ARE YOU BUYING A NEW HOME? DEMYSTIFYING THE RESIDENTIAL HOME PURCHASE CLOSING PROCESS IN VIRGINIA
In this article, we will cover the obligations of both Buyer and seller as well as the title company, brokers, agents and lenders (“Participants”) (presuming that a mortgage loan is used by the Buyer).
Once the Buyer and seller have executed the contract, and all parties have received a copy of the fully executed contract, that date becomes the Ratification Date. From that date, all contingency deadlines are calculated. This would include the deadlines for home inspection, septic and well inspection, financing, appraisal, sale of a Buyer’s prior home, and more. All possible contingencies are incorporated into the Contract and discussed separately below.
Inspections and Contingencies
The contingency addenda will set out various inspections that must be performed. They vary in scope and are discussed in their specific sections below. In essence, they allow for negotiations of issues that pose obstacles to closing, such as the property not being suitable to the Buyer or funding cannot be obtained.
Once all of the contingencies have been satisfied or removed, lender and settlement agent distribute the final settlement statement identifying the specific financial requirements of the transaction. If the Buyer is provided with a purchase money loan, a Closing Disclosure is provided three business days prior to the Settlement Date. If it is a cash transaction, a HUD-1 settlement statement is provided.
The Seller may execute its documents, specifically the deed, on any date prior to or on the date of closing but cannot execute after the Buyer closes. This is due to the effect on title by documents being recorded out of order. A Buyer who executes a deed of trust cannot do so until the title is vested in his name, i.e., the Seller has conveyed the property to Buyer by Deed. This is because in a Deed of Trust, a Buyer conveys the power to sell the Property to the bank’s Trustee, and the Buyer has no such power until he has the Seller’s Deed. The deed of trust will be recorded only after the deed to the Buyer is recorded by the clerk in the land records. While the time lapse is literally seconds between recordation of the deed from seller to Buyer and the deed of trust from the Buyer to the trustee, the order cannot be changed. Otherwise a deed of trust would be conveying an interest not held by the new Buyer.
Usually the day before or on the Settlement date, the Lender and Buyer wire all the required funds to the Settlement Agent.
On the day of settlement agent, the Buyer will execute all of his documents and once the Settlement Agent has all of the documents and funds, the new deed and mortgage will be recorded the next day and the funds will be disbursed pursuant to the closing disclosure or HUD-1.
The settlement agent (“Settlement Agent”) is an independent party in the transaction and can be thought as representing the Contract as opposed to the Seller or Buyer. Their client is the title insurance company, such as First American Title Guaranty Company or Stewart Title Insurance Company, and they issue the title insurance policies for the lenders and the Buyer. Prior to issuance, the Settlement Agent must verify ownership and chain of title by examination of all the documents recorded in the Circuit Court for the county in which the property is located. The Settlement Agent uses companies that specialize in researching real property called title abstractors (“Abstractor”). Abstractors produce comprehensive reports (“Title Abstract”) containing analyses of the documents recorded in the land records in order to verify chain of title, identify encumbrances such as mortgages, easements, and declarations of covenants conditions and restrictions. Additionally, the tax payment status is retrieved from the county tax administration.
Once title is deemed by the Settlement Agent to meet the requirements of the Contract, and the insurance underwriter, specifically that “title is to be good and marketable, and insurable by a licensed title insurance company with no additional risk premium”, the Settlement Agent may conduct the closing and issue title policies to the lenders and the Buyer.
Preparation for the Closing
In addition to reviewing the title, the Settlement Agent also communicates with the Seller and gathers authorizations to obtain payoff information from the Seller’s mortgage servicer, checks the bankruptcy courts to ensure there are no pending bankruptcies under the Sellers’ social security numbers and verifies the legal signatories for all parties.
For business entities such as LLCs, LPs, S or C Corps, the legal formation, legal authority to conduct business and authorization of those entitled to sign for Seller are verified, as are the trustees. For properties owned by trusts, the Settlement Agent must examine all trust documents including the initial declaration and any amendments which may also have further instructions as to the disposition of trust property.
