What Happens Throughout Closing Procedure?
The laws where the property is located, determines who handles the closing procedure and the closing procedure itself. The recording of the deed and exchange of the title from seller to buyer or lien holder, are pretty much the same no matter where you buy a home. Closing procedure may be referred to as settlement or close of escrow in certain parts of the U.S.
Many people, especially first-time home buyers have no idea how much work goes into closing procedure.
Closing procedure involves lots of people that do everything from making sure the seller has the legal right to sell the property to recording documents at the court house. There are many steps in between, so let’s start from the beginning.
What happens leading up to Closing Day?
Once a bid is accepted on a property, a contract needs to be signed. Buyer and seller both sign that contract, called a purchase and sale agreement. This agreement states who handles the closing procedure, usually an escrow or title company. The buyer’s real estate agent typically recommends an escrow or title company that they have experience with and trust. In some parts of the U.S an attorney of choice handles the closing procedure. At any rate, it is required that an impartial third party takes over the closing procedure from that point to the end when the buyer gets the keys to the home.
Several things go on simultaneously as it gets closer to closing day. From the day buyer and seller signed the purchase and sale agreement to the final day of closing procedure is about 4 to 6 weeks. It may seem like a long time but it moves very quickly.
So what happens during those weeks?
- The escrow or title company talks with the seller’s mortgage lender to get any necessary instruction along with the loan payoff amount, prorates the property taxes and prepares instructions for buyer and seller.
- The title company researches the history of ownership of the property and doing a comprehensive title search for the final title report. The actual, physical title must be located and it is not uncommon for it to be lost in 30 year old files at the original lenders office or original title company.
- The mortgage lender prepares the loan documents and sends them over to the escrow company.
- The seller should be tending to house repairs, pest control or whatever the purchase and sale agreement contract states is needing done so inspection contingencies can be removed. The seller should also be using this time to call utility companies to give them a final billing date.
- The buyer should be completing their loan application, buying a homeowner’s insurance policy, and contacting the utility companies to get service in their name on the day of closing.
- Real estate agents are superb coordinators. The buyer’s real estate agent’s job is to make sure the closing agent has all necessary documents and that the buyer and seller have both been notified of the expected closing date and time, what buyer and seller need to bring to the closing appointment and what needs to be completed before the closing date.
- When the closing agent has all the documents in order, the buyer will be notified of how much money you need to bring to closing with them, in a cashier’s check or certified bank check.
- If buyer requested a final walk-through in the purchase and sale agreement, it typically needs to be completed within 24 hours prior to the closing appointment time. A buyer and their real estate agent will conduct the walk-through together. The agent can help buyer mitigate anything that does not comply with the purchase and sale contract. Problems, at this point in the closing procedure, could delay closing or the escrow agent could hold back money due the seller until specified repairs are made or missing items are returned to the property.
Closing Day Procedure
When the escrow or title company, assigned as closing agent, is satisfied that everything is in order and all instructions are distributed, it’s time for the closing meeting.
The closing meeting procedure varies by location, but in many places the buyer and seller never meet each other. The buyer, along with agent or attorney meet with the assigned closing officer, or it may be just buyer and escrow officer who take care of closing.
If the buyer lives where an attorney handles closing, all parties, including buyer and seller, may be seated around a conference table.
If the buyer currently resides in another part of the country, the closing may be handled by a branch office of the escrow or title company.
Since the federal government now allows electronic signatures, it is now possible to conduct a paperless, online closing from anywhere in the world. Both buyer and seller can expect their part of closing to take a couple hours.
What Buyer Brings to Closing
- A certified bank check or cashier’s check. Federal laws require a buyer be told the amount of the check at least 24 hours prior to their closing meeting time. The buyer can expect to pay the down payment plus specified closing costs. Closing costs are usually 3 percent to 5 percent of the home purchase price minus their earnest money deposit. The closing agent is required to tell the buyer the amount of each check required, if there is more than one, and to whom the checks should be made out to. A buyer should never user personal checks or cash.
- Proof of homeowner’s insurance. A mortgage lender requires the home buyer to purchase a homeowner’s insurance policy, also called a hazard insurance policy. A closing agent must see proof that the insurance policy is in effect on the day of closing along with a receipt for a full year’s worth of insurance.
- Photo ID. An escrow agent needs to know the buyer is who they claim to be. A driver’s license or current passport is adequate proof.
- The buyer’s agent or attorney. A first-time home buyer, you should have someone with them who understands the process and represents their interest.
- Purchase and Sales Contract. A buyer should bring their copy of the contract along, just in case they need to look up any details.
Documents for Closing the Mortgage Loan
A buyer could have up to two dozen different documents regarding the home loan. All of these documents should be read carefully before signing. These documents are all written in legal jargon and it is wise to have a lawyer present.
- Promissory Note – Signing a promissory note means the buyer promises to pay back the sum borrowed for purchasing the home. When you sign this paper, you are promising to pay back the sum you’re borrowing.
- Truth in Lending Statement – Prior to signing a mortgage contract, the buyer is given a federal “truth in lending” statement, a.k.a. Regulation Z. This statement shows the interest rate, annual percentage rate, the total amount being borrowed and the total cost of the mortgage over the length of the term, usually 30 years. This is also referred to an amortization schedule.
- Mortgage or Deed of Trust – This is an important step. When a buyer signs a Deed of Trust, they are putting their new home up as collateral for the debt they now owe. Technically, this means the mortgage lender puts a lien on the newly purchased home.
- Monthly Payment Letter – A monthly payment letter breaks down the buyer’s monthly mortgage payment, showing how much of each payment goes to principal, interest, taxes, insurance and anything else the buyer is required to pay, such as PMI a.k.a. Private Mortgage Insurance.
Documents Related to Closing a Real Estate Transaction
Now it is time for the buyer to sign the documents that makes the home theirs. Again, there may be a dozen various forms that require a signature.
- HUD-1 Settlement Form – This multi-page form is the complete closing statement of fees. It itemizes the buyer’s and seller’s closing costs separately. Buyer and seller should be given a copy of this form a couple days prior to the scheduled closing meeting. both buyer and seller should carefully review this document, with their lawyers if possible.
- Warranty Deed or Title – This form transfers the property title from the seller to the buyer. It also contains a legal description of the property.
- Proration Papers – These papers explain how the buyer and seller are to divide the property taxes, interest and homeowner association dues, if applicable, for the month in which the closing takes place.
- Statement of Identity – The title company uses personal information the buyer enters on to this form to eliminate any confusion between the buyer and other persons who have a similar name.
- Declaration of Reports – By signing this declaration, the buyer acknowledges they have seen, and signed-off on all inspections and survey reports done on the property.
- Abstract of Title – This abstract itemizes all recorded documents affecting the property title.
- Certificate of Occupancy – This form is for buyers of new construction. This legal document, issued by the building department, allows buyers of new construction to move in.
Tips for Buyers on Closing Day
- Expect the closing meeting to take a minimum of two hours so allow plenty of time.
- If you are a first-time buyer, take your real estate agent or attorney with you.
- Closing document are legally binding so make sure you read every piece of paperwork before you sign it. Take your time and be feel intimidated if people in the room are watching your read
- Take your keys and enjoy your new home!