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Once
your application has been approved and
you've received either a commitment
letter or approval letter from the
lender, the final step before you can
call the house your own is the closing,
or settlement. Even though you have a
signed purchase agreement and your loan
request has been approved, you have no
rights to the property, including
access, until the legal title to the
property is transferred to you and the
loan is closed. You should have a good
understanding of what is involved in the
closing process, because there are a
number of things that you can do to make
sure it goes smoothly.
At
closing, you will sign the mortgage loan
documents. The seller will execute the
deed to the property, funds will be
collected and disbursed and the closing
agent will record the necessary
instruments to give you legal ownership
of the property. Settlement of a
mortgage loan is a legal process, so
specific procedures and requirements
will vary according to state and local
laws, but a general description of
closing practices can help you through
the process.
As
soon as you receive firm approval from
the lender, you should confirm the
actual date of loan closing. An
estimated closing date was probably
specified in the sales contract, but a
firm date needs to be set by you, the
seller and your lender. You want to make
sure that settlement will take place
before your loan commitment expires and
before any rate lock agreement
(guaranteed terms of the loan) expires.
The settlement date also has to allow
adequate time to assemble all of the
required documentation. If repairs or
maintenance on the property are a part
of the lender's commitment, there must
be time to complete them. The real
estate agents involved in the sale
transaction and the lender are often the
best people to coordinate the closing
arrangements. Most lenders require at
least 3 to 5 days advance notice of the
closing date in order to prepare loan
documents and get them to the closing
agent.
There
are standard documents and exhibits
commonly used for a loan closing,
regardless of jurisdiction. Some of
these will be your responsibility and
others will be the responsibility of the
seller. The following documents are
typically required for closing:
-
title
Insurance Policy
Every lender will require title
insurance. The company issuing the
title insurance policy will have
researched legal records to make
sure you are receiving clear title,
or ownership, to the property. Their
title search has established that
the seller of the property is the
legal owner, and that there are no
claims, or liens, against the
property. The title company offers
both a lender's policy and an
owner's policy. You will have to pay
for a lender's policy and it is
advisable for you to have an owner's
policy as well. For a small
additional premium, it will protect
you up to the full value of the
property if fraud, a lien or faulty
title is discovered after closing.
-
Homeowner's
Insurance
The lender will require you to have
homeowners insurance on the
property, at least in the amount of
the replacement cost of the
property. You should make sure the
policy covers the value of the
property and contents in the event
they are destroyed by fire or storm.
You must pay for the policy and have
it at closing. You are free to
select the insurance carrier, but
the lender will require the company
meet rating standards and be rated
by a recognized insurance rating
agency.
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Termite
Inspection and Certification
In many areas of the country, the
property must be inspected for
termites and the inspection is
required in the purchase contract.
In some parts of the country, this
may be called a "wood
infestation" report. The report
is required on all FHA and VA loans
as well as many conventional loans.
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Survey
or Plot Plan
Your lender may require a survey of
the property, showing the property
boundaries, the location of the
improvements, any easements for
utilities or street right-of-way and
any encroachments on the boundaries
by fences or buildings.
Encroachments can be minor, such as
a fence, or may be serious and have
to be corrected before closing. In
some areas, an addendum to the title
policy eliminates the need for a
survey.
-
Water
and Sewer Certification
If the property is not served by
public water and sewer facilities,
you will need local government
certification of the private water
source and sanitary sewer facility.
Properties with well and septic
water sources are usually governed
by county codes and standards.
-
Flood
Insurance
If the lender or the appraiser
determines the property is located
within a defined flood plain, you
will want, and the lender will
require, a flood insurance policy.
The policy must remain in force for
the life of the loan.
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Certificate
of Occupancy or Building Code
Compliance Letter
If your home is a new construction,
you will need a Certificate of
Occupancy, usually from the city or
county, before you can close the
loan and move in. The builder will
obtain the certificate from the
appropriate authority. Many local
governments require an inspection
when a home is sold to see if the
property conforms to local building
codes. Code violations may require
repairs or replacement of structural
or mechanical elements. The
responsibility for ordering the
inspection and paying for any
required repairs should be spelled
out in the purchase contract.
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Other
Documentation
Additional documentation required
for closing will be set out in the
commitment letter from the lender
and will depend upon terms of the
sale, peculiarities of the property
and local ordinances and custom.
Examples could include private road
maintenance agreements if the street
in front of your property is not
maintained by a municipality or
proof of sale of your previous home
if that was a condition of approval
of your loan.
