The Loan Closing

Introduction

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.

Between Commitment and Closing

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.
  • 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.
  • 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.
  • 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.
  • 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 Loan 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.

Tips to Help Ensure a Smooth Close of Escrow

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 wouldnít hurt to give them additional phone calls periodically just to be sure there isnít 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 doesnít think you just forgot it. Complete all other information. It is there for a reason. The lender isnít 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 donít call, ask your agent to periodically check to see if everything is going smoothly. This way your file doesnít 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 youíre going out of town.

If lenders, Realtors, and escrow officers try repeatedly to get in touch with you, and arenít able to, they can get very frustrated. They are trying to keep all deadlines but it may seem to them that you donít 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. Donít 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.

When is Your Dream Home Finally Yours?

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.

Moving

Obviously you canít 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 youíve done it once, youíll never do it again.

If the sellers will not deliver possession until the day escrow closes youíd 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.