Home Loan Closing: How to Prepare

You’ve waited and worked so hard and the big day is here at last. You’ll sign lots of papers, hand over lots of money, and finally get the keys to your new home.  Closing will complete the sale and make you a homeowner. Let’s look at what actually happens when you go to a closing.

This information in this chapter will help you identify the major steps and the business individuals involved in a closing, or settlement. You’ll also look at the various forms of homeownership and how they can affect the sale or inheritance of your home.

Who will be involved in closing?

Many people may be involved in a home sale, but the number of people who attend the closing will vary according to state law and local customs. You’ll probably see the seller, the seller’s real estate agent, your real estate agent and the person handling the closing such as an attorney, an escrow agent or a closing officer. The seller may have a real estate attorney present. If you are buying the property with a partner such as a spouse, other relative, or friend, then everyone whose name will be on the mortgage loan documents must be present or represented by an authorized agent. If you’re buying a home in a brand-new development, such as a new condominium apartment complex, you may be part of a group closing ceremony where the developer settles with several new homeowners at one time. Or, the closing may be private with just you and the closing agent.

You may also decide to have a real estate attorney assist you at closing. If you’re wondering why you’d need your own attorney, consider that there may be legal questions that your real estate agent simply cannot answer. If you’re   buying a FSBO, you’ll want to be sure that all legal requirements have been satisfied. If you’re buying a home in a brand-new housing development, you may have dealt with only the developer’s agents throughout the entire purchase. Plus your real estate agent will not receive a commission until the closing is completed, so your real estate agent’s interests may not entirely agree with your own on settlement day. The attorney’s fees you pay at closing may well be offset by avoiding more expensive problems later on. Your closing may be so uncomplicated that you won’t need an attorney, but you should weigh the value of having one.

The following table provides a brief look at who is involved and what each person does at closing.

Table 9-1: Who’s Involved in Closing?

What will happen?

The closing, or settlement, is a legal process that completes the transfer of property ownership from seller to buyer. It secures the mortgage lender’s interest in the property as collateral for the loan, and ensures that the change of ownership is properly entered into public records.

Once the process of closing on your home purchase begins, be sure to take the time to read each document and ask questions about anything you don’t understand.

You’ll need to make sure of the following important points:

• The interest rate and other loan terms are what were promised to you when your loan application was approved.
• The names and addresses on all documents are correct.
• No unexplained fees have been added to your closing costs.
• The sale price, your earnest money deposit and all down payment amounts are correct on all documents.
• Fees already paid such as the credit report and appraisal are listed as “paid outside of closing” on closing documents so you don’t pay twice for the same services.
• The numbers add up correctly.

More than likely, the documents you get will be correct, but, in case they are not, it’s up to you to point out errors, so go ahead and request copies of all documents a day or so before the closing takes place. You may decide to have a real estate attorney assist you. You will receive copies of each document for your personal records. Keep these documents together in a safe place for future reference. You’ll need to know the amounts of taxes and mortgage interest you’ve paid when you file your annual income tax return.

The basic process —You’ll make your down payment, accept responsibility for the mortgage loan and receive title to the property. You and the seller will pay all fees and charges associated with the transaction, the real estate agents/brokers and attorneys will receive their commissions or fees. The seller also will receive any profits due from the sale. The seller’s mortgage loan will be paid off, unless you are taking over an assumable loan. A new deed that names you as the property owner will be filed with the proper local and state government agencies. Finally, you’ll get the keys to your new home.

Your payment to the closing agent should be made with a cashier’s check; a personal check is not acceptable. If you have your bank make the certified check payable to you OR the closing agent, either of you can sign and deposit it. That way, if something goes wrong and the settlement isn’t completed, you can deposit the check into your account. Please don’t have the check made out to you AND the agent because both of you would have to sign the check before it could be deposited.

