Introduction
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:
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.
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 0.5 percent to
0.75 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 (TIL): 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.
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 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.
