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How Do I Exchange Contracts When Buying a Home?
What is an exchange of contracts?
In conveyancing an exchange of contracts is the process involving both the buyer and the seller’s legal teams, swapping the signed contracts and the buyer then paying the deposit. It is at this point that the agreement becomes legally binding; neither party can back out at this stage without having to pay a major penalty.
Why is it necessary to exchange contracts?
Up until the point of exchanging contracts, neither party is legally obliged to buy or sell the property. Either party can pull out without facing a penalty. It is therefore necessary to exchange contracts to stop buyers or selling pulling out of the transaction at the last minute, causing a breakdown of the chain.
When do you need to exchange contracts?
Contracts are typically exchanged between 7 and 28 days before completion, and sometimes even on the day of completion. It is important to ensure that everything is in order before exchanging contracts. After the paperwork has been signed, you are now legally obliged to buy or sell the property. Contracts should only be exchanged when:
- An offer has been agreed upon, including for fixtures and fittings not included in the selling price. i.e. if the owners agree to sell their sofa, dining table, white goods etc. to the buyer.
- A formal mortgage offer has been made in writing.
- Funding has been arranged for the mortgage deposit.
- A mortgage valuation has been completed.
- All relevant searches and surveys have been completed.
- You have building insurance in place. You are liable for the property as soon as the contracts have been exchanged, so it is essential that you are covered.
- You have the money available to pay the deposit of the property – this is typically 10% of the purchase price but can sometimes be as low as 5%.
- You have read, understood and signed the contract.
- You have agreed on the completion date of the sale that is written into the contract.
Once all of the above has been completed your solicitor will exchange contracts for you. This will typically be midday Monday to Friday.
How do I exchange contracts?
The process of exchanging contracts is usually done by the buyer and the sellers’ solicitor reading out the contracts over the phone, to ensure that the contracts are identical. The telephone conversation is also recorded. Paper copies of the signed contracts are then sent from each legal team to the other in the post.
Contracts are only exchanged when everyone in the chain is ready to go ahead. So, if one party pulls out or delays the process, the exchange will be held up.
Once the contracts have been exchanged you are legally obliged to buy or sell the property. If you back out after this, you will forfeit your deposit and you can also face being sued by the other party.
What happens after the contracts are exchanged?
After you have exchanged contracts the next stage is completion – this is when you get the keys to the property and can move in. Before you get the keys, ensure that you do the following:
- Complete final checks on the property. It is recommended that you and the estate agent involved, visit the property to ensure that all the fixtures and fittings that were agreed on, are intact and that nothing has been damaged.
- Your solicitor should send a copy of the title deeds tour mortgage lender, who will keep them until you pay your loan off.
- Your solicitor will register the transfer of ownership with the land registry.
- Your solicitor will notify the freeholder if the property is leasehold.
- You should take meter readings and inform utility companies that you are the new owner of the property.
- Inform your bank that you have a new address.
- Update your address on your driving license.
- Arrange to have your post forwarded to your new address.
- Organise a removal company to help with the move if needed.
Is it possible to exchange and complete on the same day?
It is possible to exchange and complete on the same day, however it is not normally recommended, as you will not have a binding contract in place until the day that you are due to move in. This is risky as it means that the buyer or seller can pull out right up until the last minute – the point of exchange.
Moving home on the same day as exchanging contracts is also risky as it means that you may end up wasting time and money on a hiring removal company, clearing rubbish and taking meter readings, all for this to be delayed if the exchange doesn’t go ahead.
There are also many other reasons that may make it more difficult to exchange and complete on the same day including:
- Buying with a Mortgage: Most mortgage lenders will only release funds after a notice period of at least 5 working days. Funds are typically requested on the day of exchange. Therefore, if the completion doesn’t happen on the stipulated date, the monies will need to be returned to the lender, along with the transfer fees for doing so.
- A Property Chain: In an ideal scenario all parties involved in the property chain will complete simultaneously. As if you sell your home before completing on the purchase of your new home, you could be forced to move out with nowhere to immediately move into.
- Giving notice to landlords: If you are moving out of rented accommodation, you will be required to give notice to your landlord to leave the property. You will need to be sure of the completion date in order to do so.
Exchanging and completing on the same day tend to be more common in purchases or sales by buy-to-let landlords or housing companies. This is because they themselves might not need to move into the property the same day or are cash buyers who do not need to secure funding from a mortgage lender.