Closing—the big day!
Closing is a
formal meeting typically attended by the buyer, the seller, the
listing and selling agents, and representatives of the lender and
the title company. (In
some areas there is no formal closing in which the buyer and
seller and the real estate sales professional sit down with the
closing agent. Instead
an escrow agent processes all the paperwork and collects and
disburses the required funds.)
The buyer may
consider hiring a real estate attorney.
They will be asked to sign numerous documents and
affidavits, and pay the closing costs.
Once all this happens, the buyer then gets the keys to his
new house.
Here is a more
detailed look at closing day.
Explanation
and signing of closing documents
A large part of the process when buying a
home is the explanation and signing of the documents.
They are described below:
HUD-1 Settlement Statement
This form,
required by federal law, itemizes the services provided and lists
the charges to the buyer and the seller.
It is filled out by the settlement agent who conducts the
closing. Both the
buyer and seller must sign it.
Truth-in-Lending (TIL) statement
This is another
document required by federal law that mortgage lenders are
required to give to all loan applicants within three business days
of receiving their initial application.
It discloses the
APR, which reflects the cost of the buyers mortgage as a yearly
rate. This rate may
be higher than the interest rate stated in your mortgage because
the APR includes any points, fees, and other costs of credit.
The TIL statement
also sets forth the other terms of the loan, including the finance
charge, the amount financed, and the total payments required.
The note
The mortgage note
represents a promise to pay the lender according to the agreed
terms. The terms of
the loan are set forth, including the date on which the payments
must be made and the location to which they must be sent.
The note details
the penalties that will be assessed if you default and warns you
that the mortgage lender can “call” the loan (require full
repayment before the end of the loan term) if you fail to make the
required payments, if you sell the house without prior written
consent of the lender, or if you otherwise violate the terms of
your note or mortgage.
The mortgage
The mortgage (or
“deed of trust” in some localities) is the legal document that
secures the note and gives the mortgage lender a claim against
your house if you default on the note’s terms.
The mortgage
restates the basic information contained in the note and the date
of the final scheduled payment.
It states the responsibilities of the borrower to pay PITI
in a timely manner, to maintain homeowner’s insurance on the
property without lapse, and to maintain the property and not allow
it to deteriorate.
The mortgage also
states that if the borrower fails to comply with these
requirements, the mortgage lender can demand full payment of the
loan balance. If the
borrower defaults, the mortgage lender can foreclose on the
property, sell it, and use the proceeds to pay off the outstanding
loan, the accrued interest, and the foreclosure costs.
The borrower will receive anything left over after any
liens (legal claims against a property) and second (or third)
mortgages are repaid.
In some states, a
“deed of trust” is used instead of a mortgage.
Under a deed of trust, the buyer receives the title to the
property, but then conveys the title to a third party called a
trustee by signing the deed of trust.
The buyer keeps the original recorded deed from the seller,
and the trustee holds title until the entire loan balance is paid.
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 mortgage lender,
or by the secondary market agencies.
If you provide false information, you can face criminal
penalties, and you can run the risk that the mortgage lender will
call your loan.
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. You should have already decided what name or names are to
appear on the deed.
Below are the various cost that are to be
paid by the buyer. But
remember that the buyer can negotiate who pays the various costs.
These costs are usually split between the seller and buyer.
Fees paid to the lender
Certain fees are
paid to the mortgage lender at closing.
A description of these fees follows here.
Loan origination fee. This
fee covers the administrative costs of processing the loan.
It may be expressed as a percentage of the loan (for
example, 1 percent of the mortgage amount).
Loan discount points. These
are the “points” charged by a lender to adjust the yield on
the loan to market conditions.
Each point equals 1 percent of the mortgage amount.
Appraisal fee. This
pays for the appraisal, which the lender uses to determine whether
the value of the property is sufficient to secure the loan should
you default on the loan. The
appraisal fee is usually paid by you when you apply for the
mortgage and may show on the settled sheet as “POC”, or
“paid outside closing”.
