Once
your application for a mortgage loan has been approved and you
have received a commitment letter from the lender, the final
step before you can call the house your own is the closing,
or settlement, of the purchase transaction and mortgage loan.
Even though you have 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 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 that it goes
smoothly and on time.
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. Settle
meant 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 who is making
your mortgage loan, you should confirm the actual date of
loan closing. An estimated closing date was probably specified
in the sale contract, but a firm date needs to be set by you,
the seller of the property 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 last 3 to 5 days advance
notice of the closing date in order to prepare the loan documents
and get them to the closing agent.
There
are standard documents and exhibits that are commonly required
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.
Every
lender will require title insurance. The company issuing
the title insurance policy will have researched legal records
to make sure that 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.
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 to meet
rating standards and be rated by a recognized insurance
rating agency.
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.
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.
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.
If
the lender or the appraiser determines that 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.
If
your home is new construction, you will have to have 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.
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 would 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, your 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.
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
actual 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 of the necessary exhibits from
you, the seller and the lender. The closing agent will make
sure that 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 lender or the closing agent. You should also bring the
homeowners insurance policy and proof of payment if it has
not been delivered earlier.
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
may help you understand their purpose and significance.
- 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 and your first payment
will be due on the first day of the month and your first
will be due on the first 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.
- 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
charges, you must receive a corrected TIL no later than
settlement.
-
- 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 your payments on time.
-
- 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.
-
- There
will be a number of documents or affidavits that you will
be asked to sign at closing. Some are lender requirements
(e.g. a statement that you intend to occupy the properties
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.
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