The Closing

The mortgage loan closing is the meeting in which your loan is finalized, your mortgage is issued, and you get the keys to your new house. The final days and weeks prior to closing are a stressful period for both buyer and seller. For example, you may have second thoughts at the prospect of taking on such a large debt. Or, you may worry that something will happen to prevent the sale - and indeed you have not bought the house until you close on it.
The signed sales contract and the signed loan commitment letter do, however, obligate both you and the seller to complete the transaction. In fact, if you fail to do so, not only will you forfeit you deposit, but you may also find yourself embroiled in a lawsuit.


Preparing for closing

Setting the closing date
The closing date is set after your loan has been approved and the commitment letter is accepted. Often, the real estate sales professional will coordinate this. You need to be sure that closing takes place before the lender's commitment expires and while the rate lock-in, if there is one, remains valid. You can now make definite moving plans.

Meeting condition of the loan offer
Be sure you understand any conditions of the loan offer that are stated in the lender's commitment letter. If the home you are buying has been found to be in violation of a building code or zoning regulation, the commitment letter may specify that those problems must be corrected before the closing. If the seller has agreed to make repairs required by the lender, you will want to make sure the work is finished (and done properly) before closing.

Securing title services
Before the closing, you will also want to make sure that a title search on the property has been made and that you have obtained title insurance.

Title search
Lenders require a title search to prevent fraudulent sales. They want to be sure that the seller is indeed the owner of the property. The title search also attempts to uncover any "encumbrances" on the title. This includes liens (legal claims against a property) filed by creditors in an attempt to collect unpaid bills, as well as liens filed by the IRS for nonpayment of taxes. Any such claims against the property must be paid before (or often at) closing. The buyer typically pays for the title search.

Title insurance
As further insurance that the seller is giving the buyer a "marketable title" the lender will require that the title insurance be bought. There are two types of policies, and you should get both:

  • A lender's policy
  • An owner's policy
The lender's policy protects the lender in the event a flaw in the title is detected after the policy protects you. Generally, the buyer pays the cost of both, and obtaining a combined lender's/owner's policy will save you some money. You may also get a price break if the company that previously insured the title will give you a "reissue" policy.

Survey
The lender may require a survey of the property before closing. This is done to confirm that the property's boundaries are as described in the purchase and sale agreement. This is another charge that is normally paid by the buyer. This survey, or plot plan, may show that a neighbor's fence extends onto the seller's property (or vice versa). Sometimes more serious violations are uncovered that must be addressed. Again, you may be able to save money by requesting an "update" from a surveyor who has surveyed the property previously.

Homeowner's insurance
You lender will require that you purchase homeowner's or "hazard" insurance, which protects you and the lender from loss in the event the house is damaged or destroyed by fire or storm. Most home buyers purchase a homeowners package of insurance that includes:
  • Personal liability insurance, which protects you in the event you are sued by someone who is injured on your property or injured by a member of your family, except in an automobile accident
  • Coverage against fire, theft, and certain weather related hazards (various options are available)
You will want to get quotes from several companies as to what types of coverage your homeowner's policy should include and how much coverage you need. Generally, the lender will require you to get only minimal amount of coverage up to the "replacement value" of the house. In some cases, it may be advantageous to take over the existing insurance policy held by the seller. In other cases, the lender may recommend a particular policy. Or, you may want to use an insurance company with which you already do business; you may save money by having two or more policies with the same company.

Lenders typically want the first year's premium to be paid at or before closing. A lender may insist on paying subsequent hazard insurance premiums from an escrow account in order to insure that the policy remains in effect for the life of the loan. If so, the cost of the insurance policy will be added to your monthly mortgage payments. The lender will then keep this portion of your payments in an escrow account and will pay the insurance bill when it comes due each year. If you are obtaining the insurance on your own, you will need to bring the insurance policy and paid receipt with you to the closing.

Final walk-through inspection
Your contract should have included a clause allowing you to examine the property within 24 hours prior to the closing. This allows you to make sure that the seller has vacated the house and left behind whatever property was agreed upon (such as appliances). You can also make sure that all conditions in the contract have been satisfied. Typically, the real estate sales professional (often both the selling and listing agents) will accompany you.

If your sales contract made the seller responsible for ensuring that the plumbing, heating, electrical and mechanical systems are in working order at the time of the settlement, this is your last chance to make sure that everything works. During this walk-through, all remaining deficiencies should be noted. If they cannot be corrected before settlement, funds may be withheld from the seller by the settlement attorney by payment of the agreed upon repairs. If during the walk-through you observe major problems or violations of the purchase contract, you have the right to hold up settlement until they are corrected.


Documents you will sign at closing

A significant part of the process of closing is the explanation and signing of various documents.

HUD-1 Settlement Statement
This form, required by federal law, itemizes the services provided and lists the charges to the buyer and the seller.

Truth-in-lending Statement
This is another document required by federal law that mortgage lenders are required to give to all loan applicants within three days of receiving their initial application. This document will show the annual percentage rate (APR), which may be slightly higher than the interest rate stated in your mortgage because points and fees are included in it. It will also give other details about the loan including the total amount financed and total number of payments.

The note
The mortgage note represents your promise to pay the lender according to the agreed terms. It is, in effect, a legal "IOU". It also explains the penalties that will be assessed if you default on the loan.

The mortgage
The mortgage is the legal document that secures the note and gives the lender a claim against your house if you default on the note's terms. In effect, you have possession of the property, but the lender has partial ownership until the loan has been fully repaid.

Affidavits
You may be asked to sign numerous affidavits (for example, that it is your intention to occupy the property). These may be required by state law, by the lender or by the terms of your mortgage insurance. If you provide false information, you can face criminal penalties and run the risk the lender will call your loan (require full payment).

The deed
The seller must bring the deed to the closing, properly signed and notarized. It is the document that transfers ownership from the seller to you.


Closing Costs

Final estimate of closing costs
In times past, buyers dreaded closing day because they frequently were hit with hundreds or even thousands of dollars in unexpected closing costs. Today, the situation has changed for the better, thanks in large part to government intervention on the buyers behalf. You will know in advance exactly what costs you will be responsible for and approximately how much they will add up to.
The lender is required to give you an estimate of closing costs soon after you have filed your application for a loan. Because these estimates are subject to change, you have the right to inspect the settlement form (called the HUD-1 Settlement Statement) one business day before settlement. It is useful to do so because you probably will be required to pay the remainder of the down payment (minus the amount of your deposit) and closing costs with a certified or cashiers check. A personal check may not be acceptable.


Step 9 - Owning a Home