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Clearing the Closing Hurdles

October 20, 2010

Clearing the Closing Hurdles

Anticipate problems before they happen and your closings will stay on track. All your hard work has paid off. The purchase contract is signed. Now you can just sit back and wait to get paid. Wrong!

Sometimes clients and salespeople think the closing is going to be a piece of cake, but these days, having a contract is only the beginning.

According to recent REALTORS® Confidence Index surveys conducted by the NATIONAL ASSOCIATION OF REALTORS®, between 10 percent and 14 percent of pending transactions don’t close. Another 20 percent are delayed but eventually close.

The easiest way to avoid a closing delay is to do your homework up front. Most of the time, a problem at closing really starts much earlier.

Most brokers encourage their agents to use a checklist of tasks that must be completed. Review the list weekly and make follow-up phone calls to lenders and title companies, as needed.

Setting realistic client expectations is also essential. Before they sign the purchase agreement, you need to educate your clients about the possible closing hurdles. You don’t want to scare them, but they do need to understand what could go wrong—from buyers who can’t qualify for a loan to delays with title.

Most hurdles that delay or prevent closings fall into three major areas: loans and appraisals, titles, and home inspections. By focusing in on the most common closing hurdles in each of these areas, you can gain control of your transactions and master the intricate details that make a closing happen.

PROBLEM: Financing falls through at the last minute
SOLUTION: Help buyers get their documentation in order

Tighter—and in some cases still-evolving—loan underwriting standards make it more critical than ever for buyers to make sure they’re financially qualified for the purchase. However, because of new requirements under the Real Estate Settlement and Procedures Act, many lenders are no longer issuing pre-approvals—only pre-qualifications. If a buyer you’re working with has just a pre-qualification letter,it is recommended to find out whether income and assets have been verified.

Tighter lending standards and heightened concern about mortgage fraud also mean more time-consuming paperwork. Mortgage brokers have had to relearn the underwriting process and ask all the questions up front.

For example, not only do FHA buyers who receive funds from a family member have to disclose the gift and its source, but the person making the gift must also show the source of the funds. It’s easy to overlook this requirement, but you can’t fund the loan without it.

PROBLEM: Appraised value doesn’t support contracted sale price
SOLUTION: Become an ally of the appraiser

The biggest hurdle to closing in an uncertain market is the lack of comps, especially for FHA and VA loans that require comps to be within a three-month time limit.

PROBLEM: New lending and closing regulations create delays
SOLUTION: Understand rules and allow time for compliance

Recent changes to the federal Truth in Lending Act and RESPA can slow the closing process. The new HUD-1 form adds a few more hours of document preparation because underwriters and escrow agents aren’t familiar with it yet.

Unfamiliarity and the fear of making a costly mistake in the Good Faith Estimate form are sometimes prompting lenders to ask for closing-cost information more than once or in several formats.

To prevent delays, avoid last-minute changes whenever possible. But sometimes, when the matter is out of your control, the best thing you can do is help your client have expectations about how long the transaction will take.

PROBLEM: Title can’t be transferred at closing
SOLUTION: Investigate potential title troubles early

Title defects are another major closing hurdle—but one that can often be avoided with pre-planning.

Open title as soon as you take a listing. A preliminary title search can reveal an array of problems, from unpaid taxes to land-use restrictions. The fee is “nominal” and can usually be rolled into the final title work if the buyer agrees to use the same title company that does the search.

PROBLEM: A home inspection uncovers serious issues
SOLUTION: Look into possible repairs before buyer’s inspection

The time it takes to negotiate which party pays for repairs and get estimates—and sometimes even complete the work—can spell big delays for a closing. People want a perfect house. It’s not uncommon to see buyers renegotiating repairs two or three times.

One way to head off last-minute wrangling is to get a home inspection and make repairs before the property is on the market. However, that practice isn’t endorsed across the board.

Source: Mariwyn Evans 08/2010

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