What to Know Before Your Closing

The closing, also known as the settlement, 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 single event in your life. You’ll have to pay a number of fees as well. These factors can make the closing confusing and a little overwhelming.

What Is “Closing”?

If I agree to buy a house from you, we can shake hands. But then what? What about state and local laws and all the regulations that were created to protect both buyer and seller? What about finances and the people lending the money? Closing is about all of that. It is the legal process of transferring ownership of a home from one person to another. Most people think of the closing as a single meeting. It’s really a whole process, with plenty of decisions that can save you money — or cost you money.

The Event

The process of closing, which begins with your offer, ends at a meeting that 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 collect all the necessary paperwork from you, the seller and the lender. This meeting is what most people mean when they say “the closing” or “the settlement.” 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.

Who Attends

Who attends can vary from state to state, but the closing agent and you, or someone representing you, are always present. The seller, or someone representing him or her, is usually present also, and real estate agents for you and the seller may or may not attend. The closing agent makes sure everything is signed and recorded, and that the funds collected for various fees and expenses are properly dispersed. At the closing, you will sign all the documents associated with your mortgage. The closing agent will explain each document and give you the chance to look at them. You have the right to obtain the HUD-1 Settlement Statement for review 24 hours before your closing. Be sure to request this from the closing agent.

Scheduling Your Closing

As soon as you receive final loan approval (usually in a letter of commitment), 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 date. If you are scheduling your closing yourself, keep the following points in mind:

• Allow enough time to complete all required documents (Most lenders need at least three to five days from the time you’re given a clear to close; other parties may need more time.).

• Allow time for any required repairs or maintenance on the house to be completed.

• Schedule before your loan commitment expires (specified in your letter of commitment, if you received one).

• Schedule before any rate lock agreement on your loan expires.

Just before the scheduled closing — ideally within 24 hours — you should plan to make a final inspection of your home with your real estate agent ensuring that no recent damage has occurred and that the seller has honored all repair agreements.

What Will Happen at Your Closing

There are two issues that can make closing seem complicated — the number of documents and the costs involved.

The Number of Documents

Closing requires the review and approval of many documents with complex legal language. Behind that legal language is a straightforward agreement or certification. Generally, the documents confirm arrangements already agreed upon by you, your lender and the seller.

Documents You’ll Receive

• Settlement Statement HUD-1 Form

Prepared by the closing agent, this form lists the important details regarding the sale of your new home: price, amount of financing, loan fees and charges, prorated real estate taxes amounts paid back and forth between you and the seller. Your lender will keep the original.

• Truth-In-Lending Act Statement (TILA)

Shortly after you apply for your mortgage, you will receive a truth-in-lending statement from your lender that includes your estimated monthly payment and the cost of finance charges involved in your mortgage. You’ll get a corrected TILA statement at the closing only if these amounts have changed.

• Mortgage Note

The Mortgage note is legal evidence of your mortgage and includes your formal promise to repay the debit. 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.

• Deed of Trust

This document gives your lender a claim against the house if you do not live up to the terms of the mortgage. It lists the legal rights and obligations of your and the lender, including the lender’s right to foreclose on the home if you default on the loan.

• The Costs Involved

To ensure there are no problems with your home or your loan, much must be done, often by specialists, all of whom are paid.

Keep in mind that you can negotiate which party —you or the seller — pays for most of these fees. However, depending on the state, the seller or buyer may be required to pay specific fees for property transfer, so you should consult with your lender or real estate agent. You can reduce the cost of title insurance by getting the seller’s policy before closing.

What You Need to Bring

The closing agent will generally be responsible for ordering all the documents for your closing. You shouldn’t have to worry about ordering any of the certifications or other documents. However, you are responsible for the following, which you must bring to your closing:

• A certified check for all closing costs, including the remaining portion of your down payment made payable to the title company. You can get the total amount a day or two before your closing from your closing agent. In fact, 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.

• Drivers license

Common Certifications and Insurance

Below are some certifications and insurance coverage commonly required for closing; they vary widely according to state and local laws. Check with your lender — he or she will know the processes of your state or county.

• Title search and title insurance

The title search ensures that the seller is the legal owner of the house and that there are no outstanding claims against the property. Title insurance guards the lender against a mistake in this search and will not necessarily cover you. You can get an owner’s title insurance policy for an additional premium. Talk to the seller prior to closing about obtaining his or her title policy on the house. If you can get this policy, you may be able to obtain a significantly cheaper re-issue rate.

• Survey

A survey ensures that the home and other structures on the lot are where they’re supposed to be and that the lot is free of any illegally encroaching structures. If a fairly recent survey is available, a less costly survey verification may be sufficient. In the case of a survey less than seven years old, your lender may accept a signed statement that no changes have been made to the property since that survey was completed.

• Termite inspection and certification (not always required)

Usually included as part of the purchase contract (it may be called a wood infestation report), this inspection is generally paid for by the seller. It’s

required for all FHA and VA mortgages and many conventional mortgages.

• Water and sewer certification (not always required)

This may be needed if the home you’re buying is not served by public water and sewer facilities.

• Homeowners insurance

Your lender will probably require you to have this to cover the replacement value

Of your home and may require a copy of your policy before the closing to confirm your coverage. You should consider adding coverage for your furniture and other

possessions. At the closing, you will generally have to pay in advance for at least twelve months of coverage.

• Mortgage insurance (not always required)

If you have a conventional mortgage and your down payment is less than 20 percent of the purchase price, you may have to get mortgage insurance. (If your loan is insured by FHA or guaranteed by VA, you’ll pay FHA mortgage insurance premiums or a VA funding fee.)

• Flood insurance (not always required)

Law requires this if the home you’re buying is on a defined flood plain and in many cases even if it is not. The policy must be in force at the time of the settlement and remain in force for the life of the mortgage. This is by no means a complete list. For example, you may have to sign a statement that you intend to make your new home your primary residence. As there are serious consequences for making false statements on these documents, make sure you understand them. Ask your lender beforehand which documents will be at your closing.

• Fees and Taxes

The fees listed here are typically associated with settlements throughout the country. You should receive an estimate of your anticipated closing costs from your lender shortly after you apply for your mortgage. You can get an exact figure for all final costs a day or two before your closing from your closing agent.

• Appraisal fee

This payment for the independent appraisal of the home you’re buying may be paid directly to the appraiser or to the lender when you complete your application.

• Loan origination fee

Usually a percentage of the loan amount, this covers the remaining costs associated with completing your loan.

• Discount points

Paid to the lender to obtain a lower stated interest rate, the “points” can be paid when you close. If you pay points, you are prepaying finance charges. One point is 1 percent of the value of the mortgage (for example, $1,000 on a $100,000 mortgage).

• Taxes

Local governments generally charge transfer, recordation and property taxes when a home changes ownership. In some parts of the country, these taxes can be quite 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 taxes or require they be split between the two parties. You may have other fees or costs at your closing as well. For example if you are assuming the seller’s mortgage, there may be an assumption fee. The amount is set by the lender and could vary between several hundred dollars and 1 percent of the loan. You and the seller may have negotiated other payments, which also 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.

A Few Things to Remember as You Leave the Title Company

Make sure you know when your first mortgage payment is due and where to send it. Within a few weeks of closing most lenders provide a coupon book clearly listing due dates and the correct mailing address. Also be aware that immediately following closing (or perhaps later) your loan may be transferred to another lender or investor of the lender for “servicing,” or collection of the loan payments. When you apply for your loan, your lender will tell you in writing whether it will service your loan or transfer the servicing to another company