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What happens at closing?
What is Closing
The mortgage loan closing (or settlement) is the formal meeting at which you take official ownership of the property. Actual possession of the property varies according to local practice and the terms of the contract. At closing, the buyer requires that the seller prove the title (ownership) is complete and free of anyone else's claims. Technically, two separate closings occur at this time: the closing of your loan and the closing of the sale. The closing meeting is typically attended by the buyer and seller (and their attorneys if they choose), both real estate sales professionals might also attend, a representative of the lender, and the closing agent. The meeting takes about an hour and is usually held at the closing agent's office. In addition to a number of other activities, you'll be required at that time to review and sign various documents relating to the mortgage loan and pay closing costs.
What Takes Place Before Closing
Review the Commitment Letter Be sure you understand all conditions of the loan offer stated in the lender's commitment letter. Check to see if all conditions have been met before closing.
Set the Closing Date: An estimated closing date is usually specified in the sales contract. After your mortgage loan is approved and the commitment letter is accepted, a firm closing date needs to be set. You need to be sure that closing takes place before the lender's commitment expires and while the interest rate lock-in, if there is one, remains valid. You should request from your closing agent a statement confirming the date, place, and time and a list of items you need to bring to the closing meeting.
Consult with an Attorney: Because the loan closing is a legal transaction, you may want to consult with an attorney early in the application process. Your attorney will review your sales contract before you sign it and represent you at closing if hired to do so.
Select a Closing Agent: You'll need a closing or "settlement" agent to coordinate closing activities, such as preparing and recording the closing documents and disbursing funds. The types of services provided will depend on the closing agent you hire. Usually the closing is conducted by title companies, escrow companies, or attorneys, but it can be held at the lender's or real estate professional's office.
Title Search: You need to make sure that a title search on the property has been made and that you have obtained title insurance before the closing meeting. A title search is required to prevent fraudulent sales. Lenders want to be sure the seller is indeed the owner of the property. The title search also attempts to uncover any liens (legal claims against a property on the title). Any claims against the property must be paid before (or often at) closing.
Title Insurance: Title insurance is required as further assurance that the seller is giving you a "marketable title." A lender's policy protects the lender in the event a flaw in the title is detected after the property has been bought. The owner's policy protects you. You should get both types of policies. Obtaining a combined lender's/owner's policy will save you some money. You may also get a price break if the title company that previously insured the title will give you a "reissue" policy. The buyer typically pays for the title search and both types of title insurance. Your closing agent will coordinate both title services before the closing meeting.
Order a Property Survey: The lender may require a survey, or plot plan, of the property. This is done to confirm that the property's boundaries are as described in the sales contract. Usually the buyer pays for the survey and the lender orders it. You may be able to save some money by requesting an "update" from a surveyor who has surveyed the property previously.
Order a Termite Inspection: In many locations, homes must be inspected for termites before they can be sold. You need a certificate from a termite inspection firm that states that the property is free of both visible termite infestation and termite damage. In Naples, the buyer usually pays for this. But you will want to make sure that the original certificate is delivered to your lender at least three days before closing.
Obtain Homeowner's Insurance: Your lender will require that you purchase homeowner's or "hazard" insurance, which protects you and the lender from loss in the event the house is damaged or destroyed. Coverage must be equal to at least the replacement costs of the property. Most home buyers purchase a homeowner's package of insurance that includes personal liability insurance (in case someone is injured on your property), personal property coverage (which covers loss and damage to personal property due to theft and other events), and dwelling coverage (which protects your actual house against fire, theft, weather damage, and other hazards). If you live near a body of water, you may also want to get flood insurance as part of your homeowner's protection. Lenders typically want the first year's premium to be paid at or before closing. Your lender may add the insurance cost to your monthly mortgage payments and keep this portion of your payments in an escrow account (or reserve). Then, the lender pays the insurance bill when it is due each year. In Florida, during hurricane season, you have to obtain a binder from an insurer while any hurricane is outside a specific demarcated area. Once a hurricane is within the area demarcated by the insurance companies you will not be able to obtain a binder and therefore you may not be able to close on your real estate purchase
Inquire about Mortgage Insurance: Private mortgage insurance (PMI) helps protect the lender in case of a foreclosure (the legal process in which a lender takes ownership of your home if you fail to make your monthly payments). Typically, the lender will require this insurance if your down payment is less than 20% of the purchase price of the property. The lender orders PMI from a mortgage insurance company after your loan is approved. You may be required to pay the full first year's premium at closing. Renewal premiums will be added to the monthly mortgage payments you make to your lender after closing and will be put into an escrow account. Many PMI companies offer programs that require no up-front payment at closing, but they may require a slightly higher monthly payment.
