Closing on a Bank-Owned Home

The mechanics of closing on a bank-owned (REO) home are the same as for any purchase: the title company or attorney prepares the documents, funds move through escrow, you sign and the deed is recorded. For those general steps, see closing and recording a property purchase and closing day: what to expect.

What changes with a bank seller:

• The bank's addendum, not your standard contract, usually sets the closing date, extension rules and who pays which costs.
• The seller may choose the title or escrow company, or limit which ones it will work with, depending on state practice.
• The deed carries fewer promises than a homeowner's deed typically would.
• The seller signs through an asset manager or authorized officer, often remotely, and its documents may arrive close to the closing date.
• The home is usually vacant, so condition can change between your inspection and closing.

Bank addenda typically set a firm closing date and treat it seriously. Many include a per-diem charge: a daily fee you pay for each day closing is delayed past the contract date for reasons within your control, such as a slow loan approval or missing paperwork. The amount and terms vary by seller. For example, an addendum might set a fixed daily amount or a percentage of the price, and it may also allow the seller to cancel after a set number of days.

To avoid penalties:

• Give your lender, title company and agent a copy of the addendum as soon as it is signed, and highlight the closing date.
• Order the appraisal, insurance and any required inspections early.
• Respond to lender and title requests the same day where you can.
• If a delay looks likely, ask for a written extension before the closing date passes. Banks may grant one, sometimes with a fee, but an extension is never guaranteed.

Read how the addendum treats delays caused by the seller, such as late payoff figures or missing signatures. Those are often excluded from per-diem charges, but only if the language says so. Your earnest money may be at risk if you cannot close and the contract does not protect you. Choosing a lender that can meet the bank's timeline starts before your offer; see proof of funds and pre-approval for bank-owned offers.

Lenders rarely give a general warranty deed, in which the seller promises the title is good back through all prior owners. They more commonly convey with a special warranty deed, sometimes called a limited warranty or grant deed depending on the state. In it, the seller warrants only that it did not create title problems while it owned the property.

That reflects the lender's position. It took the home through foreclosure, never lived there and has limited knowledge of what happened before it took title. Some sellers convey with even fewer promises, and a quitclaim deed transfers only whatever interest the seller has, with no warranty at all. If an REO seller offers a quitclaim, ask the title company whether it will still issue an owner's policy without unusual exceptions.

Deed names and forms vary by state. Have your title company or a real estate attorney explain the deed you will receive before closing.

Because the deed limits the seller's promises, an owner's title insurance policy is your main protection against problems that predate the bank, such as a defect in the foreclosure process. A lender's policy, which your mortgage lender will require, protects only the lender.

The title company runs a title search and issues a commitment listing the requirements that must be met before closing and the exceptions the policy will not cover. On an REO purchase, pay close attention to:

• Requirements tied to the foreclosure, such as proof that the sale was properly completed and recorded.
• Any remaining lien, unpaid property taxes or municipal charges, and who is paying them at closing.
• HOA or condo balances, which should appear on an association statement and be resolved at closing.
• Whether any right of redemption period has ended, in states that allow one after a foreclosure sale.

Who pays for the owner's policy depends on local custom and the addendum. Why REO title is usually cleaner to begin with is explained in what is a bank-owned (REO) property; for a deeper look at lien review, see title, liens and due diligence.

If utilities were turned on for your inspection, they may still be in the bank's name, or the home may have been re-winterized. Plan the handoff so the home is never left without heat in cold weather:

• Call the electric, gas, water and sewer providers a week or two before closing to start service in your name on the closing date.
• Ask whether new accounts need a deposit or an in-person meter check.
• If the home will be re-winterized before closing, schedule a plumber to de-winterize it after you take ownership.
• Set up trash, internet and security monitoring if you want them.

Your lender will require homeowners insurance before closing, and some insurers restrict coverage on homes that are vacant or under renovation. Tell the insurer if you will not move in right away or plan major work, and ask whether you need a vacant-home or builder's risk policy. Get quotes early, since an older or damaged home may be harder to insure.

For the de-winterizing and testing done during your inspection period, see inspecting and negotiating on REO properties.

Schedule the final walk-through as close to closing as you can, ideally the same day or the day before. Vacant homes can suffer theft, vandalism, leaks or freeze damage after your inspection.

Check that:

• Nothing has been damaged, removed or broken into since your inspection.
• Utilities are on, or the home has been properly winterized.
• Any repairs or items the bank agreed to in writing are complete.
• There are no new leaks, pests or signs of someone living there.
• Debris or belongings the bank agreed to remove are gone.

If you find new damage, notify the bank in writing through your agent before you sign. Depending on the contract, the bank may repair it, offer a credit or price reduction, or decline, and you may have the right to cancel. Do not close on a verbal promise to fix something later.

Because REO homes are usually vacant, you typically get the keys at closing or once the deed is recorded and funds are released, depending on local practice. In some states, funding and recording can take a day or more after signing.

If the home is still occupied, the addendum should say whether the bank will deliver it vacant or whether you take it subject to the occupants. Buying an occupied home means you may have to handle the possession process yourself, which follows state law and can take time.

After closing:

• Change all exterior locks, garage codes and any lockbox the bank installed.
• Confirm utilities and insurance are in your name.
• Keep your settlement statement and recorded deed; you will need them for taxes and any future sale.
• Start urgent repairs, especially anything that affects safety or could cause further water damage.

Budget for these costs alongside your closing costs, since the bank is unlikely to have fixed anything before you take over.