- Minnesota’s homebuying process is similar to other states where a closing agent (either a real estate attorney or a representative of a title company) is used to consummate the transaction and prepare all the closing documents.
- In Minnesota, buyers and sellers often consummate the transaction at the same closing table.
- In some cases, Minnesota sellers may continue to offer the home for sale while contingencies (such as the inspection contingency) haven’t been met. Check your specific contract and its addenda to be sure.
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.
- Concurrently, a deposit, or earnest money, is paid to the buyer’s attorney, broker, or escrow agent (never to the seller directly). Sometimes this deposit may be broken into two consecutive payments.
- The signed contract is sent to an attorney or title company to begin the title search and all other work-related to transferring and changing the title to the new owners and preparing the title commitment.
While some wait until later in the process to do a title search, it’s not uncommon for liens or assessments to derail a transaction, so buyers can benefit from learning these things early. Put simply: don’t be afraid to ask to run a title search early, even if that means you might have to pay for it yourself.
- 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 standardized disclosure form called a seller’s property disclosure statement is required by Minnesota law to be provided by the seller as an addendum to the contract and must be signed by both buyer and seller (or the deal does not proceed). It is very important for buyers to review this form carefully, as certain defects found during inspections that were previously disclosed by the seller cannot be grounds for terminating the agreement.
- The buyer elects to perform inspections on the property if agreed upon in the contract. Any inspections must be completed by a number of business days (not including weekends) after the signing of the contract, and any problems found must be reported by the buyer by a number of business days thereafter (which can be referred to as the inspection contingency date).
The types of inspections vary by property type and situation (and locale), but in Minnesota, a home inspector generally inspects the home, and if necessary, a lead-paint inspection, mold inspection, pest inspection, and a radon inspection are somewhat common as well.
- If buyers find any problems during inspections, they can cancel the agreement and recoup their earnest money deposit. Or, they can ask that the seller remedy the defect (either through making repairs or providing closing cost credits) to the buyer’s satisfaction.
If the seller is unable or unwilling to remedy the major defect, the buyer can walk away without penalty. If a buyer simply lets the inspection contingency date pass, this will be interpreted as having removed the inspection contingency.
- Certain contracts will allow for the seller to continue to offer the property for sale until this contingency is removed – check your specific contract and addenda to be sure!
- 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
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 Minnesota:
- 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 Minnesota.
- 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.
- 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 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 (also known as a ‘written statement’), 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.
- 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 is unlikely to fund the loan. Most Minnesota contracts do not control separately for this contingency and expect the buyer to close their financing per the timetables in the contract, regardless of the appraisal.
- The financing contingency (also known as a loan contingency) is removed by the buyer before the expiration of the financing contingency date as defined in the contract as a number of days from the acceptance of the contract. This contingency is removed by sending a copy of their loan commitment / written statement to the listing agent or another designee (such as a real estate attorney).
If this date lapses without the buyer providing a loan commitment and the buyer does not manage to close their loan by the closing date, the contract provides an option for the contract to be terminated and the earnest money to go either to the buyer or seller – make sure you’re aware which option is selected in the contract to avoid any expensive misunderstandings. Also, it’s important to build in enough time into the financing contingency to allow for the results from an appraisal to be delivered.
- 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.
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 generally takes place at one table (either at the office of an attorney, lender, or title company), where buyers sign all documents related to their loan and the transaction itself. After all documents are signed and payments exchanged, the deed is recorded with the county. Buyers generally take possession of the keys immediately thereafter 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 final cash figure for what a buyer needs to bring to the closing in the form of a cashier’s check is calculated by the closing attorney or lender. 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 up to the day before closing to verify the property is in the same condition it was when the process began, provided it’s agreed upon in the contract.
- 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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