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Closing Day

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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