- Arkansas’ escrow process is similar to other states where a closing agent, (who is often an escrow agent or representative from a title company) is used to complete the transaction.
- In Arkansas, buyers and sellers often consummate the transaction at the same closing (or ‘settlement’) table.
- After all the documents are signed by all parties, the closing agent then disburses all funds and the seller or seller’s agent gives the keys to the property to the buyer.
- Arkansas has its own environmental features that influence which inspections get performed, such as termite inspections and termite protection contracts (a form of a service contract from a termite extermination company) are somewhat common.
Step by Step
Part 1: Disclosures, inspections, and 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:
- An offer is accepted by the seller and a contract is signed and accepted. The escrow process begins.
- A deposit, called earnest money, is deposited with the seller’s real estate brokerage, an escrow agent, or an attorney depending on the contract (never to the seller directly). Escrow companies are often part of a title company but work as separate divisions.
- The signed contract is sent to a title company to begin the title search and all work related to transferring and changing the title to the new owners and preparing the title commitment. Tip: the earlier a title search is done, the quicker buyers can be appraised as to any defect (liens or assessments on the title) that can affect the value of the property.
- The buyer reviews and signs off on any disclosures. These disclosures vary based on property type but often include things like known flaws with the property, prior improvements or repairs, and potential environmental hazards.
A form called a seller property disclosure is provided by the seller either before the signing of the contract or upon request (as indicated in the contract itself). Sellers may see this as beneficial to themselves, and believe that buyers will build these pre-disclosed facts into the contract price (and thus sellers may be reluctant to provide any credits for these defects).
- The buyer elects to perform inspections on the property as agreed upon in the contract within a set number of days from acceptance of the contract (the inspection contingency date), common inspections include an initial inspection by a licensed home inspector and additionally a termite inspection.
Failure of the buyer to complete the inspections and report on any flaws by the inspection contingency date functionally waives the contingency, so buyers are advised to pay close attention to these dates.
- Based on the outcome of inspections, buyers can provide a report of any defects to the seller. Sellers have a set number of days (indicated in the contract) to decide whether they’re going to make the repairs requested.
Unlike other areas, in Arkansas, some contracts include language indicating that by not responding within the time provided, a seller is implicitly agreeing to make the requested repairs, up to a set limit (repair limit) if such a limit is indicated in the contract. If the cost of repairs exceeds the repair limit, the buyer can walk away and recoup their earnest money deposit or negotiate with the seller on another arrangement.
- The seller then has until closing to make the repairs that they’ve indicated they’ll make (either by responding as such or by ignoring the report by the buyer).
- If the home was built before 1978, the seller is required to disclose that lead paint may exist in the home. The buyer can then decide to do a lead paint inspection (or waive their right to do so). Buyers have a set number of days to perform and report on this inspection, as indicated in the contract.
- The buyer may also negotiate for a termite protection contract.
Part 2: The mortgage process
For those borrowing to purchase their home, the mortgage process is usually the most stressful and opaque part of the transaction. It’s best to start as early as possible and be ready to produce lots of documentation. The following is the general process in Arkansas:
- A buyer submits a loan application to their lender, either directly or through a mortgage broker / loan officer. See a sample Uniform Residential Loan Application used in Arkansas. Of course, well before this point, a pre-qualification or pre-approval with a lender should have been acquired.
- Within 3 days, the lender sends a “good faith estimate (gfe),” or GFE, to the buyer that is a breakdown of estimated closing costs. The final costs are likely to deviate from this estimate. See a sample GFE at hud.gov.
- The buyer sends a series of personal financial disclosures to the 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 by 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 the 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 financing contingency or loan contingency is removed by the buyer by the loan contingency date if defined in the financing section contract. In some cases, the contract may leave out such a date and buyers have until closing to get their financing in order. Check your specific contract and/or consult your agent or an attorney to best understand what is expected.
- 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, a lender can decline to approve the borrower unless a change is made to the purchase price or the size of the downpayment.
- Homeowners’ insurance is purchased (or substantiated, if the property being purchased includes homeowners’ insurance as part of association fees or similar arrangements), within a number of days indicated in the contract. In Arkansas, obtaining homeowners’ insurance is often a contingency of sale, and buyers can back out without penalty if, by no fault of their own, they’re unable to obtain this insurance.
This contingency expires, of course, after the number of days indicated in the contract. Once insurance is obtained, proof of homeowners’ insurance is submitted to the lender.
Tip: As this process can be long, arduous, seemingly arbitrary, and is often critical to your homebuying transaction, try to prepare these documents (or at least figure out how to prepare them) in advance.
Also, 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 else that can affect your credit report.
Part 3: The closing itself
The closing generally takes place at one table (either at the office of a lender, 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 makeup closing are:
- As part of the preparation for closing, the escrow 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 changing the title / deed and 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 property taxes and utilities paid in to date by the seller.
- A final walkthrough will often be performed the day of or before closing to verify the property is in the same condition it was when the process began, provided it’s agreed upon. If repairs were requested and agreed to after inspections, those may be verified as well.
- At the closing or settlement, table, the buyer (and seller) sign all closing documents, including the hud-1 (see a sample HUD-1 here), and the final loan documents.
- The buyer pays the remaining funds in their downpayment 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.
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