The closing is the last step in getting your mortgage and actually becoming the owner of your new home. You’ll probably see and sign more legal documents at your closing than at any other event in your life. You’ll have to pay a number of fees as well. These factors can make your closing confusing and a little overwhelming.
Closing (or settlement) is the legal process of transferring ownership of a home from one person to another, and generally the purchaser receives a loan to finance the home purchase. Closing involves decisions that can save you money — or cost you money. Two issues can make closing seem complicated — the number of documents and the costs involved.
There are two types of closings. One type brings all the parties together at a closing table. The other allows the parties to execute the documents separately through an escrow process. For purposes of illustration, we'll focus on the type where all the parties assemble together.
In most cases, closing is conducted by a "closing agent." This person may work for the lender or the title company or may be an attorney representing you or your lender. He or she knows what documents need to be reviewed and will have collected all the necessary paperwork from you, the seller and the lender. Several things happen here:
- Terms of the agreement between you and your mortgage lender are confirmed
- Your loan goes into effect and you receive your mortgage
- What you and the seller agreed to in the sales contract is confirmed
- Ownership of the home is transferred
Each of these steps normally involves several legal documents, each with costs for research and preparation. That’s why there’s so much to review, sign and pay for at the closing and why some states require you to have an attorney present.
This can vary, but the closing agent and you — or someone representing you — are always present. The seller, or someone representing him or her, is usually present, too, and real estate professionals for you and the seller may or may not attend. A representative of the lender also may attend.
The closing agent makes sure everything is signed and recorded and that the funds collected for various fees and expenses are properly disbursed. The agent will explain each document and give you and your attorney (if in attendance) the chance to look at them. There are a lot of documents.
As soon as you receive final loan approval, you should confirm the time and date of settlement (an estimated date may be in your sales contract) with the seller and the lender. Usually, the real estate agents representing you and the seller are in the best position to coordinate the closing. If you are scheduling your closing yourself, keep the following points in mind:
- Allow enough time to complete all required documents
- Allow time for any required repairs or maintenance on the house to be completed
- Schedule before your loan commitment expires
- Schedule before any rate lock agreement on your loan expires.
- Just before the scheduled closing—within 24 hours— plan time to make a final inspection of your new home with your real estate professional, ensuring that no recent damage has occurred and that the seller has honored all repair agreements
The closing agent will generally be responsible for preparing or ordering all the documents for your closing. However, you are responsible for the following, which you must bring to your closing:
- Your new homeowner’s insurance policy and any other required insurance policies you’ve taken out, along with proof of payment. In most cases the lender will require a review of the homeowner’s insurance policy and proof of payment prior to scheduling the closing.
- A certified check for all closing costs, including the remaining portion of your downpayment. You can get this figure a day or two before your closing from your closing agent. You are entitled to a copy of the HUD-1 Settlement Statement a minimum of 24 hours prior to the closing of the loan. This statement itemizes the services provided and fees charged to you. These fees should be negotiated prior to the closing.
The fees listed here are typically associated with settlements throughout the country. As noted above, you should have received an estimate of your anticipated closing costs from your lender shortly after you applied for your mortgage. You can get an exact figure for all final costs a day or two before your closing from your closing agent.
Often charged when you complete your mortgage application, this covers the lender’s initial costs to process your application. In some cases, the application fee includes the cost of the property appraisal and credit report. You may want to confirm with your lender if these fees are included or are being charged as separate fees.
This fee may also be charged when you complete your application. It covers the costs of an independent appraisal of the value of the home you’re planning to buy for your lender’s use in evaluating your application. You may be asked to pay for your credit report at the same time you pay for the appraisal. In some cases, you may be instructed to pay the fee to the property appraiser when this person arrives to perform the property appraisal.
This fee covers remaining costs associated with processing your mortgage application and completing your loan. This fee is usually expressed and charged as a percentage of the loan amount.
Discount points are finance charges paid when you close on your loan usually to obtain a mortgage with a lower interest rate. Usually, a lender will offer a number of mortgages with different combinations of interest rates and discount points; the higher the interest rate, the fewer the discount points charged at closing. Discount points are charged as a percentage of the loan amount. One point is 1 percent of the value of the mortgage (for example, $800 on an $80,000 mortgage). Points are paid to the lender. (See All About Interest Rates.)
Local governments generally charge transfer, recordation and property taxes when a home changes ownership. In some parts of the country, these taxes can be substantial. You cannot reduce them, but you may be able to negotiate with the seller to share them when you make your offer. However, some states require either the seller or the buyer to pay these or require they be split between the two parties. These are not paid to the lender but directly to the government entity at closing.
In most states, the government does not determine ownership of property. Changes in ownership are recorded at the local government level, and "title searches" are necessary to trace ownership. For this reason, most lenders require that borrowers purchase title insurance to cover the lender in the event there is a claim on the property that is not known at the time of closing. In addition, although it is not required, most buyers also purchase title insurance for themselves. It covers legal costs in the event of a future claim on the property.
Although home buyers can choose their own title insurance, most simply allow the real estate professional or the lender to choose it for them. Recent events, however, suggest that owners may want to be more directly involved in choosing the title insurance issuer. The U.S. General Accounting Office (GAO) issued a report in April 2007 suggesting that title insurance may be priced higher than necessary.
You may have other fees or costs at your closing as well. If you are assuming the seller’s mortgage, for example, there may be an assumption fee. The amount is set by the lender but could vary between several hundred dollars and one percent of the loan.
You and the seller may have negotiated other payments that will be settled at the closing, such as prorated payments for condominium fees or property taxes. You also may have to pay for the services of the closing agent in conducting the closing.
Here are some of closing documents you should receive.
Prepared by the closing agent, this form lists all the important details regarding the sale/purchase of your new home: price, amount of financing, loan fees and charges, prorated real estate taxes and amounts paid between you and the seller. It must be signed by both you and the seller. Your lender will keep the original.
Shortly after you applied for your mortgage, you received a truth-in-lending statement from your lender, including your estimated monthly payment and the total cost of all finance charges involved in your mortgage. You’ll get a final TILA statement at the closing if these amounts have changed.
The mortgage note is legal evidence of your mortgage and includes your formal promise to repay the debt. It also spells out the amount and terms of the loan, along with the penalties the lender can impose if you do not make your payments on time as well as any prepayment penalties that may be required.
This document gives your lender a claim against the house if you don’t live up to the terms of the mortgage. It lists the legal rights and obligations of you and the lender, including the lender’s right to foreclose on the home if you default on the loan.
As basic as it sounds, make sure you know when your first mortgage payment—and all subsequent regular payments—are due. Most homeowners make monthly payments, but some mortgages are structured with payments every two weeks. Most lenders provide a coupon book clearly listing due dates and the correct mailing address and a monthly coupon to send with the payment.
You should also make sure you know what the penalties are if your payment is late. You may not think about this on closing day, but you’re likely to go through the whole process again in the future, and your ability to qualify for larger loans and lower interest rates will have a lot to do with your payment history on this mortgage. It’s best to simply make sure your mortgage payment is consistently made on time.
Also be aware that immediately following your loan closing (or perhaps a few weeks later), your loan may be transferred to another company for “servicing,” or collection of the loan payments. Your lender should have disclosed whether it will transfer the servicing to another company when you applied for the loan. See Step 5: Submit the Loan Application.