The Settlement Agent also works with the Buyer’s lender in preparation for the final settlement statement, and to receive the funds from the lender for closing. The lender provides the final settlement statement and under federal law, where a loan is used for a residential property a specialized form called a Closing Disclosure is prepared.
The Closing Disclosure presents all details of the financial transaction related to the sale, including information for the Buyer that explains all aspects of a Buyer’s financial obligations taken from the promissory note and deed or deeds of trust given as security for the loan.
Exceptions to this requirement are commercial property loans, reverse mortgages and transactions that are funded without a loan. For those cases, the Buyer will receive two forms: a HUD-1 Settlement Statement and a final Truth-in-Lending disclosure—instead of the Closing Disclosure. If the Buyer is applying for a home equity loan (HELOC), a manufactured housing loan that is not secured by real estate, or a loan through certain types of home Buyer assistance programs, the Buyer will not receive a HUD-1 or a Closing Disclosure, but will receive a Truth-in-Lending disclosure. (12 CFR Part 1026 (Regulation Z).
Disbursement and Recording
In Virginia, the Settlement Agent is required to record all documents and disburse the funds as indicated in the settlement statement/closing disclosure within two business days of closing (Va. Code 55.1-903). Upon full recording and disbursement, closing is fulfilled.
In Virginia, there are statutorily required clauses and notices for any contract for the sale of a residential property. Our custom contracts are modified every year to be compliant with Virginia law. These requirements include the following:
- Virginia Residential Property Disclosure Act, Va. Code 55.1-700 – this is the codification of Virginia as a caveat emptor jurisdiction. Buyers, through this disclosure learn that the Sellers are protected from defects of the real estate or the improvements thereon as well as a number of other aspects of the property such as criminal activity of one’s neighbors, or well or septic. The Buyer is warned to make any inspections he desires or waive any right to object after closing. This form accompanies the Contract offer as a separate page.
- Real Estate Settlement Agent’s Act Va. Code 55.1-1006 – requires that a specific notice be provided to the Buyer, in the contract, notifying him of his right to choose the settlement agent for the transaction. It states the right cannot be modified by waiver or consent. This is important to combat the incidence of fraud and kickbacks in the industry. It is included in the NVAR Contract in paragraph 4. While the seller can be represented by its own settlement agent, the Buyer’s settlement agent conducts the closing, recording of documents and disbursement of funds. This is called a “split settlement” in the industry.
- Virginia Property Owners’ Association Act, Va. Code 55.1-1800 – Requires a detailed report (“Resale Certificate”) regarding the association and the compliance of the property with the association’s rules. It includes financial reports, lawsuit reports and if the property can be sold (no current violations) and is paid up on its dues, a “resale certificate” is included in the report. Once delivered to the Buyer, the Buyer has three days to cancel the contract without penalty. If canceled within that timeframe, the deposit is returned. It is included in the NVAR Contract in paragraph 8.
- Virginia Condominium Act Va Code. §55.1-1900 – This statute follows the same general notice provisions of the Property Owners’ Association Act. This also requires delivery of a Resale Certificate providing the same list of documents and verification that the condominium is current on all dues obligations and is not in violation of any of the rules or regulations of the Condominium Association. It also provides for a three-day review of the Resale Certificate package with the option to void if Buyer chooses. It is included in the NVAR Contract in paragraph 9.
Common Contingency Addenda
The Home Inspection Contingency Addendum (“HICA”) provides options for the Buyer to hire a professional home inspector to produce a report after a walk-through inspection. Home Inspectors are guided in their general obligations by a standard of ethics published by the American Society of Home Inspectors. Their inspections are limited in scope and are only intended to find areas of concern for the Buyer. If suspicions are raised, the report will suggest that professionals inspect and recommend solutions.
The HICA contains different choices for how the inspections are conducted such as the initial deadline to have the report, a deadline for delivery of the report to the Seller and demands for repairs, and the period in which the parties can negotiate repairs, credits or waivers of the work to be performed.