Setting the date—The closing usually takes place 30 to 60 days after the seller accepts your offer. Your real estate agent can help negotiate a convenient closing date that allows time for the seller to perform any cleaning, maintenance or repairs you included as part of your offer. If the home is newly built, it will allow you to make a final inspection and identify problems the builder must correct before you take possession. You’ll have time to order your homeowner’s insurance policy and send the policy to your settlement agent’s office before closing. Take care to check with your lender before accepting a closing date. If your loan approval has a low interest rate locked in for a specific period of time and mortgage interest rates are rising, you’ll want to close before the rate expires. If interest rates are falling, you may feel less pressure to hurry the closing along.

This 30- to 60-day period will also provide time for you and the seller to make moving arrangements. You can give your landlord the customary 30-day notice to vacate and get back any security deposit you’ve made on rental housing.

The seller will also be able to arrange for new housing. In some areas, it may be customary for the seller to keep possession of the property for two or three days after closing, but it’s not required. As the closing date approaches, if the seller appears unable or unwilling to move out, you may need the advice of a real estate attorney.

Your seller may have problems with closing on another home to replace the one you’ve just bought. A real estate attorney can explain your options, including:

• Delay the closing.
• Delay taking possession of the property.
• Force the seller to vacate the property.

If you choose to delay the closing, be sure that your mortgage rate lock-in won’t expire and that you’ll have no problem remaining in your current housing. If you choose to settle, then delay taking possession of the property; you’ll need to negotiate with the seller on exactly how long the delay will last. You’ll also need to decide what the financial consequences of this delay will be. Will the seller pay you rent? If so, how much?

You may decide to hold back some money in an escrow account at closing so the seller will not get all the profits from the sale until the property is vacant. You may also want to negotiate an additional inspection of the property before you take possession. If you choose against delay and force the seller to vacate, be prepared to deal with an unhappy seller at closing. 

Try not to schedule your closing for a Monday. Your loan interest charges usually begin on the business day before closing. If your loan documents are printed on a Friday in anticipation of a Monday settlement, you’ll pay interest for three days—the weekend—instead of one.

Some people will choose a closing date near the end of the month because the prorated interest they pay at settlement is less at the end of the month than the beginning. However, other people will choose a date near the beginning or middle of the month because the closing agents will be less busy and less likely to make mistakes.

Your real estate agent or your loan officer should be able to tell you when and where the formal closing will take place. It could be in the lender’s office, an attorney’s office, a closing agent’s office or elsewhere.

Closing Documents—You’ll come away with a thick folder of documents, many with strange-sounding names. Each document serves a specific purpose and is required by the lender, the federal government or your local government. The following documents should be included:

HUD-1 Statement—This statement provides the buyer and the seller with summaries and itemized lists of all costs involved in the sale. Ask for this the day before so you’ll know, to the penny, the amount of money you’re required to pay by certified check at closing. In addition, by getting the HUD-1 Statement a day in advance, you’ll be able to compare the itemized costs to the costs provided in your Good Faith Estimate and ask for clarification on anything you don’t understand. The HUD-1 Statement takes several things into account:

• Terms you negotiated and described in your purchase contract.
• Requirements set forth by your lender.
• Applicable state and local laws.

Take a look at the sample HUD-1 Statement on the following pages to see how it separates costs according to their purpose and according to who has responsibility for payment.  Then explore the pages after the HUD-1 Statement to learn more about the various fields and what information is found within them.

After the HUD Statement you’ll find samples of two additional important loan closing documents, the HUD Good Faith Estimate (GFE) and the Truth In Lending Disclosure Statement.

Your Guide to the Most Common Documents

Truth-In-Lending Statement-Federal law requires your lender to provide this statement when you submit a loan application. If there are significant changes between the rates, terms and amounts quoted when you submitted the application and the actual mortgage note you receive at closing, your lender must provide a revised Truth-in-Lending Statement to explain the differences.

