What Is a Home Purchase Agreement and Closing?
Understanding Purchase Agreements
Perhaps the hardest part of any major purchase is sifting through the paperwork and understanding what you’re signing. It’s not uncommon to get to the end of the buying process and feel as though you don’t understand what you’ve agreed to, relying instead upon your trust in the experts you’ve turned to for help along the way.
Buying a home is the major purchase for most, and prospective homebuyers understandably want to have a handle upon as much of the terms and forms flying about, given how important it is to find the right home. The more you feel that you understand, the more comfortable you’ll be with whatever decision you make.
As the name suggests, a purchase agreement is a contract between a home buyer and a seller for the sale of a particular home outlining the particulars of the deal agreed upon by the two parties. Given that it is a contract, the agreement should be drawn up by an attorney, as real estate agents cannot practice law. State laws differ in terms of whether an attorney is required; however, the real estate agent may fill in the important blanks of the agreement.
Universal Elements of Purchasing Agreements
The purchase agreement is more than a statement of your intent to buy and the agreed-upon price; it stipulates all the conditions and requirements of the sale for both the buyer and seller, leaving no room for misunderstanding and misapprehension. While purchase agreements are not necessarily uniform based upon the particulars of a given sale, there are basic elements that should be universal across all of them:
Basic identifying information about both buyer and seller, including whether multiple buyers intend to be owners as joint tenants or tenants in common (these legal terms are best explained by an attorney).
- Identification and description of the property being sold.
- The offer and agreement for the sale, and the details of how the purchase is to be financed, whether through cash, home loan, or assumption of an existing mortgage.
- Fixtures and appliances included in the sales, as well as disclosure of the property's condition and of any defects or faults in the home that may affect the home's value.
- The date of the closing, and when possession of the home will be turned over.
- An itemized list of closing costs, and which party is responsible for paying these costs.
- The required earnest money deposit amount. Earnest money is a payment made to a buyer to indicate their seriousness about buying the home, and is usually held in escrow by a third party and eventually applied to as part of the down payment or closing costs.
- Contingencies and how these must be met for the sale to go through.
Considering Home Buying Contingencies
Potential contingencies are a major consideration to be accounted for in the purchase agreement. No matter how you feel about the person you’re buying your home from, you want to ensure that you get your own inspection and appraisal of the property to verify the condition and value. An inspection contingency in the purchase contract allows you to back out of the purchase if the home inspection turns up issues and discrepancies that haven’t been previously disclosed and with which you wouldn’t feel comfortable continuing with the process. Similarly, an appraisal contingency allows you to halt the sale if the value is determined to be lower than the price you agreed to pay.
There are also financial contingencies to be planned for. If you’re already a homeowner and looking to move to a new place, buying that home depends upon being able to sell your current property as well as finding financing for your prospective home. A home sale contingency allows you to back out of the agreement if you’re unable to find a buyer for your home and a financing contingency protects you from having to move ahead with the deal if you’re unable to find a lender to back you.
A caveat is that these contingencies protect you as the buyer but can potentially make your offer unattractive to the seller and in certain markets, that may mean that you are not successful when competing against other buyers for a certain property. Like other transactions, you must balance the risks when determining which contingencies to include in the offer.
Working with an Attorney to Close on Your New Home
Closing might seem like another formality, but it’s a crucial part of the process, where everything is finalized and signed. To start, you need to arrange a home inspection and appraisal to verify the condition and value of the property. You have to finalize the loan for your home mortgage, which includes origination and underwriting. You also have to have a title search done to ensure there are no other claims on the property.
For the actual closing, you’ll need an attorney (in some states) and an escrow agent to manage document signing and transfer of funds and to verify that terms are met on both sides. Prior to the day of the closing, you’ll have to review the closing notice and closing disclosure to ensure you understand what is needed at the closing and all that you’re agreeing to in buying the home. On the day of closing, you’ll arrive at the prescribed location to make a final walkthrough, review and sign the remaining paperwork with your attorney, handle the closing costs, and take possession of the keys to your new home.
What type of closing costs you might occur depending on the type of property and the location of the home, but the costs usually tally up to between two to five percent of the total price of the home. While that percentage might seem small, given the considerable amount you’ve just committed to a home, it still comes out to thousands of dollars, covering numerous fees and insurance payments that have to be paid to finalize the sale.
Much work is needed to make it from offer through signed purchase agreement and closing, but finding the right home is worth the investment of time and effort to get there.
LegalShield members can talk with an attorney about creating or reviewing a purchasing agreement and any closing documents, plus any other legal issue that may arise in the home buying process. Memberships start at $24.95 a month.
LegalShield provides access to legal services offered by a network of provider law firms to LegalShield Members through member-based participation. Neither LegalShield nor its officers, employees or sales associates directly or indirectly provide legal services, representation or advice. See a plan contract at www.legalshield.com for specific state of residence for complete terms, coverage, amounts, and conditions. This is not intended to be legal or medical advice. Please contact a medical professional for medical advice or assistance and an attorney for legal advice or assistance.
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