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Step 6 Closing and Settlement |
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Prior to Closing |
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Final Verification
A few days before the closing you will want to contact whichever entity that is closing the transaction and make sure that all of the necessary forms and documents have been prepared and are going to be available to sign on the appropriate date. It would be a shame to get this close and have the deal fall through because of a document not being at the right place at the right time. You should also begin to make arrangements for your upcoming move if you have not done so.
Final Inspection
Most sales contract will include a clause allowing the buyer to examine the property within 24 hours before closing. The real estate sales professional usually will accompany a buyer on the walk-through. This is the buyer's opportunity to make sure that all conditions of the sales contract have been met and to verify that the seller has vacated the house and left behind whatever property was agreed upon.
If a observe major problem is observed, the buyers have the right to delay the closing until they are corrected, or ask that the moneys be placed in an escrow account at closing to cover major repairs to be completed.
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What is closing? |
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The closing process, which in different parts of the country is also known as "settlement" or "escrow." Settlement is a brief process where all of the necessary paperwork needed to complete the transaction is signed. Closing is typically held in an office setting, sometimes with both buyer and seller at the same table, sometimes with each party completing their papers separately.
The closing agent will review the settlement with you and the seller, along with evidence that any legal requirements, such as insurance and inspections, have been met. Once everyone agrees that everything is in order, and the closing costs are paid by the buyer and, if necessary, the seller, the papers are signed and the keys turned over to you. Once the deed is recorded with your county clerk, you officially become the owner of the property.
One of the best parts of settlement is that buyers and sellers need to do very little.
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When should you close? |
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With automation now available, closings can occur within a week in some areas -- at least in theory. In practice, it takes time to arrange financing, conduct inspections, obtain appraisals, locate replacement housing, contact movers, pack and actually move.
While instant closings are not practical, neither are closings too far in the future. The problem with closings past 60 days is that loan rates are difficult to lock in. If mortgage rates go up, it's possible that the buyer will no longer be able to afford the home and thus the deal may fall through.
The result of these considerations is that most homes close 30 to 45 days after a sale agreement has been signed.
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Closing Documents |
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At closing you will get:
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A HUD-1 Settlement Statement, listing all the services and charges to you and the seller. You may review this form on the business day before closing. |
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A Truth-in-Lending (TIL) statement. You will receive this within three days of applying for the loan. It details the actual cost of the mortgage. |
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The mortgage note itself. This is your promise to repay the loan, as agreed. |
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The deed. Signed only by the seller at closing, it transfers ownership of the property. At first, you may only get a copy; when the actual deed is recorded with the county listing you as the new owner, it will be mailed to you. |
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Any other affidavits. For example, an affidavit may state that you will use the property as your principal residence. |
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Final Closing Statement |
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You may think that the most valuable piece of paper you get when closing is your check for the proceeds of sale. From an accounting standpoint, however, the most precious piece of paper is the final closing statement. If you think of the closing as a checking account, the final closing statement is your checkbook. It records all the money related to your transaction either as credits or debits.
Check the closing statement extremely carefully, line-by-line and from top to bottom, to be absolutely certain that it accurately reflects your credits and debits. Closing officers are human -- they sometimes make mistakes. So do other parties in the transaction who may have given the closing officer incorrect information.
It's your money on the table. Pay attention to detail. Review the closing statement and question whatever isn't clear or correct.
Credits
Any money that you paid in advance (such as your initial deposit and down payment) appears as a credit to your account. You may also receive credits from the seller for such things as corrective work repairs and property taxes. And, of course, your loan is a credit
Debits
Funds paid out in your behalf are shown as debits. Your debits include modest and not-so-modest expenses, such as what you graciously paid the seller for your dream home, loan fees, homeowners-insurance premiums, and property inspection fees.
Down Payment
Most lenders require at least 10% of the purchase price, though new programs are available for 3%-5% down. 100% financing can be found, but you credit must be excellent and PMI insurance will be required.
