Real Estate Transaction Documents

Buying or selling a house?  The legal documents can make you crazy!  It’s to your advantage to understand the documents required and whether you should sign on that dotted line.

With the home-buying season underway, you may be thinking about buying and/or selling a house. The documents that you are expected to understand and sign can be overwhelming. While the list changes with new laws, and varies from state-to-state, here is a quick rundown to help you through the process.

Getting Started

Buyer:  The initial documents you will need are necessary to get pre-approved for a mortgage:

• Tax returns including W-2s (last two years)
  
  
• Paystubs (last two months)
  
  
• Bank and investment statements (last two months)
  
  
• Valid photo ID

Seller:   A Listing Agreement is necessary to get the selling process started.  Most realty agents use a standard form created by the state or local realtor association. Key terms to know include:

• Exclusive right – This gives your agent the exclusive right to sell your property and collect compensation regardless of who produced the buyer.
  
  
• Duration – The term your agreement will last, which is typically three, six, or nine months. 
  
  
• Duties – Description what your realtor will do to market your property. Be sure to include any specifics you expect (signage, property visits, etc.).
  
  
• Commission – Expect the commission costs to be 5% to 7% of sale proceeds.

Writing or Accepting an Offer

Buyer: You will need to sign a Sales Contract and submit to the listing agent. Although not required, submitting a loan pre-approval letter strengthens your offer.  Even stronger is writing a check for earnest money, which is the amount you are willing to pre-pay. However, earnest money will be forfeited to the seller if you renege on an accepted offer.   

Seller:  You will also sign the Sales Contract; either accepting the offer or countering with a new price to begin the negotiation process.
 

After Accepted Offer and Before Closing

Buyer and Seller:  At this stage both parties are typically waiting for two key documents:

• Buyer’s Inspection Response – Following an inspection (if requested by the buyer), the buyer and seller will receive a report regarding any property deficiencies. This is an opportunity for the buyer to request that unforeseen/undisclosed major problems be corrected as a condition of the sale. If the seller does not make the necessary repairs or adjust the price to the buyer’s satisfaction, the buyer can walk away from the deal and any earnest money is returned. 
  
  
• Appraisal – An appraisal should represent an unbiased professional opinion of a home’s value. It is used to ensure the contract price is appropriate given the home’s location, condition, and features. The buyer’s mortgage lender will require this report.

Finally - Closing Time

This is where both parties are inundated with many unfamiliar documents to sign. The most common include:

Buyer:  Your documents primarily consist of loan paperwork:

• Note – Among other things, it describes the loan terms, payment instructions, default consequences, etc.
  
  
• Mortgage – Your agreement to pledge the property as collateral for the loan. It is recorded in the county recorder’s office as a lien.
  
  
• Loan Application – Final copy of your loan application with updated information.
  
  
• Truth-in-Lending Disclosure – A required and standardized form indicating the annual percentage rate, finance charges, amount financed, and total payments.

Other documents such as proof of insurance, receipts for repairs, and a check for any miscellaneous payments due may also be required.

Seller:  As the seller, you complete documents to transfer ownership of the property:

• Deed – This is the legal document that records the change in ownership and how the buyer will hold title, i.e. individual, joint, etc.
  
  
• Seller’s Affidavit – Sworn statement confirming ownership and declaring any leases, liens, boundary issues, or pending litigation against the property.
  
  
• Tax Declaration – Describes how property taxes (which are often collected in arrears) are to be paid by the parties.
  
  
• Title Insurance – A search of property records is done to ensure there are no unknown liens or clerical errors in the deed and that you really own the property and have the right to sell it. If your title is challenged in court, any costs will be paid by this insurance.  

One last document, shared by both parties, is the HUD-1 Settlement Statement. It lists all the charges and credits to the buyer and seller. Be sure it correctly records the type of loan (FHA, conventional, etc.), earnest money, escrow deposits, property taxes, etc. Also included are any charges for home warranties, personal property sold, surveys, etc.

Summary

Whether you are buying or selling, a major financial transaction requires a significant amount of paperwork that is meant to protect both parties in the transaction.  Be sure to ask questions and if you don’t understand something, consult a professional.  Failure to do so may create major headaches in the future.

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