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. 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
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.
Title Insurance Policy
Every lender will require title insurance. The company
issuing the title insurance policy will have researched
county 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. Homeowner's
Insurance The lender will require you to have hazard
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. 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 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.
Certificate of Occupancy or Building Code Compliance Letter
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. 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 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 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.
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.
Settlement Statement -
HUD 1 For 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. Truth-in-Lending Statement -
Regulation Z 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
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. It outlines the amount of the debt, the terms and
payments, the interest rate, margins and caps for ARMs, the
name of the lender (beneficiary), the name of the borrower
(mortgagor) and any other material item required by the
lender. The borrower(s) must sign the note. 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. Usually the security instrument is
recorded as a public document. Miscellaneous Documents 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.