Within
24 hours prior to the actual closing,
you and your real estate agent should
make a final inspection of the property
to make sure any required repairs have
been completed, all property described
in the sale contract, such as kitchen
appliances, carpeting and draperies are
present and that no recent fire or storm
damage has occurred. In most cases, the
lender will make a similar inspection
before closing.
The
actual loan closing procedure, including
who conducts the closing and who is
present, depends upon local law and
custom and lender practices. Some states
require that you be represented by an
attorney, others do not. Even if it is
not required by law, you may want to
have an attorney review the closing
documents. At the point when an offer to
purchase has been accepted, all funds,
documents and instructions should be
delivered to a neutral third party. That
party could be the escrow officer or an
attorney. If the escrow officer ever
gets conflicting information between you
or your agent and the seller and their
agent, the transaction stops until the
differences are resolved. Common kinds
of disputes are whether or not some item
is included in the purchase price of the
property. Some lenders will close the
loan in their offices, some will use
title or escrow companies and some will
send their instructions and documents to
their attorney or yours to conduct the
closing. As soon as you receive your
commitment letter from the lender, you
should determine who is responsible for
closing arrangements.
The
closing is conducted by a closing agent
who may be an employee of the lender or
the title company, or it may be an
attorney representing you or the lender.
The lender and seller, or their
representatives, and the real estate
agents may or may not be at the actual
closing. It is not unusual for the
parties to the transaction to complete
their roles without ever meeting face to
face.
The
closing agent will have received
instructions from the lender on how the
loan is to be documented and the funds
disbursed, and will have collected all
necessary exhibits from you, the seller
and the lender. The closing agent will
make sure all necessary papers are
signed and recorded and that funds are
properly disbursed and accounted for
when the closing is completed.
You
typically need to come to the closing
with a certified check for the closing
costs, including the balance of the down
payment. You can get the exact figure a
day or two prior to the closing from the
lender or the closing agent. You should
also bring the homeowners insurance
policy and proof of payment, if it has
not been delivered earlier.
One
of the final documents you will receive
just prior to closing escrow is a copy
of the closing statement. A copy is also
mailed to you after closing. Go over it
carefully for any errors. Keep a copy
filed away where you will know where to
find it. You will need it again when you
prepare your tax return.
Keep
in touch with your lender.
Lenders
say the number one reason for missed
deadlines is the borrower never got back
to them on documentation still needed.
If they have requested additional items
from you, please provide them promptly.
It wouldn’t hurt to give them
additional phone calls periodically just
to be sure there isn’t anything else
they need.
Fill
out your loan application completely.
If
a section on the loan application does
not apply to you, draw a line through
it. That way the lender doesn’t think
you just forgot it. Complete all other
information. It is there for a reason.
The lender isn’t needlessly prying;
they really need to know this stuff.
Keep copies of everything you send in to
the lender. That way you always know you
have everything in case something gets
lost.
Keep
in touch with the escrow officer, too.
If
you don’t call, ask your agent to
periodically check to see if everything
is going smoothly. This way your file
doesn’t get stuck in the bottom of
some endless pile.
Make
yourself available to sign your
documents.
This
is important. The lender often has rate
locks they are trying to keep for you.
When the documents arrive at the escrow
office for signature you should sign
them shortly thereafter. If you delay
because of scheduling conflicts, you
could lose your interest rate or even
the property itself.
Let
people know if you’re going out of
town.
If
lenders, Realtors, and escrow officers
try repeatedly to get in touch with you,
and aren’t able to, they can get very
frustrated. They are trying to keep all
deadlines but it may seem to them that
you don’t care much. If you will be
out of town for more then a day or so,
you should leave a number where you can
be reached with your Realtor. That way
someone can get in touch with you if
necessary.
Try
and be a little flexible.
You
need to allow some time between when you
would like to close escrow and "you
absolutely must or everything goes down
the drain". You will need
maneuvering room to solve any
last-minute problems that inevitably
show up. Don’t schedule your closing
on the last day of the year. This allows
no time if there is a problem and you
must close by year-end.
