After months of searching, touring, and urgent phone calls with your real estate team, the moment has finally come – you’re closing on the Chicago property of your dreams.
Unfortunately, you aren’t free of the red tape, paperwork, and fees, just yet. Traversing from contract to closing is a vital stretch of the homebuying process that comes with its own unique set of challenges, and even its own set of vocabulary terms you’ll need to know to pull off a successful purchase.
Here are four of the more confounding phrases you’ll need to know as you move into closing on your next home:
1.) Earnest Money
Earnest money is an upfront financial commitment designed to make buyers focus in on closing on one particular home, rather than running around town making countless offers.
To show that you're committed to buying a particular home and to put some money towards the down payment, the buyer will tender the earnest money in two separate installments.
Generally speaking the buyer, will deposit $1000 initial earnest money when the seller signs the contract; following an attorney review of the contract (often 5-10 days later), the buyer will then put forward a second installment of earnest money, commonly referred to as the balance of earnest money, which could range anywhere between 3-10% of the contract price (the amount may depend if you are in a bidding war on the property, which could force you to offer a higher amount to stay competitive).
If the sale is successful, your earnest money will go toward your down payment. If you back out, typically, the seller still receives the earnest money from the escrow agent. However, you can set up legitimate means of being entitled to getting your earnest money back, through…
2.) Contingencies
Contingencies are conditions that need to be satisfied in order to close on the home. Maybe more practically, contingencies are legitimate and legal means for canceling a contract, enabling buyers to walk away from a deal without major financial consequences. We’ll let REALTOR.com explain:
“Contingencies must be removed for the deal to go through. For instance, if the buyers placed a 10-day inspection contingency on the purchase, that means for that period they have a right to hire a home inspector to check the house top to bottom for any glaring flaws. Upon the 10th day, if nothing major is found, the buyers will be asked to remove this stipulation in writing. Once the buyers have removed all of their contingencies, they have to go through with the purchase or forfeit their [earnest money deposit].
With that in mind, remember that “cold feet" is not a valid legal contingency. Generally, companies only return the earnest money if there is an issue with inspection findings or if the seller defaults on any other contractual stipulation. The contract must be legally terminated in order for a refund to be issued.
3.) “Cash to Close”
As Amerifirst Mortgage puts it in their helpful mortgage glossary, “cash to close” refers to “the entire amount you will need on the day of closing your mortgage loan.” We often tell homebuyers to budget about three percent of their purchase price as “cash to close,” which goes toward a wide variety of closing costs, including appraisal costs, title insurance, escrow deposits (typically prorations like property taxes, or mortgage insurance payments), and various fees, including survey, underwriting, and processing fees.
4.) Escrow
Escrow is one of the more foreboding terms to a lot of homebuyers – so much so that not knowing what it means is actually, believe it or not, a key plot point from this summer’s Neighbors 2. Fortunately, while escrow is used much more broadly in other states, it operates only in a limited capacity in Illinois.
In simplest terms, escrow refers to having an impartial third party agent hold back funds and important documentation until after a deal is finally, officially closed (also known as COE, or “close of escrow”), at which point the escrow agent distributes payments and contracts accordingly. It’s important to talk with your real estate team about the many different variations and meanings to escrow, which you can read a bit more about on Zillow.
Curious about any other common closing phrases? Looking for a handy homebuying glossary? REALTOR.com does a great job of breaking down many of the ABC’s of homebuying with their “Learning the Lingo” series.
And when you’re ready to start the buying or selling process in Chicagoland, Real Group is here to help! Our experienced team is here and happy to guide you every step of the way. Why not check out some of our listings or drop us a line to get started?
