How to Buy a Home: The Real Estate Closing

The Real Estate Closing is post number eight of an eight post series on How to Buy a Home.

real-estate-closing

The real estate closing, or settlement as it’s sometimes called, is the grand finale—the process that makes that house officially yours.

The buyer (that’s you), buyer’s agent, seller and seller’s agent attend the closing, which is typically held at the title company’s office. At the closing you will sign and initial many documents. You will also provide a check for closing costs.

Real Estate Closing Checklist

  • Select a Closing Agent – The closing (or settlement) agent is usually a title company or attorney that you select. Your Realtor® can provide recommendations.
  • Meet Conditions – Check your commitment letter from your lender. Does it mention any conditions to the loan offer, such as additional deposit information or income documentation?
  • Get Homeowner’s Insurance – Homeowner’s insurance covers fire, theft, certain natural disasters and personal liability if someone is injured on your property. Usually, you need to pay one year’s premium upfront and provide a receipt to your loan processor to verify it has been paid. The monthly premium will be escrowed and paid by your lender.
  • Final Walk Through – The day before or day of closing, you will do a final walk-through your new house. Make sure everything is as you expect it to be. If you find any problems, you have the right to delay the closing until these are corrected.

Other Closing Preparations

Your lender will attend to various other matters before closing, including ordering a title search to ensure the home has “clear title” – that is, no one else can lay legal claim to the house. The title search verifies that the seller is the owner and also turns up any liens (legal claims) against the property, such as an IRS lien for taxes owed or a contractor’s lien for unpaid bills. The seller must pay any such claims before or at closing.

The lender will also get a survey of the property’s boundaries to ensure they are correctly described on the purchase-and-sale agreement.

The costs of the title search, title insurance and the survey are your responsibility. You will pay them as part of the closing costs at settlement.

You, as the buyer, have the right to select your own title company. Your Realtor or lender can provide recommendations. In addition to executing the title work, the title company will prepare all closing documents, including the HUD-1.

Bring Along on Closing Day

  • Government-issued photo ID of all the owners-to-be (those whose names will be on the deed).
  • Information about any transfers of property or pro rations (such as for utility bills) between you and the seller. Your Realtor will typically assist with this. Just be sure someone has attended to it before your closing day.
  • A certified or cashier’s check, rather than a personal check, to pay closing costs.
  • Your patience. With all the variables involved in a home sale, delays “at the table” are not uncommon.

Real Estate Closing Costs

Closing costs should not be a surprise to the buyer on settlement day. Your lender will have already provided you with the Good Faith Estimate of settlement charges within three days of your loan application. The title company will provide a written statement of the actual closing costs just prior to closing.

Below are some of the settlement charges that may appear on your HUD-1 settlement sheet:

  • Loan discount points – Or just “points.” Points adjust the lender’s yield on the loan to market conditions. Each point equals 1% of the loan amount. For example, if you have a $100,000 loan with 1.5 points, that’s $1,500. You might opt to pay points to get a lower interest rate.
  • Appraisal fee – The lender hires someone to appraise the house to verify that its value is enough to cover the loan. You most likely already paid this to the lender when you applied for your loan. The cost can vary but usually falls somewhere between $350-$450.
  • Credit report fee – To assess your creditworthiness (cost varies, usually $35-$50 or more).
  • Flood determination fee – Paid to the lender to determine if the property is in a flood hazard area and needs flood insurance coverage.
  • Tax service fee – A fee collected to set up third-party monitoring of the borrower’s property tax payments. This is to ensure that the payments are made on time and to prevent tax liens from occurring to the detriment of the lender.
  • Pre-paid interest – You will need to pay the interest covering the period from the closing date to the date of your first mortgage payment. For instance, if you close on June 12 and your first mortgage payment won’t be made until August 1 (for amounts accrued in July), you’ll need to pay the interest covering June 12 to July 1.
  • Private Mortgage Insurance – if you need PMI because your down payment was less than 20%, you may have to pay the first year’s premium at closing. Typically, however this is not required, and the PMI premium is added into your monthly payment.
  • Reserves or escrow accounts – At closing, your lender may set up an escrow account into which you will make monthly deposits to cover your premiums for PMI (if you have it), hazard insurance, and property taxes.
  • Settlement or closing fee – Fee the title company (or escrow company) charges to conduct the closing duties.
  • Document preparation fee – Paid to lender or title company/attorney for preparing the closing documents.
  • Title search – Assures that the seller is the legal owner of the property and that there are no liens (legal claims) against the property.
  • Title insurance – Title is proof of ownership. Title insurance (for both buyer and lender) is a one-time fee that protects against problems or defects with the title, such as outstanding liens or errors.
  • Recording and transfer fees – State or local governments often have a tax on property transfers.
  • Survey – The lender may require this to confirm the property’s legal description.
  • Pest inspection – Fee for termite inspection, which your lender may require.

Don’t forget to compare lender fees.

Remember, all told you can expect closing costs to amount to 3% to 5% of the loan amount. And like the down payment, closing costs are due in full on the day of closing; they are not part of the mortgage. You may have to pay all of closing costs listed below, or the seller might pay some of them if it was specified in the contract.

Real Estate Closing Documents to Keep

At the closing, you will sign and initial many documents. You’ll receive copies of these documents. It is advisable to keep any document you sign however all closing documents will be assembled in a folder for you. These documents include:

  • HUD-1 settlement statement – This is the form that itemizes everything covered in the closing; it shows which costs were paid by the seller and which were paid by the buyer.
  • Truth in Lending statement – This document is required by federal law, the idea being that borrowers should know the details about the loans they take. On this document, you’ll see an annual percentage rate (APR). This will be higher than the rate stated on your mortgage because it factors in points and other fees you pay. The Truth in Lending statement also spells out the total amount you’re financing, the total amount of interest you’ll pay over the life of the loan, what your monthly payments will be.
  • Note – This represents your promise to pay the lender according to the agreed-upon terms. It details all the terms of the loan, including any penalties the lender will impose if you default. It also explains your right to prepay the loan (that is, pay up your mortgage before your loan period is up) and specifies if there are any prepayment penalties.
  • Mortgage Deed of Trust – This is the legal document that secures the note and gives the lender the right to take your house if you default. It spells out all your responsibilities as a borrower.
  • Deed – One of the most important papers in the packet; this is the document that transfers the ownership of the property from the seller to you (this is typically mailed to you after closing).
  • Affidavits – On closing day, you will sign many affidavits, such as stating that you intend to occupy the property and so on.
  • Riders – These detail any additional requirements that apply—for example, an ARM rider or a condo or PUD rider for condominiums or planned unit developments.

Taking Possession

Once the closing is complete, the home is officially yours! Be sure to get all copies of all keys from the seller, as well as any remote control devices/fobs for security systems, garage door opener, etc.

 

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Melvin is the Smart Green Pig. "Smart" as in intelligent. Some would say "Super Intelligent" or perhaps "Genius". But also "Smart" as in surly and sarcastic, so watch your Ps and Qs! By the way, Melvin gets paid (quite handsomely) by SECU, so even though he's completely unbiased, some might think otherwise. Just sayin' (disclosin').

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