When thinking about buying a house, most of us can probably agree that wading through legal documents seems like the least exciting part of the process. This stack of paperwork is, however, essential. Gaining an early understanding of the legal documents for buying a house will help you avoid confusion and keep stress levels to a minimum while you’re in the midst of negotiations, inspections, and closing.
That’s why we’re laying out a comprehensive list of the most important — and sometimes misunderstood — legal documents involved in the homebuying process. Here to help is top Chicago-based real estate agent Debra Dobbs, whose 37 years in the industry have made her a true documentation expert. We’ll also hear from Richie Helali of HomeLight Home Loans for an inside scoop on the loan-related documents for buying a house.
Grab a pen and let’s review!
Real estate agent contract
Your agreement with a buyer’s agent may be one of the first legal documents you’ll encounter when buying a home. This is a contract you might sign — though note that they’re more common in some states than others — when you’ve found a great agent whom you trust to help you find the perfect home.
A buyer representation agreement solidifies the relationship between you and your agent: You’re agreeing to work exclusively with them to find your new home, and they’re agreeing to act in your best interests and represent you to the best of their ability.
Dobbs works in Illinois, where buyer representation agreements are not common. Nonetheless, she ensures that her clients have a full understanding of what buyer agency really means.
“There’s a document I present to buyers that explains buyer agency in Illinois, and there’s another document I show that explains dual agency,” says Dobbs.
“I tell buyers that we’ll first have a meeting, then we’ll go look at properties on an outing or two, and then I’ll ask if they want to work with me exclusively.”
In most cases, her potential clients are happy to say yes. But for those who don’t, that’s okay, too!
“I’d rather have a buyer choose a different agent than think they’re going to get better service by working with a number of agents,” she explains.
Working with just one agent actually is to your benefit as a buyer — contract or no contract. You’ll have just one point of contact, and that is a person who understands your situation, your budget, and your wants and needs for your new home. The process is simplified, and both parties benefit from the clarity.
Different states have different disclosure requirements. Some states require sellers to fill out a seller disclosure statement documenting known repair needs or health and safety hazards in the home.
In states where seller disclosures are not required, it’s a bit of a “buyer beware” situation. Though — if we’re being honest — it can be difficult to prove that a seller who claims otherwise did, in fact, know about a cockroach infestation under the main bathroom, or mold growth in the attic, or damage to the roof.
This is why it’s so important to have a thorough home inspection conducted during the due diligence period of your purchase agreement.
This legal document is the key to buying your new home!
When the terms have been finalized, accepted, and signed off on by both sides, your purchase agreement is now officially a sales contract to which you and the seller are both held liable.
A Loan Estimate is a document provided by your lender that includes the terms of your mortgage loan and an estimate of your closing costs.
“The Loan Estimate has all the meat and potatoes, so to speak,” says Helali. “It shows the loan amount, the purchase price, the payment, the interest rate — and is that locked, is it not locked? — all that good stuff.”
This document is where you’ll see the estimated specifications for:
- Loan amount
- Interest rate
- Monthly principal and interest payment
- Prepayment penalty (if there is one)
- Mortgage insurance amount
- Estimated escrow for prepaids like taxes and homeowner’s insurance
- Estimated closing costs
- Estimated cash needed to close
Helali notes that a Loan Estimate is sometimes just one component of a loan disclosure package, which he warns can be between 75 and 120 pages, depending on the state. And if you’re applying for a mortgage loan with more than one lender because you’re shopping around (good for you!), then you can expect to see more than one Loan Estimate to help you compare and contrast the loans.
“Honestly, it’s a lot of paperwork,” he admits. “I always tell people, ‘Hey, when you receive the loan disclosures, please read through it and let me know if you have any questions.’
“I really encourage people to just hop on the phone with me when they have time, so we can go over some things line by line, and review the actual Loan Estimate itself. That way, we’re on the same page.”
Like your real estate agent, this is why it’s so important to work with a mortgage lender whom you trust and feel comfortable talking to.