Obtain Well and Septic Certifications: If your property is not served by public utilities, you will need local government certification of the private water source and sanitary sewer facility before closing. Usually the county government performs the certification.
Inquire about a Certificate of Occupancy: If you are buying a new house, a certificate of occupancy needs to be provided at closing. The builder obtains the certificate, usually from the city or county. An inspection may also be required to see if the property meets local building codes.
Go on the Final Walk-Through Inspection: Your sales contract should have included a clause allowing you to examine the property within 24 hours before closing. This is your opportunity to make sure the seller has vacated the house and left behind whatever property was agreed upon. You will want to check that all lights, appliances, and plumbing fixtures are in working order. You will also want to make sure that all conditions of the sales contract have been met. If you observe major problems, you have the right to delay the closing until they are corrected, or you could ask that the monies be placed in an escrow account at closing to cover major repairs to be completed.
Inspect Condominium Association Rules and Regulations:
If you are buying a condominium you request or are given the Association Rules & Regulations to read so that you become familiar with and understand them.
What Happens at the Closing Meeting
Although the closing process varies from state to state-and even within the same county or city, certain activities are standard. It is to your benefit to understand the many activities that need to occur during, and after the closing meeting.
1. First, the closing agent reviews the settlement sheet with you and the seller and answers any questions. Both you and the seller sign the settlement sheet.
2. The closing agent then asks you to sign the other loan documents, such as the mortgage note and Truth-in-Lending statement. If it wasn't previously given to the lender, evidence of required insurance and inspections is also presented.
3. If everyone agrees that the papers are in order, you (and the seller) submit a certified or cashier's check to cover the closing costs and the balance of funds due (if applicable). And, the check from the lender covering the mortgage amount is submitted to the closing agent.
4. If the lender will be paying your annual property taxes and homeowner's insurance for you, a new escrow account (or reserve) is established at this point.
5. You receive the keys to your new home.
6. After the meeting, the closing agent officially records the mortgage and deed at your local government clerk's office or registry of deeds. This legal transfer of the property may take a few days. The closing agent usually will not disburse the funds to everyone who is owed money from the sale until the transaction has been recorded. It is at the point of deed recordation that you become the official owner of the home.
Closing Costs
No later than three business days after your loan application was received, your lender should have delivered or mailed to you a "good-faith estimate" of the total charges due at closing and a copy of the government publication "Settlement Costs: A HUD Guide". Then, one business day before the closing meeting, your closing agent must allow you to review a copy of your two-page settlement form-called the HUD-1 Settlement Statement. The good-faith estimate is based on the lender's typical loan origination costs for the area in which your home is located. So the estimate usually changes between application and closing and will show the actual amount of money you'll need to bring to closing. Remember that you'll need to pay your closing costs in the form of a certified or cashier's check. Personal checks usually aren't accepted. Closing costs vary widely depending a variety of factors, including price and location. Overall, you can expect your closing costs to amount to between 3% and 6% of the sales price. These expenses are paid by both buyers and sellers. Some closing costs you pay up-front when you apply for a mortgage loan. That includes money for a credit check on all applicants and an appraisal on the property. Keep in mind that even if you don't eventually receive the loan, that money is not refundable. Other closing costs are possible and should be considered when evaluating your financial situation. These may include, but are not limited to: Title insurance fee; Survey charge; Loan origination fee; Attorney fees or escrow fees; Document preparation fee; Garbage or trash collection fees; and the big one Points - up-front interest paid in return for a lower interest rate. Each point is one percent of the loan amount. Sometimes you can contract for the seller to pay your points. Some mortgage plans allow the seller to pay some or all of your closing costs, such as title insurance, escrow fees, and points. Certain closing costs can sometimes be added to the amount of mortgage loan you're receiving.
