Closing the Mortgage Loan and Purchase of Your New Home
The last formal stage of the home-buying process is the closing and, of course, taking possession of the property. Although the closing is usually the briefest stage of the entire process, the closing and the immediate preparations leading up to it are often the most nerve-racking.
The closing, which is often called the settlement, finalizes the purchase transaction between you and the seller, as well as between you and the lender. [With mortgage loan refinances, the relationship is only between you and the lender.]
The actual purchase transaction between you and seller is completed quickly—unless unforeseen issues arise that the attorneys must negotiate—with standard calculations and a few acknowledgments and disclosures. If you were to purchase the property with all cash and no mortgage financing, the closing could be concluded in a few minutes.
Little known to many consumers is that the major portion of the closing is spent on the mortgage loan, rather than on the actual purchase transaction. The mortgage closing package is usually 25 to 40 pages long, as discussed below.
The closing process typically follows a four-stage process:
- Preparation
- Final Walk-Through Inspection
- Actual Closing
- Taking Possession of the Property
Without exception and regardless of all efforts made by the lender, attorneys and real estate agents to alleviate your worries, the first-time homebuyer will find the closing and days leading up to it to be extremely hectic and worrisome.
Even after everything is approved and scheduled, there still will be much to do and prepare. Moreover, the sheer weight of this event can sometimes feel overwhelming, especially for first-time homebuyers.
The closing may last as little as 45 minutes, or as long as four hours, depending on the property and conditions that must be addressed at the closing. It is advisable that you plan on using the whole morning or afternoon for the closing, just to be on the safe side.
Preparation
As soon as the mortgage loan is approved, your attorney and the attorney representing the seller will begin to prepare for the closing.
The seller’s attorney will provide a clear preliminary title insurance commitment to your attorney, who will review it to ensure that there will be no unnecessary problems with the subject property’s title deed.
The seller’s attorney will consult with the lender and you, through your attorney, about scheduling the closing. The closing is normally conducted in the offices of the title company, although it is sometimes conducted at the offices of the seller’s attorney, developer or lender. Your attorney will then provide you with directions to and instructions for the closing.
Prior to the closing, you must obtain and prepay a full year’s hazard insurance policy. The exception is with condominiums, which takes care of the basic insurance coverage through the association dues. This normally takes only 15 minutes with the insurance agent, but remember to bring the entire insurance package with you to the closing… just in case.
Your attorney will receive the preliminary closing figures from the closing agent, after the closing agent has collected the preliminary figures from all of the parties involved with the closing. Based on this information, your attorney will instruct you to obtain a cashier’s check for the amount necessary to satisfy the balance of the down payment, closing costs and prepaid expenses.
The cashier’s check will be made out to your name. At the closing, you will endorse the check over to the closing agent. A cashier’s check is necessary because the closing is essentially a cash transaction. The parties involved cannot wait for personal checks to clear as transfer of the home is immediate.
Final Inspection
The day before or the morning of the closing, you are provided an opportunity for a final walk-through inspection of the property. This inspection is meant to ensure that negotiated repairs have been made and that no additional damages have been incurred.
Your real estate agent will normally provide a punch list of items to inspect during this final inspection. Inspect all necessary items thoroughly because once the sale is closed, there is little if any recourse against the seller for any problems with the property.
Note that this final walk-through is not the time to discuss or negotiate new items about the property. If you just noticed certain items about the property that were present during the initial inspections, you cannot expect to renegotiate the purchase transaction for relatively minor issues.
If you do find problems with items on the punch lists or major problems that may have arisen since the initial inspections, then negotiations should be conducted by the attorneys at the closing. In fact, a good deal of last-minute negotiations and compromises are handled at the closing.
The Actual Closing
Don’t be late. Because title companies and banks often schedule closings tightly throughout the day, it is important to arrive for the closing on time, if not early. You should plan on spending at least two hours there—although most closings do not last that long.
The closing is normally conducted by a representative of the title company at the one of the title company’s office, or at the offices of the lender, escrow agent or one of the attorneys. The closing agent coordinates and mediates the closing to ensure that all legal and financial requirements are satisfied by all parties.
The closing agent is especially responsible for satisfying the following elements of the closing:
- Lender conditions
- Legal requirements
- Financial transaction
- Notarizing and recording
Lender Conditions
The closing agent will ensure that all lender conditions and instructions are satisfied before releasing the purchase loan funds. Standard closing conditions include the following items, that you must remember to bring to the closing:
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- Proof of adequate hazard insurance, including a copy of the prepaid annual policy, with receipt of payment.
- Legal picture identification, preferably a driver’s license or passport.
- Cashier’s check for the balance of the down payment, closing costs and prepaid expenses.