Earnest money check
Earnest money acts like a good faith deposit. When preparing a purchase agreement, your agent will advise you if it would be advantageous to include earnest money to show the seller that you’re serious about your offer; it can depend heavily on your market.
The amount of an earnest money check can be as little as $500, or it can be several thousand dollars — it depends on the price point of the home you’re interested in, as well as current market conditions. Roughly 1% to 3% of the purchase price is considered “normal” territory for an earnest money amount.
These funds are held in an escrow account until closing, and they will usually be credited toward your down payment. If you fail to hold up your end of the bargain with the seller, though, you risk forfeiture of your earnest money funds.
It’s worth noting, of course, that earnest money may change hands through the form of a wire transfer rather than a paper check. In this case, there’s technically no “document,” but the premise is the same.
When you buy a home, you’ll take over the title to that home. The property title represents your right to legal ownership of the property.
The title is less a document and more of what is called a “bundle of rights,” meaning that a transfer occurs from seller to buyer regarding rights to the property:
- Right of possession
- Right of control
- Right of exclusion
- Right of enjoyment
- Right of disposition
In other words, it’s now your house, and you have the right to do with it what you like, determine who is and isn’t allowed to enter, and sell it if you so choose.
While the title isn’t a physical document, you will sign a physical deed to the home at closing. This document solidifies your ownership of the property, and after the deed is recorded with your local county office, the whole thing’s official.
Which leads us to the importance of a…
During the closing process, a title review will be performed to ensure that there are no hidden problems that may interfere with your ability to hold the title.
Troublesome issues can include things like tax liens, boundary encroachments, estate disputes, forgeries, and more. It’s better to learn about these things before you’re under the impression that you own the home, only to find out that a previous owner’s second cousin thrice removed believes he has a legal claim to the property.
For further protection, you’ll want to have title insurance. Whether you make the purchase or the seller covers the cost — usually between 0.5% and 1% of the purchase price — title insurance protects you in the event that something was not uncovered during the title review.
Title insurance means you won’t be on the hook for someone else’s lien (or whatever else!) if it wasn’t discovered prior to your purchase.
A survey is a document that shows the property lines so that everyone — from you, to the city, to your future buyer if you decide to sell — understands exactly what you do and do not own.
Property surveys are also useful when adding features to your property, such as a fence or a storage shed. Imagine how frustrating it would be to build a fence (they can be pricey!) only to find out you’ve placed it 10 inches over your property line. Thanks to the aforementioned bundle of rights, the owner of the neighboring home would have every right to ask you to remove the encroaching fence.
Certificate (or affidavit) of title
This is one of the many documents you’ll encounter during closing, wherein the seller signs off on a statement swearing to their legal right to sell the property.
In a perfect world, if the seller is being untruthful about their ownership rights, this would be uncovered during the title review process — but the affidavit of title is another way of keeping everyone on the same page. Just in case!
Transfer tax documents
Unless you live in one of the 13 states that does not charge it, real estate transfer tax is a line item charge you’re likely to pay as part of your closing costs (though in some states, it’s customary for the seller to pay it).
In short, it’s a fee charged by a county, state, or municipality for the process of transferring ownership of the home you’ve just bought. Each state’s fee will vary, but there will probably be at least one piece of paper in your stack of closing documents that will pertain to transfer tax and require your signature.
Certificate of occupancy
While a certificate of occupancy may sound like something you would need to provide in order to prove that you’re going to live in the home, it’s actually a document certifying that the home has met all legal requirements for occupancy.
In other words, the house is certifiably up to code and safe to inhabit.
Certificates of occupancy are issued by a relevant building or zoning authority for the area, and while they’re a must for new construction homes, they’re often reissued when the property title changes hands. This helps ensure that occupied homes don’t fall into — or remain in — disrepair, particularly if you’re buying a house that the seller has lived in for the last, say, 20 years.
It’s important not to confuse certificate of occupancy inspections — which usually involve fire, plumbing, electrical, and structural inspections — with a conventional home inspection. The latter is essential to knowing what you’re signing up for if you move forward with the purchase of a home, and it can be a handy negotiating tool.
Your real estate agent can help you navigate any and all inspections, so don’t hesitate to ask questions.