Credit report fee. This
covers the cost of the credit report, which the mortgage lender
used to determine your creditworthiness.
Like the appraisal fee, you probably paid this fee when you
applied for the mortgage.
Assumption fee. You pay
this processing fee if you take over the payments on the
seller’s existing loan.
Advance payments or pre paid
The mortgage lender may require you to
prepay some or all of the following items at the time of
settlement.
Interest. You will
probably have to pay the interest on the mortgage from the date of
settlement to the beginning of the period covered by the first
monthly payment.
For example,
suppose you settle on March 10.
Your first monthly payment begins to accrue on April 1 and
will be payable at the beginning of May.
At closing you may be required to prepay the interest for
the period from March 10 through the end of March.
This means that if
you settle later in the month, your closing costs will be less
than if you settle early in the month.
Mortgage insurance premium. The
mortgage lender may require you to pay your first year’s premium
or a lump-sum premium at settlement.
Homeowner’s insurance premium.
You may be required to pay the first year’s premium at
settlement. Or, you
may be expected to bring proof that you already have paid for such
a policy.
Escrow accounts or reserves
Reserves are
required if the mortgage lender will be paying your property
taxes, mortgage insurance, and homeowner’s insurance.
State and local
law and mortgage lenders’ policies vary.
Title charges
These primarily
are charges payable to companies or persons other than the
mortgage lender.
This includes the
settlement (or closing) fee, title search/title insurance premium,
document preparation fees, and attorney fees (for legal services
provided to the lender).
Note that the fees
you pay for your own real estate attorney are not part of the
settlement procedures.
Recording and transfer fees
Most states impose
a tax on the transfer of property and require payment of a fee for
recording the purchase documents.
Additional charges
Included here are
the surveyor’s fees, charges for termite and other pest
infestation inspections, and any other inspections required by the
lender.
Adjustments
Another part of
the settlement costing-out involves looking at items paid by the
seller in advance and items yet to be paid for which the seller is
responsible.
The most common
expense to be prorated between the buyer and seller is property
taxes, which are split so that you take responsibility for them
beginning at settlement.
If the seller
already has paid taxes beyond that date, you reimburse the seller;
if taxes for the current period have not yet been paid, the amount
owed is deducted from the buyer’s settlement payment.
Final reckoning—the bottom line
In calculating the
total amount that the borrower must pay, the HUD-1 Settlement
Statement begins with the sales price and adds in the total
closing costs for which you are responsible.
Any prorated adjustments payable to you are then added in.
From this total is
deducted your earnest money deposit and the principal amount of
your mortgage. Then,
any adjustments payable by the seller are deducted.
The resulting figure is the amount you must pay at
settlement.
Recording
the documents
After all the
papers have been signed and the fees have been paid, the mortgage
(or deed of trust) and the deed must be officially recorded,
usually at the registry of deeds or the town clerk’s office.
The closing agent
usually will not release the checks to the seller or the agent
until the transaction has been recorded.
This legal
transfer of the property usually takes one to two days after
settlement.
Getting
the keys to your new home!
Real estate sales
professionals say that the house keys are the one item that
sellers most commonly forget to bring to settlement.
You will want to make sure you get the keys for all the
doors (basement, garage, etc.)
We have outlined the basic process of closing
when buying a home. This
does not need to be a stressful experience if you know what to
expect. Be prepared by doing a few basic things:
- Set
a closing date
- Select
a settlement agent
- Meet
the conditions of the loan commitment
- Secure
a title service
- Get
a termite certificate
- Acquire
homeowner’s insurance
- Acquire
a homeowner’s warranty
- Make
a final walk through
Once you get to the actual closing meeting,
you will be prepared to go over the documents, sign them, make the
closing payment, and finally get the keys to your new home.
Now that you understand the entire home
buying process, take the most important step by getting
prequalified.
>Next> Get pre qualified for a
mortgage loan now
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