Sometimes, the lender will require additional conditions such as copies of additional pay stubs and bank statements, or original sets of additional verifications.
A common closing condition for many newly built or converted homes is a certificate of occupancy from the city. These conditions will be discussed with you, by the lender, prior to the closing. If you fail to provide these items at the closing, the mortgage loan funds will not be disbursed and the closing will not be consummated.
Legal Requirements
The closing is a complex transaction that will require several legal disclosures to all parties involved. The closing agent must ensure that all legal requirements are met, such as payment of property taxes and water bills, clear disclosure of financial obligations, and legal transfer of property ownership.
During the closing, your attorney will go over each document and explain them to you before having you sign it. Do not be frightened by the number of documents flying by; they are all standard documents and most of them are government-required disclosures. Moreover, you/borrower will receive copies of all the documents signed at the conclusion of the closing.
Of the many documents you will sign at the closing, the following are probably the most important (hint: pay attention as your attorney reviews them with you):
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- Promissory note. The promissory note will contain all of the final, binding features and terms of the mortgage loan that the lender is providing to you.
- Mortgage deed. The mortgage or security instrument is connected to the promissory note, as the mortgage offers the subject property as collateral for the promissory note.
- Final Truth-in-Lending (TIL) disclosure. At the closing, you will receive the final version of the Truth-in-Lending disclosure, which summarizes the features, terms and total costs of the subject mortgage loan.
- Escrow disclosure. The escrow disclosure itemizes the projected schedule of collections (from you) and disbursements (for taxes, insurance, etc.), as well as estimated amounts for such. This disclosure provides you with a better understanding of how the escrow funds will be applied.
- First payment letter. You will receive a first payment letter at the closing, that can and sometimes must be used to make the first payment on the mortgage loan. If you do not receive a coupon book by the time that the first payment is due, use the first payment letter to send your first payment.
- HUD-1 settlement statement. The HUD-1 settlement statement is the final balance sheet, itemizing all amounts collected and disbursed from all parties involved with the closing. You should make additional copies of the HUD-1, as it can used for tax deduction and credit updating purposes.
Financial Transaction
The closing agent will tabulate all deposits and prepayments already made, as well as charges and expenses that must be paid at the closing. The agent will collect all necessary funds from you, the lender and, in some cases, third parties.
The closing agent will then disburse the appropriate amounts to the rightful parties.
For example, the closing agent will collect the earnest money from the real estate agent, the balance of the down payment and closing costs funds from you and the loan funds from the lender. Then the agent will issue payments for any taxes, commissions and closing costs due, as well as to pay off all existing liens on the property.
Only the remaining surplus goes to the seller. Also, if you have overpaid, the closing agent will immediately provide reimbursement.
The seller will be responsible for real estate taxes, utility bills and any special assessments incurred by the property—up until the time of closing. When necessary and as indicated on the purchase contract, the seller will pay a prorated amount for these assessments. For example, since the property tax bill may not be assessed for another four months, the seller will often pay you 110% (standard on most contracts) of the estimated prorated real estate taxes, so that you will have sufficient funds to pay the taxes when due.
Once all the figures have been finalized and all funds disbursed, the sellers will give you the keys to the house, as well as any garage door openers and (from the seller’s attorney) a new plat of survey to the subject property.
Notarizing & Recording
Dozens of documents are signed at the closing. The closing agent must notarize most, if not all, of these closing documents. The title company will record the new deed and mortgage, as well as any necessary riders, addenda and releases, with the county’s office of the recorder.
The closing agent will also make several copy sets of the entire closing package. You will receive one set. Depending on the specific document, the originals will go to the lender and county recording office.
Taking Possession of the Property
As soon as the closing is finalized, the property officially belongs to you, and you can begin moving in immediately. One of the final events during the closing is when you receive the keys and, as applicable, garage opener for the property.
However, it is advisable to delay making any moving plans until the closing has been scheduled and all conditions are sure to be met. Closings have been known to be delayed or even canceled, for various reasons.
Avoid placing yourself in a tight schedule, just to save a few dollars on your lease or with the movers. Remember that the days immediately prior to the closing, as well as the closing day itself, can be very hectic for first-time home-buyers. Give yourself a little room to maneuver. In the long run, you will save yourself a lot of hassles, stress and your own sanity.
In some cases, the sellers may request a delay in their move-out for one reason or another. That decision is entirely up to you (the new owner), because once that closing is completed, you own that property. If you do allow the sellers to delay their final departure, the attorneys will write that into the closing agreement. It is also standard for the sellers to be charged a daily rent, usually prorated against the projected housing expense, for this privilege.
Go to next HomeBuyer Guide chapter: “17. Post-Closing and Move-In”
