Utah Home Buying and Escrow Process
- Utah's escrow process is similar to other states where an escrow agent, closing agent, or representative from a title company is used to complete the transaction.
- The buyer's funds are held by a neutral third party, as is the purchase contract, until an escrow agent verifies that both parties have performed their roles in the transaction and prepares the new title.
- Documents are signed and payments made on the settlement date, and within a few days, the escrow company then disburses all funds and the listing agent delivers the keys to the property to the buyer (the closing date).
Step by Step
Part 1: Disclosures, due diligence (inspections), and credits
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. The escrow process begins.
- A deposit, called earnest money, is deposited with the seller's real estate brokerage, an escrow agent, or an attorney depending on the contract (never to the seller directly). Escrow companies are often part of a title company, but work as separate divisions.
- The buyer reviews and signs off on any disclosures, usually attached in a standard form as an addendum to the purchase contract. 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 form called a seller's property condition disclosure is provided by the seller either with the contract itself or during the inspection period. 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).
- As part of a buyer's right to do due diligence on the property, inspections are usually performed. The types of inspections vary by property type and situation (and locale), but in Utah, common inspections include an intial inspection by a licensed home inspector and additionally a termite inspection. A property survey may also be performed during due diligence.
- If the buyer finds anything unsatisfactory with the property during due diligence, and before the expiration of the due diligence deadline indicated in the contract, they can walk away without penalty and recoup their earnest money deposit. Or, they can negotiate with the seller for repairs or closing cost credits. However, if the buyer doesn't take action before the due diligence deadline, that contingency is as good as waived.
- 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 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 Utah:
- 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 Utah. Of course, well before this point, a pre-qualification or pre-approval with a lender should have been acquired.
- 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 the 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 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 eligability for the loan for which you've applied.
- The lender renders a preliminary approval decision, and if appropriate, issues a preliminary loan approval, 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 an agent or 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 can decline to approve the borrower unless a change is made to the purchase price or the size of the downpayment. Most contracts will have an appraisal condition (a.k.a. appraisal contingency) to protect the buyer if the appraisal comes in under purchase price. In this case, buyers can provide a written appraisal report to the seller by the appraisal deadline and walk away without penalty.
- The financing condition (a.k.a. financing contingency) generally used in Utah allows buyers to cancel the deal without losing their deposit if they are unable to get a loan satisfactory to them before the expiration of the financing deadline (or financing contingency date). However, in Utah, if a buyer fails to remove the financing condition and does not get a loan commitment from their lender, the seller can cancel the deal with written notice and keep the buyer's earnest money deposit. Buyers are advised to be diligent in pursuing their loan application and make the appropriate decision before the expiration of the financing contingency.
- Provided all is still going to plan, the lender typically submits a request for title commitment to a title company. The title company then examines the quality of the title and any findings from the property survey that is provided. If all is well, a title commitment will be prepared that certifies that the title is free and clear and ready for sale. Title insurance may also be arranged in this step.
- 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.
- Hazard insurance may be required by the lender to protect the asset from fire and storms. If the property is located on a flood plain, then flood insurance may be necessary as well.
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 settlement & closing itself
The closing process itself can span a couple of days or even a week, and in contrast to other parts of the country, the transaction is generally not consummated with all parties sitting at the same table. In Utah, an escrow state, settlement and closing consists of the following steps:
- A buyer's lender sends final loan documents to the escrow agent and the final settlement date is scheduled.
- The settlement itself convenes at the office of an escrow agent, closing agent, or title company. The seller generally signs their closing documents first.
- The buyer then signs all closing documents, including the HUD-1 (see a sample HUD-1 here), and the final loan documents.
- The buyer pays the remaining funds for their downpayment and closing costs to either the escrow agent, closing agent, or representative of the title company (via wire transfer cashier's check). This may also be done a few days in advance to speed along the closing process.
- The deed gets recorded with the appropriate municipality and the escrow agent disburses funds to the appropriate parties.
- The deal is now closed- the buyer receives the keys and, unless indicated differently in the contract, officially takes possession of the property.
Information provided by Amitree Home Buyer's Guide
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