What is involved in the sale/purchase of a house? – and why does it take so long to get to the closing?
There are several steps to go through before closing.
Engineer / Termite Inspection The purchaser should have an engineer inspect the house before going into contract. Any issues which are raised must be addressed before signing the contract. That insepector may also perform an inspection for termite infestation or damage (This must be done anyway, so they might as well do it). If infestation or damage is found, the seller has the option of fixing the problem at their expense or canceling the deal. In most cases they fix the problem.
The Contract The Seller’s attorney traditionally drafts the contract of sale, stating the terms and conditions of the sale. The buyer’s attorney will usually meet first with the purchaser to review and sign the contract. Then the seller’s attorney will meet with the seller to sign. Once the contract is signed, by both parties, several steps must occur before closing (see below).
The Title ReportThe purchaser’s attorney will order a title report from an abstract company (also called a title company). The company searches various government agency records for any judgments or liens which may effect the property and produces a report summarizing the results. This may take up to a month. There may be title issues (i.e. liens, violations, judgments, etc) which must be cleared prior to closing.
Mortgage Commitment The purchaser must obtain a mortgage commitment from their lender. The mortgage commitment is the official statement from the bank that they will lend money to the purchaser. This may take about a month. When a commitment is obtained, it is often given with a list of conditions which must be satisfied prior to closing.
Buyers and Sellers (and their lawyers) are often frustrated by the answer to this question. Because the closing depends on so many factors being satisfied, as stated above (see #1-4), a closing date can only be estimated, usually by a phrase in the contract such as “The closing will occur on or about 30 days” from a specific date, or from the purchaser’s receipt of a mortgage commitment. This is more of a time frame than a date. The closing date may be 30 days before or after the date listed.
Satisfaction of Mortgage, if any. If there is an outstanding mortgage on the property, the mortgage will have to be paid off at the closing. In addition to the payoff, there will be a $50 charge by the Title Company to record the Satisfaction and a charge by the Title Company’s representative to handle the payoff (approximately $150).
New York State Transfer Tax: .4% of the sale price.
New City Transfer Tax (for properties within the 5 Boroughs): 1% of the sale price.
For Example, if you are selling your house for $100,000, the NYS Transfer Tax will be $400 and the NYC Transfer Tax will be $1,000.
Capitol Gains Tax (not a closing expense- consult your accountant at the end of the tax year)
Recording/Filing Fees: Satisfaction of Mortgage, if any. Power of Attorney (if any).
A lender will generally allow a borrower to spend up to 28% of their gross household income on mortgage and related costs (real estate taxes, insurance, maintenance if the property is a condo and common charges if the property is a co-op). A buyer with good credit who has a household income of $50,000 would probably qualify for a mortgage costing about $14,000 a year ($1,150/month). If the buyer obtained a 30-year mortgage at 7.5%, that would convert into a mortgage of between $125,000 and $150,000. Consult with a mortgage broker to find out how much you might be able to borrow.
With dozens of potential buyers in each home sale, a buyer who has pre-approval for a mortgage has a distinct advantage over all other potential buyers. Pre-approval is a certificate given to the mortgage applicant by a bank stating that such buyer qualifies for a certain mortgage amount ($). This lets the seller know that the buyer is serious about purchasing a home, an important advantage when competition is tough.
“Pre-approval” should not be confused with “pre-qualification”, another commonly used term. “Pre-qualification” is given by a broker, while “pre-approval” is given by a bank. Pre-qualification typically refers to situations where a mortgage broker, using income figures provided by the buyer, estimates the maximum mortgage the buyer should be able to obtain.