirm that the property you’re buying isn’t worth far less than you’re paying) but will also generally include any material change in your situation -or the property- as initially disclosed to your lender.
- The loan contingency is removed by the buyer before the expiration of the loan contingency date defined in the contract (usually by a number of days after the execution of the contract), by sending a copy of their loan commitment or approval. If the buyer/borrower is unable to get this approval before the expiration of the financing deadline, the seller can terminate the contract with written notice. If it turns out the buyer did not act diligently in pursuing their loan commitment, they can be found in default and lose their deposit money. Unlike other areas, the loan contingency date does not automatically extend.
- An appraisal is ordered by the lender or mortgage broker via a central directory of appraisers (often called an Appraisal Management Company or AMC). Choosing a specific appraiser is not possible, but a mortgage broker can reject an appraiser and ask for a new one. If the appraisal comes in lower than the purchase price, and the contract indicates that appraisal is a contingency of the agreement, then a buyer can walk away. Sellers may also try to negotiate to avoid losing the buyer if appraisal becomes an issue.
- Homeowners’ insurance is purchased (or substantiated, if the property being purchased includes homeowners’ insurance as part of association fees or similar arrangements), and proof of homeowners’ insurance is submitted to the lender.
Part 3: The Closing Process
The closing or ‘settlement‘ process itself general takes place at one table (either at the office of an attorney or title company), where buyers sign all documents related to their loan and the transaction itself. After all documents are signed and payments exchanged, buyers generally take possession of the keys after the deed is recorded unless a separate agreement has been reached to allow the seller to stay in the property for a period after closing. The detailed steps that make up closing are:
- As part of the preparation for closing, the attorney or title company performs a title search (if they haven’t already) to determine if there are any liens or assessments on the title. Provided the title is deemed ‘clear,’ the closing proceeds as planned and the attorney or title company issues a title commitment. All paperwork for transferring the title/deed and the title insurance is prepared, and a final closing date is confirmed with all parties.
- A final cash figure for what a buyer needs to bring to the closing in the form of a cashier’s check is calculated. This is based not only on a mortgage’s closing costs but factors like prorated property taxes and utilities paid to date by the seller.
- A final walkthrough will often be performed the day of or the day before closing to confirm the property is in the same condition it was when the process began, provided it’s agreed upon.
- At the closing or settlement table, the buyer (and seller) sign all closing documents, including the HUD-1, and the final loan documents.
- The buyer pays the remaining funds in their down payment to the attorney or a representative of the title company who is acting as the settlement agent via certified funds.
- The representative from the title company or attorney will then record the transaction and deed with the appropriate municipality.
- The buyer receives the keys and, unless indicated differently in the contract, officially takes possession of the property.
The escrow process can sound pretty intimidating, can’t it? Most people think that a real estate agent earns their commission by driving around showing customers houses. At The Trembley Group Real Estate, our sales executives only begin the sales process by negotiating a good contract. Outstanding customer service means walking a transaction from contract to closing. To this end, The Trembley Group Real Estate has a full-time employee, a transaction specialist, whose sole job is to help the sales executive guide transactions, contract to closing. When interviewing Realtors, ask who they use as a transaction specialist.
Need help? Call The Trembley Group at 843.945.1880 ext. 100 and we’ll help you look for the perfect listing or buyers agent!
At The Trembley Group, we pride ourselves on being the experts at more than just selling real estate. We are local residents, some of us have been here for a lifetime. The rest of us will be here until the end of time. We love living, working, and playing in the diverse backyard of Coastal Carolina, and look forward to helping you live and love your dreams soon too. Please reach out to us by phone or email for personalized service and one-on-one advice.