For
the most part, your role at closing is
to review and sign the numerous
documents associated with a mortgage
loan. The closing agent should explain
the nature and purpose of each one and
give you and/or your attorney an
opportunity to check them before
signing. A brief description of the
major documents will specify their
purpose and significance:
- Settlement
Statement - HUD-1 Form
-
This
form is required by Federal law and
is prepared by the closing agent. It
provides the details of the sale
transaction including the sale
price, amount of financing, loan
fees and charges, proration of real
estate taxes, amounts due to and
from buyer and seller and funds due
to third parties such as the selling
real estate agent. It must be signed
by both buyer and seller and becomes
a part of the lender's permanent
loan file. Some of your
charges on the HUD-1 may have
already been paid, such as credit
report and appraisal fees. They will
be noted as P.O.C. (paid outside the
closing). You will usually be
charged interest on the loan from
the date of settlement until the
first day of the next month. Your
first payment will be due on the
first day of the following month.
Make sure you know exactly when your
first and subsequent payments are
due and what the penalties are for
being late. If your loan is greater
than 80 percent of the value of the
property, you will probably have to
pay for mortgage insurance that
protects the lender in case you
default. One year's premium will
usually run between .5 percent to
.75 percent of the loan amount. In
addition to your monthly payments on
the loan, most lenders will require
you to maintain an
"escrow", or
"impound," account for
real estate taxes and insurance.
Current law permits a lender to
collect 1/6th (2 months) of the
estimated annual real estate taxes
and insurance payments at closing.
Additionally, real estate taxes for
the current year will be pro-rated
between you and the seller and paid
at closing. After closing, you will
remit 1/12 of the annual amount with
each monthly payment. Tax and
insurance bills should be sent to
the lender who will pay them out of
the escrow funds collected.
- Truth-in-Lending
Statement
-
This
form is also required by Federal
law. You were given an initial TIL
shortly after you completed the loan
application. If no changes have
taken place since that time, the
lender need not provide one at
closing. If, however, there are
significant changes, you must
receive a corrected TIL no later
than settlement.
- The
Mortgage Note
-
The
mortgage note is legal evidence of
your indebtedness and your formal
promise to repay the debt. It sets
out the amount and terms of the loan
and also recites the penalties and
steps the lender can take if you
fail to make your payments on time.
- The
Mortgage or Deed of Trust
-
This
is the "security
instrument" which gives the
lender a claim against your house if
you fail to live up to the terms of
the mortgage note. It recites the
legal rights and obligations of both
you and the lender and gives the
lender the right to take the
property by foreclosure if you
default on the loan. The mortgage or
deed of trust will be recorded,
providing public notice of the
lender's claim (lien) on the
property.
- Miscellaneous
Documents
-
There
will be a number of documents or
affidavits you will be asked to sign
at closing. Some are lender
requirements (e.g. a statement that
you intend to occupy the property as
your primary residence), or are
required by state or Federal law.
These instruments should not be
taken lightly. Some provide for
criminal penalties for false
information, and some may give the
lender the right to call your loan,
which means the entire loan amount
becomes immediately due and payable.
When everything has been signed and
the closing agent is satisfied that
all of the instructions for closing
have been complied with in full, you
become the owner and are given the
keys to the property.
Sometime
during the day in which you close escrow
you will become the legal owner of the
home. The escrow officer usually will
call you after the money has been issued
to the seller and the deed has been
recorded. At that point the home is
yours.
Obviously
you can’t move in if someone else is
still living there. Do not attempt to
move in on the same day the previous
owners are trying to move out. If
you’ve done it once, you’ll never do
it again.
If
the sellers will not deliver possession
until the day escrow closes you’d be
wise to wait and move in the day after.
Allow the sellers time to move out on
close of escrow day. This will also give
you time when the house is empty to go
through and check for possible damage
caused by the seller's movers.
The
utilities will become your
responsibility on the close of escrow
day. You need to make sure that all
services are being transferred into your
name on that day. You would usually set
this up with each utility company
several weeks before the close of
escrow.
Sometimes
the seller needs to continue to occupy
the residence after close of escrow
because the home they have purchased is
not yet available for occupancy. If the
new owner can accommodate this, their
Realtor will prepare a rent-back
agreement. The typical amount of rent
collected covers the prorated cost of
the mortgage, taxes and insurance so the
new owner does not have to pay these
expenses while not having use of the
property.
If
you purchase a vacant home and are
anxious to make improvements, you should
always wait until escrow has closed.
What if you spend all kinds of money and
the sale falls through. You would be out
all that expense.
It
is always best to inspect the property
the day before escrow closes. This is to
make sure the property is in the same
condition it was when you bought it. If
there is something wrong you can order
escrow to be stopped until it gets
resolved. Most of the time this is not
necessary.
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