- Massachusetts’ homebuying and closing process is similar to other states where a real estate attorney is used to complete the transaction
- There is generally an attorney review period at the beginning of the process.
- In Massachusetts (as well as other attorney review states), buyer and seller typically consummate the transaction at the same table, as funds, keys, and title all change hands at the same time.
- Massachusetts also has some specific environmental features that may affect the closing process (old heating oil tanks, for instance).
Step by Step
Part 1: Attorney review, inspections and credits
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 by both parties. The 72-hour attorney review period begins. During this period, changes can be made to the contract that is agreed upon by both parties. Also, either party can walk away during this 72-hour period.
- Often, an initial “good faith deposit” is paid to the attorney or broker (never to the seller directly), usually a token amount ($1,000-$5,000) upon signing of the contract.
- The rest of the deposit or earnest money is paid in the time frame indicated in the contract (usually a few days).
- The buyer elects to perform inspections on the property as agreed upon in the contract. These inspections must be completed by a certain date, which is called the inspection contingency date. The types of inspections vary by property type and situation (and locale), but in Massachusetts, a licensed home inspector generally inspects the home first, and other inspections and tests can be ordered if revealed to be necessary by the initial inspection. The types of inspections vary by property type and situation (and locale), but other common inspections in Massachusetts include a termite inspection, radon inspection, lead paint inspection, and asbestos inspection.
- In addition to inspections, homebuyers in Massachusetts may need to obtain certification or documentation of:
- A buried oil tank: Before homes in Massachusetts (and elsewhere on the East Coast) were heated with natural gas, they were heated with heating oil. Because this oil and the buried tanks that once contained this oil are environmental hazards, they must be decommissioned through a process subject to inspection and approval by the appropriate regulatory body in Massachusetts. Furthermore, the location of these buried oil tanks can be problematic if they haven’t been decommissioned.
For instance, an oil tank buried under a garage floor (or worse, under a part of the house itself) can incur significant costs and should be taken into account in any transaction. While decommissioning is not a requirement to complete the transaction, it does present a significant risk to a new owner and in practice is usually made a condition of sale. This is not the same as an aboveground oil tank that may still be in use to heat the property.
- Well testing: While Massachusetts law does not require testing of water wells to ensure environmental safety as a condition of sale, you may want to make it a condition of your contract.
- Flood search: This is a survey of the property that assesses its risk of flood damage.
- Certificate of occupancy: This is a document that proves the property can be occupied and lived in, and that it complies with zoning and building code.
- Based on the outcome of inspections, buyers may elect to ask the seller for repair work, closing cost credits, or a reduction in the sale price due to flaws that were uncovered. Sellers have three options: agree to all of the buyers’ requests, offer a modified solution back to the buyer, or decline to make any amends.
In response, the buyer can continue to negotiate, accept the seller’s position, or in some cases, end the transaction and recoup their earnest money.
- The buyer removes or waives the inspection contingency by agreeing to a signed inspection response with the seller, or by failing to make an inspection response request to the seller before the inspection contingency date has passed.
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 Massachusetts:
- A buyer submits a loan application to their lender, either directly or through a mortgage broker. See a sample Uniform Residential Loan Application used in Massachusetts.
- Within 3 days, the lender sends a “Good Faith Estimate,” 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.
- At the request of their lender, the buyer sends a series of personal financial disclosures. 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 as defined in the contract. Buyers often ask the seller for an extension to their loan contingency date if they have not yet received their loan commitment letter. In Massachusetts, a buyer must submit their request for an extension in writing, and the seller has a set number of days (usually indicated in the contract) to respond negatively if they do not wish to grant the extension.
- 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), and proof of homeowners’ insurance is submitted to the lender. Your lender will also require you to get title insurance.
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 process itself 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 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:
- A title search is run just prior to closing to determine if there are any liens or assessments on the title. Provided the title is deemed ‘clear,’ the closing proceeds as planned.
Note: buyers can ask for this title search in advance of closing (sometimes for an additional fee), and it may reveal material information regarding the property that may be good to know well before closing.
- A buyer’s attorney begins preparing the paperwork for changing the title / deed and will prepare title insurance, and a final closing date is scheduled on or around the date indicated in the contract.
- 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 into date by the seller.
- A final walkthrough will often be performed on the day of or before closing to verify the property is in the same condition it was when the process began.
- 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 an attorney or a representative of the title company (who is present at closing) via cashier’s check.
- The representative from the title company or your 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.
Tip: Try to control for any surprises that may come up at the time of closing. Running a title search early may be appropriate, as is the aforementioned advice not to materially change your employment or credit before closing.
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