- Florida’s home buying process is similar to other states where a buyer’s attorney, escrow agent, or representative from a title company is used to consummate the transaction and prepare all the closing documents.
- In Florida, buyer and seller often consummate the transaction at the same closing (or ‘settlement‘) table.
- Florida has its own environmental features that influence which inspections get performed, such as termite inspections (and termite bond contracts are common ways to protect a buyer’s investment in Florida and other southern states).
Step by Step
Part 1: Disclosures, inspections, and title
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.
- Concurrently, a deposit, or earnest money, is paid to an escrow agent, the buyer’s attorney, or broker (never to the seller directly).
- The signed contract is sent to a closing attorney or title company to begin preparation of all work related to transferring and changing the title to the new owners.
- The buyer reviews and signs off on any disclosures. 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 Real Property Disclosure Statement (see an example form used in Florida here) is one version of this disclosure form generally provided by the seller on or before the day the contract is signed (various areas in Florida have their own versions of this form). Sellers may see making these disclosures 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).
- The buyer elects to perform inspections on the property as agreed upon in the contract. These inspections must be completed by a certain date, which is called the inspection contingency date as indicated in the “Inspection Periods” section of most Florida home buying contracts. The types of inspections vary by property type and situation (and locale), but in Florida, a home inspector generally inspects the home first, and other inspections and tests can be ordered if revealed to be necessary by the initial inspection. A termite inspection is also often performed in Florida as well as other areas of the southern US, and a drywall inspection may be performed as well.
- Beyond a termite inspection, some properties may be covered by a termite bond contract with an extermination company to protect the asset from termite damage on an ongoing basis.
- Beyond the drywall inspection, a seller must provide and both buyer and seller must sign a defective drywall Disclosure that certifies that the seller has no knowledge of any defective drywall at the time of sale.
- Based on the outcome of inspections, buyers may elect to ask the seller for repair work, closing cost credits, or a reduction in the sale price due to flaws that were uncovered. Sellers have three options: agree to all of the buyers’ requests, offer a modified solution back to the buyer, or decline to make any amends. In response, the buyer can continue to negotiate, accept the seller’s position, or as long as they’re within the due diligence period, end the transaction and recoup their earnest money without penalty.
- The buyer may also negotiate for a home warranty 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 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 Florida:
- 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 Florida.
- Within 3 days, 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.
- Before the buyer is ready to write an offer, a pre-approval with a lender should be acquired. The buyer sends a series of personal financial disclosures to their 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 eligibility for the loan for which you’ve applied.
- The lender renders an approval decision, and if approved, issues a loan commitment letter, 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.
- The loan contingency is removed by the buyer before the expiration of the loan commitment period (also referred to as the loan contingency date) as defined in the contract, by sending a copy of their loan commitment or approval. If the buyer/borrower is unable to get this approval before the expiration of the loan commitment period, they have to send the seller written notice during this period to be able to get out of the deal without losing their earnest money/deposit.
- 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 a mortgage broker can reject an appraiser and ask for a new one. If the appraisal comes in lower than the purchase price, the buyer has until the appraisal contingency date to request a reduction in price from the seller. The seller then has a set period of time to accept or reject the buyer’s request. If the seller rejects the requestor that time lapses, the buyer can walk away from the contract without penalty.
- 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.
Tip: As this process can be long, arduous, seemingly arbitrary, and is often critical to your home buying 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 closing itself
The closing process itself takes place at one table (either at the office of an attorney or title company), where buyers sign all documents related to their loan and the transaction itself. After all, documents are signed and payments exchanged, buyers generally take possession of the keys unless a separate agreement has been reached to allow the seller to stay in the property for a period after closing. The detailed steps that make up closing are:
- As part of the preparation for closing, the attorney or title company performs a title search (if they haven’t already) to determine if there are any liens or assessments on the title. Provided the title is deemed ‘clear,’ the closing proceeds as planned and the attorney or title company issues a title commitment. All paperwork for changing the title/deed and title insurance is prepared, and a final closing date is confirmed with all parties.
- A final cash figure for what a buyer needs to bring to the closing in the form of a cashier’s check is calculated. This is based not only on a mortgage’s closing costs but factors like property taxes and utilities paid into date by the seller.
- A final walkthrough will often be performed the day of or before closing to verify the property is in the same condition it was when the process began.
- At the closing or settlement, table, the buyer (and seller) sign all closing documents, including the HUD-1 (see a sample HUD-1 here), and the final loan documents.
- The buyer pays the remaining funds in their downpayment to an attorney or a representative of the title company (who is present at closing) via cashier’s check.
- The representative from the title company or your attorney will then record the transaction and deed with the appropriate municipality.
- The buyer receives the keys and, unless indicated differently in the contract, officially takes possession of the property.