- Missouri’s homebuying process is similar to other states where a settlement agent or closing agent (who is usually an attorney or representative from a title company) is used to consummate the transaction and prepare all the closing documents.
- In Missouri, buyers and sellers often consummate the transaction at the same closing (or ‘settlement’) table.
- Missouri has its own environmental features that influence which inspections get performed, such as termite inspections (a.k.a. wood destroying insect infestation inspections).
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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, marking the ‘effective date.’
- Concurrently, a deposit, or earnest money, is paid to an escrow agent, an attorney, or broker (never to the seller directly).
- The signed contract is sent to a title company or attorney or 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 mandatory form called a Seller’s Disclosure Statement for Residential Property is provided by the seller on or before the day the contract is signed.
Though it’s mandatory (unless the type of property is exempted), 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 within a number of days referred to as the inspection period. The types of inspections vary by property type and situation (and locale), but in Missouri, a home inspector generally inspects the home first, and other inspections and tests can be ordered if revealed to be necessary by the initial inspection.
Note that in Missouri, sellers can indicate which features of a property may be exempt from any problem found during inspections (or as-is, in other words) Also, failure to complete inspections and/or bring up any defects with the seller before the expiration of the inspection period is the same as waiving the inspection contingency.
- Termite inspections (also called wood destroying insect infestation inspections) are somewhat common in Missouri and many contracts contain language that puts the responsibility on the seller to rectify any termite or other wood destroying insect problem if found (and substantiated) during the inspection.
- Based on the outcome of inspections -and within the number of days designated for the inspection period- buyers may either a) provide a report of defects and walk away, b) provide a report of defects and ask the seller for repair work, closing cost credits, or a reduction in the sale price due to flaws that were uncovered, or c) accept the property as-is. Buyer and seller have a set amount of time to negotiate on all this (indicated in the contract) before the contract becomes null and void (and earnest money returns to the buyer).
- The buyer may also negotiate for a home warranty (a.k.a. ‘home protection plan’) 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 Missouri:
- 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 Missouri. 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,” 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 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, 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 loan contingency is removed by the buyer before the expiration of the loan contingency date, which is defined in the contract usually by a number of days after the effective date in the contract (or in some cases, the earlier of a number of days from the effective date or number of days before the closing date).
The loan contingency is removed by sending a copy of their loan commitment to the seller’s agent or designee thereof. If the buyer/borrower is unable to get this approval before the expiration of the financial contingency date, either buyer or seller can terminate the contract with written notice and the buyer recovers their earnest money deposit.
- 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, and the contract indicates that appraisal is a contingency of the agreement (an appraisal contingency), then a buyer can notify the seller of the low appraisal and give the seller a chance to order a new appraisal. If the second appraisal still comes in under the purchase price, the buyer has a right to walk away. If it comes in at or above purchase price, the buyer is still bound in most cases.
- 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, itself 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 attorney 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 into 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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