Loan Origination Fee
A lender's fee for establishing a new loan. Government regulations allow only 1% origination fee on FHA or VA loans. Conventional loan fees can vary from -1 to 3+ points, plus other costs. A point is 1% of the loan.
Appraisal Fee
The appraisal fee pays for the appraisal, which the lender uses to determine whether the value of the property is sufficient to secure the loan should you default on the loan. You usually pay this when you apply for the mortgage and may appear on the settlement form as "POC," or "paid outside closing." The cost is about $300-$500 and is non-refundable.
Credit report fee
The credit report fee covers the cost of the credit report, which the lender uses to determine your creditworthiness. You probably also paid this fee when you applied for the mortgage, so it may appear on the settlement form as POC. The cost is usually $50-$60 and is non-refundable.
Tax Service Fee
A charge of approximately $75 is made by a tax service company to verify to the lender that the taxes have actually been paid when due or are due to be paid by borrower or mortgage company if impounding.
Assumption fee
An assumption fee is charged if you take over the payments on the seller's existing loan. The fee may range from several hundred dollars to 1 percent of the loan amount.
Pest Inspection Fee
Fees of $75 - $175 is charged by termite companies for inspecting property for damage done by wood destroying organisms and dry rot.
It is customary for the seller to pay for Section 1 and the buyer for Section 2 work.
Homeowners insurance:
This insurance typically costs from several hundred to a thousand dollars plus, depending on the value of your home and how much coverage you want. You can't get a mortgage unless you prove to the lender that you have adequate homeowners insurance coverage. Lenders usually insist that you pay the first year's premium on your insurance policy at the time of the closing.
Title insurance
This insurance typically costs from several hundred to several thousand dollars, depending on your home's purchase price. Lenders require that you purchase title insurance when you buy your home to make sure that you have clear, marketable title to the property. Title insurance protects you and the lender against the remote possibility that the person selling you the home doesn't actually legally own it.
Legal Fees
These fees range anywhere from nothing to hundreds of dollars. In some eastern states, lawyers are routinely involved in real estate purchases. In most states, however, lawyers are not needed for home purchases as long as the real estate agents use standard, fill-in-the-blank contracts.
Private mortgage insurance (PMI)
Should you need it, this insurance can cost you several hundred dollars. If you put less than 20 percent down on a home, many mortgage lenders require that you take out private mortgage insurance. This type of insurance protects the lender in the event that you default. At closing, you need to pay anywhere from a couple months' premiums to more than a year's premium in advance. If you can, avoid this cost by making a 20 percent down payment or by obtaining 80-10-10 financing.
Miscellaneous Costs & Fees
An estimate of $150 should be adequate to cover minor items as notary, recording documents, endorsements, etc. as well as allowing for variations from these other estimates.
Hazard Insurance Reserve
Two month's premium is collected for the impound account if required.
The buyer will need to either provide or pay for coverage for the 1st year.
Prepaid Interest
Interest must be paid from COE (close of escrow) to 30 days prior to the first regular mortgage payment. An estimate of one month's interest should suffice.
Mortgage Insurance
Mortgage Insurance is required on all conventional loans greater than 80%.
The cost may range from 1/2% to 1% per year and 14 months premium is
collected in advance. This is coverage for the lender in case of default.
Tax Impounds
If the new loan is going to have an impound account, the lender will require from 2-10 months taxes to be deposited, depending on the time of year. Note: if taxes are prorated, buyer's total charge for taxes should equal about six month's taxes.
Escrow Fee
These fees range from $750-$2500, depending on the sales price. In some counties it's customarily paid by the seller, in other counties the buyer pays, while in others it may be customarily split. Remember though, everything is negotiable.
Recording fees and transfer taxes
Recording fees and transfer taxes are charged by most states for recording the purchase documents and transferring ownership of the property. Your closing agent will usually calculate these costs as a percentage of the sales price. In some localities it is customary that the seller pay one fee and the buyer pay another. Your real estate sales professional can advise you about this.
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Step 1 Deciding to buy a Home
Step 6 Closing and Settlement