In the event no accord is reached, the Buyer will have the option to void the contract and have his earnest money deposit returned.
The Financing Contingency Addendum (“FCA”) provides for:
- a) an assurance that the Seller can receive written evidence that the Buyer will have the loan in time for closing, and;
- b) a way for a Buyer to void the contract if he cannot obtain said loan. This is the financing contingency.
The assurance to a Seller comes in a document prepared by the Buyer’s lender called the written conditional commitment (“WCC”).
The FCA requires Buyer to deliver the WCC before a certain deadline (“FC Deadline”), calculated by a negotiated number of days following Ratification. This is typically 20-30 days following Ratification but is adjusted according to the circumstances of the parties.
The Buyer may void the contract prior to the Deadline by delivering a formal rejection letter to Seller. Also, if the WCC was not delivered to the Seller prior to expiration of the Deadline, Seller may at any time thereafter, up to the date of settlement, demand that Buyer either produce the WCC or a written notice to void the Contract before expiration of the third day following the demand.
If the Buyer fails to either produce the WCC or notice to void within those three days, the financing contingency is removed, and the Buyer must go to closing with or without financing.
There is also an option for the financing contingency to automatically expire at the end of the Deadline but is rarely selected by a Buyer.
Also included in the FCA is the Appraisal Contingency. In the event the appraisal results in a value that is equal to or greater than the sales price, the contingency is satisfied, and the Parties proceed to settlement.
If the appraised value is equal to or less than the sales price, the Buyer may elect to not proceed with settlement. Also, if the Property does not satisfy the lender’s requirements on the grounds of inadequate collateral the Buyer may issue a Notice of Election Not to Proceed to the Seller, accompanied with the lender’s written denial concerning the property.
Also, if the appraised value is equal to or less than the sales price, the Seller may elect to lower the Sales Price to the appraised value. If the Seller does not make that election, the parties may agree to acceptable terms.
Alternatively, the Buyer may elect to go through with settlement. This would only occur in the situation where the Buyer is not borrowing funds and can pay the Sales Price without concern of the appraised value.
Lender Required Repairs
It is possible that the Lender, having been provided with the inspection reports may require that certain repairs be made. Buyer is required to provide Seller Notice of the Lender’s requirements and Seller is then required to give Notice to the Buyer as to whether or not the repairs will be performed. If neither Buyer nor Seller make the repairs, the Contract becomes void.
There is a general document used by realtors called the Contingencies/Clauses Addendum that provides additional contingencies:
- sale of Buyer’s property allowing the Buyer to void the contract upon the failure of the property to sell.
- Seller’s purchase of another home.
- Blank contingency for special provisions.
- Back-Up Contract – used when the offer is a back up to a different pending contract and providing terms under which the contract may be the primary or void.
- AS IS – provides for specific deletions of what would otherwise be a requirement of the Contract.
- Unrepresented Seller or Builder and Buyer’s Broker (Selling Agent) – Specifies the obligations of payment to the Selling Agent.
- 1031 Exchange (Buyer) – Acknowledges that the acquisition is being handled through the 1031 tax-deferred exchange and identification of the qualified intermediary.
- 1031 Exchange (Seller) – Acknowledged the transaction is funded partially or entirely with funds from a Section 1031 account.
- Pre or Post Settlement Occupancy Agreement – In the event that the Buyer needs to take possession before settlement or the Seller needs to stay in the home after settlement, the Parties may agree as to the respective fees or credits to be paid in order to allow these situations to be resolved.
The NVAR attorneys created a specialized addendum early in 2020 to provide for difficulties in closings caused by the effect of the pandemic. It was created to assist agents in persuading parties to enter into contracts with the uncertain consequences that the pandemic may create.
The stated purpose of the addendum is to protect the parties from Default in the event they are unable to perform due to circumstances beyond their control. While the language of the document may be deemed incomplete or ambiguous, cases have been brought before the Courts determine the correct interpretation and application of the addendum.
If you have any questions regarding this process, please call our experienced attorneys to schedule a consult. We at Fox & Moghul would be happy to assist you.
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