In addition to the previous examples, you’ll sign and receive many other documents. The following are some of the most common documents you’ll see:

• Deed—This document transfers or conveys ownership of the property.
• Initial Escrow Statement—A portion of each monthly payment will be set aside into an escrow account to pay your local real estate taxes and your insurance premiums.
• Truth-In-Lending Statement—Federal law requires your lender to provide this statement when you submit a loan application. If there are significant changes between the rates, terms and amounts quoted when you submitted the application and the actual mortgage note you receive at closing, your lender must provide a revised Truth-in-Lending Statement to explain the differences.
• Mortgage Note—This is a legal contract you sign to accept responsibility for repaying the amount of money provided by the lender, plus interest and fees. The note describes when and in what amounts you’ll make repayments. It also describes penalties for failure to pay and steps your lender can take to recover the investment. You must make payments— even if you do not receive billing statements or a coupon book. Your payments are due on the first of each month; payments arriving after the 16th are considered late. If there is no early penalty in your note, you can pre-pay your loan by writing a separate check for an additional amount over your monthly payment. Specify on the memo line of the check FOR PRINCIPAL ONLY, and mail this separate check to your loan servicer.
• Mortgage (Deed of Trust)—This document establishes an “encumbrance” on your title by giving your lender part ownership of the property until the mortgage loan has been repaid. The mortgage describes in exact detail the amount of money you borrow and the terms by which you agree to repay it. The document lists payment amounts and due dates. It also describes what the lender may do if you fail to make the agreed upon payments. This includes acceleration of the loan, foreclosure and resale of the home, and getting a legal judgment against you.
• Deed of Trust Rider—This is an addition or an amendment to a contract. An ARM may have riders attached to establish terms and conditions outside of those normally contained in a mortgage transaction.
• Title insurance policies—Your closing costs will include payment for the policy that protects the lender’s investment against claims against your ownership of the property. This will repay the lender for the amount of your mortgage loan if, for any reason, your ownership is legally declared void. You should seriously consider a title insurance policy to protect your personal investment also. If your title is voided, an owner’s title insurance policy will repay the amounts of your down payment and other costs.
• Hazard insurance policy—You’ll also pay for this insurance that protects the lender’s investment in case your home is damaged or destroyed by fire or storm. To protect yourself, make sure the policy covers the home’s contents and provides liability coverage.
• Flood insurance policy—Your lender may require this insurance if the home is located in an area subject to flooding when a nearby stream or river is at flood stage.
• Termite inspection (wood infestation) certificate—This inspection and certification is required for many federally backed mortgage loans. Your state or local government may also require it.
• Survey certificate/plat—These documents show the precise location, size, and boundaries of the property as well as any existing easements (someone else’s legal right to use the property), or encroachments (someone else’s illegal use of the property).
• Certificate of Occupancy—This is a statement by the local government that your home meets local building code specifications. For new homes, this certificate is required before you may move in. For existing dwellings, the certificate may be required to ensure the building meets local building codes. Payment for the certificate is open to negotiation between buyer and seller. You can ask the closing agent for copies of all documents a day or so before the scheduled closing. This way, you can read everything and note items you don’t understand. You’ll have time to ask your realtor, the closing agent, or an attorney for complete explanations. No matter how many documents are handed to you at closing, read everything carefully and do not sign anything you don’t understand. Some documents may set up residency requirements, carry criminal penalties or allow the lender to call the loan if you make false statements. Look carefully to make sure that dollar amounts are correct and add up properly. Ask questions until the entire process is clear to you. Don’t allow anyone to rush you or insist that you sign now and read later. As the buyer, you’re in the driver’s seat at closing because there is no deal unless you’re satisfied enough to sign.

Summary

What occurs at closing—settlement—will affect you and your household for a long time. Take your time, ask questions and make sure everything that happens is clear to you.

• There are many different real estate professionals involved in closing. Not all of them will attend the settlement.
• Closing is the process of transferring property ownership, funding your mortgage loan, paying professional fees, and recording the change of ownership.