The Closing Disclosure is an important document — it contains all the final details about your loan.
“The Closing Disclosure is an exact copy of what’s going to show up on your final documents at closing,” says Helali. “It needs to come out no less than three business days before closing.”
Fortunately, this document isn’t presented as a dizzying stack of paperwork — it’s quite straightforward and “in plain English rather than bank-speak,” as Helali puts it. It looks almost identical to the Loan Estimate, and the numbers shouldn’t be wildly different from one form to the next.
Given the tight timeframe, if you have questions about your Closing Disclosure, it’s best to go straight to your lender (rather than your agent).
Closing costs check
As with the earnest money check, it’s quite possible that your funds for down payment and other closing costs will be in the form of a wire transfer rather than a paper check, so this may not be a literal document.
Nonetheless, you’ll almost certainly need to bring some amount of money to the closing table.
Unless you’re paying cash for your home, you’ll have a mortgage note. Also known as a promissory note or borrower’s note, the mortgage note outlines the full terms of your loan and how you’ll repay it. This includes loan amount, interest rate, payment dates and how to pay, repayment terms, and what happens if you fail to uphold your agreement.
This document is the final stop on your mortgage journey. All approvals have been completed, your questions have (presumably) been answered, and you now officially have a mortgage loan.
New construction documents
If you’re not purchasing a newly constructed home, you won’t have to worry about these documents.
If you are, however, buying a brand new home, there are going to be a few extra pieces of paperwork you can expect to see throughout your homebuying process:
- A construction contract agreement, which you’ll sign with the builder who will be doing the work
- A detailed scope of work, which outlines what the builder will do during the construction process
- A bill of quantities, which details the materials, parts, and labor involved
- Construction insurance, which protects your home while it’s under construction
- Zoning and utility documents, which specify use of and service to the property
Do keep in mind that each state and builder will be a little different, so specific documents may vary. As always, your agent will be able to help with clarification.
HUD-1 Settlement Statement
“The HUD,” as it’s often referred to, has been largely replaced by Closing Disclosures since late 2015 — but it isn’t obsolete, so it’s worth a mention here. This is a document that outlines all charges and credits between both parties in a real estate transaction. The settlement statement provides full transparency as to where every dollar is going.
Depending on the mortgage loan you’re using, you may not see a HUD-1; the pertinent information will be in your Closing Disclosure.
At closing, the attorney takes over. I’m involved every step of the way and am typically in on every conversation with my clients and their closing attorney, but [at closing] the attorney takes over, and it is their job to make sure that all legal documents are reviewed.
- Debra Dobbs Real Estate AgentCloseDebra Dobbs Real Estate Agent at @properties
- Years of Experience 38
- Transactions 433
- Average Price Point $874k
- Condominiums 268
Legal documents to bring to closing
Aside from turning up with a check for closing costs and any documents that either your lender, agent, or closing attorney may have specified, don’t forget the most basic legal document of all: proof of identity.
Be sure to bring at least two forms of identification. A passport, driver’s license, or government-issued photo ID will suffice as primary identification, but do come prepared with a second identity document. Bring your Social Security card or another piece of identification with your legal name printed on it.
Once the closing process is underway, it’s generally time for your agent to step back. Many states, including Illinois, are attorney states — which means that a closing attorney is required to facilitate the final transaction.
“At closing, the attorney takes over,” says Dobbs. “I’m involved every step of the way and am typically in on every conversation with my clients and their closing attorney, but [at closing] the attorney takes over, and it is their job to make sure that all legal documents are reviewed.”
As Dobbs explains, this is because in her state, real estate agents are not permitted to interpret legal documents — no matter how competent they may be after decades of experience.
Feel free to ask questions in the lead-up to closing, but remember that on closing day, questions should be directed to the closing attorney if you’re using one.
You’ve got this!
Yes, there are a lot of legal documents involved in buying real estate, and yes, it’s important that you understand what you’re agreeing to — but that’s why you’ll have an expert buyer’s agent in your corner. Good luck!
Header Image Source: (Grant Durr / Unsplash)