Closing Documents You Receive
You will receive a number of important documents at the closing meeting.
HUD-1 Settlement Statement: The settlement sheet itemizes the services provided and lists the charges to the buyer and the seller. It is filled out by your closing agent and must be signed by both you and the seller. You should have been allowed to review this form on the business day before your closing meeting so that you will know your closing costs in advance.
Truth-in-Lending (TIL) Statement: Within three business days of applying for a loan to purchase a home, your lender should have given you this document, which outlines the costs of your loan. You receive it at that time so that you may compare the loan costs with those of other lenders. The TIL statement also discloses the annual percentage rate, or APR, which is the cost of your mortgage as a yearly rate. This rate may be higher than the interest rate stated in your mortgage because the APR includes any points and certain other costs of credit. The TIL statement also discloses the other terms of the loan, including the finance charge, the amount financed, the payment amount, and the total payments required. It is possible that the APR calculated at your loan application will change at closing.
The Note: The mortgage (or promissory) note is a legal "IOU" and represents your promise to pay the lender according to the agreed terms of the loan, including the dates on which your mortgage payments must be made and the location to which they must be sent. The note also details the penalties that will be assessed if you fail to make your monthly payments and warns that the lender can "call" the loan (require full repayment before the end of the loan term) if you violate the terms of your note or mortgage.
Mortgage: The mortgage is the legal document that secures the note and gives the lender a legal claim against your house if you default on the note's terms. In effect, you have possession of the property, but the lender has an ownership interest (called an "encumbrance") until the loan has been fully repaid. The mortgage restates the basic information found in the note. It also states your responsibilities to pay principal and interest, taxes, and insurance on time; to maintain hazard insurance on the property; and to adequately maintain the property and not allow it to deteriorate. If you consistently fail to meet these requirements, the lender can demand full payment of the loan balance or foreclose on the property, sell it, and use the proceeds to pay off the outstanding loan and the foreclosure costs.
Affidavits: Ask your lender whether you'll be required to sign any affidavits. For example, you and the seller may need to sign an affidavit that states that you will use the property as a principal residence, or that all of the improvements to the property that were required in the sales contract were completed before closing.
Deed: Only the seller signs the deed at closing. It is the document that transfers ownership from the seller to you. At the closing, you'll only receive a copy of the deed. After the agent records the deed with you listed as the new owner, the deed will be sent to you.
Closing-Related Tax Tips for Buyers and Sellers
There are certain tax benefits for buyers related to closing. They are: Some of your costs at the time of closing can be taken as deductions on that year's income tax return. They include any prepaid mortgage interest and property taxes (consult your closing statement). Points paid at the time of closing represent additional mortgage interest, and you're entitled to take as a deduction not only points you pay, but also any paid by the seller. Many of your other closing costs are simply added to your cost basis for the house. When you sell, they'll reduce your capital gain. Make sure to keep all your records, including those for permanent improvements, which are also added to your cost basis. On each year's income tax return, you may deduct all property taxes paid on any real estate you own. You are also entitled to claim as deductions all mortgage interest paid on a first and second home. Your deduction is limited to interest on up to a million dollars borrowed to buy or improve your property, and interest on an additional hundred thousand dollars in equity loans or second mortgages. If your borrowing exceeds that amount, consult an accountant and an estate planner.
There are certain tax benefits for sellers related to closing. They are: A single taxpayer may take up to $250,000 gain free of federal tax if the house has been owned and occupied as one's main residence for at least two of the five years before the sale. To avoid confusion, it helps to think of the requirement as "two years' ownership and occupancy...recently." Married taxpayers filing jointly who meet the requirement are entitled to a $500,000 exclusion. These days no age limitations apply, no replacement residence need be purchased, and the exclusion may be used again on another main home, as often as every two years. If part of the home, a duplex for instance, has been used for rental or business purposes, the sale is treated as two transactions. Gain on the part attributable to one's own residence qualifies for the exclusion; gain on the business portion is taxed at capital gains rates, with a higher rate for that portion attributable to depreciation claimed in the past.
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