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. Settle meant 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
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.
- Title Insurance Policy
Every lender will require title insurance. The company issuing
the title insurance policy will have researched legal records to
make sure that you are receiving clear title, or ownership, to
the property. Their title search has established that the seller
of the property is the legal owner, and that there are no
claims, or liens, against the property. The title company offers
both a lender's policy and an owner's policy. You will have to
pay for a lender's policy and it is advisable for you to have an
owner's policy as well. For a small additional premium, it
will protect you up to the full value of the
property if fraud, a lien or faulty title is
discovered after closing.
- Homeowner's Insurance
The lender will require you to have homeowners insurance on the
property at least in the amount of the replacement cost of the
property. You should make sure the policy covers the value of
the property and contents in the event they are destroyed by
fire or storm. You must pay for the policy and have it at
closing. You are free to select the insurance carrier, but
the lender will require the company to meet rating
standards and be rated by a recognized insurance
- 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
- 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
- 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
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. At the
point when an offer to purchase has been accepted, all funds,
documents and instructions should be delivered to a neutral third
party. That party could be the escrow officer or an attorney. If the
escrow officer ever gets conflicting information between you or your
agent and the seller and their agent, the transaction stops right
there until the differences are resolved. The common kinds of
disputes that sometimes occur are whether or not some item is
included in the purchase price of the property. 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
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.
One of the final documents you will receive just prior to
closing escrow is a copy of the closing statement. A final copy is
also mailed to you after close. Go over it carefully for any errors. Keep a copy filed away where you will know where to find it.
You will need it again when you prepare your tax return.
Tips to Help Ensure a Smooth Close of Escrow
Keep in touch with your lender.
Lenders say the number one reason for missed deadlines is
that the borrower never got back to them on documentation still
needed. If they have requested additional items from you, please
provide them. It wouldnít hurt to give them additional phone calls
periodically just to be sure there isnít anything else that they
Fill out your loan application completely.
If a section on the loan application does not apply to
you, draw a line through it. That way the lender doesnít think you
just forgot it. Complete all other information. It is there for a
reason. The lender isnít needlessly prying; they really need to know
this stuff. Keep copies of everything you send in to the lender.
That way you always know you have everything in case
something gets lost.
Keep in touch with the escrow officer too.
If you donít call, ask your agent to periodically check to
see if everything is going smoothly. This way your file
doesnít get stuck in the bottom of some endless pile.
Make yourself available to sign your documents.
This is important. The lender often has rate locks they
are trying to keep for you. When the documents arrive at the escrow
office for signature you should sign them shortly after. If
you delay because of scheduling conflicts, you could
lose your interest rate or even the property itself.
Let people know if youíre
going out of town.
If lenders, Realtors, and escrow officers try repeatedly
to get in touch with you and arenít able to they can get very
frustrated. They are trying to keep all deadlines but it may seem to
them that you donít care much. If you will be out of town for more
then a day or so you should leave a number where you can be reached
with your Realtor. That way someone can get in touch with you
Try and be a little
You need to allow some time between when you would like to
close escrow and "you absolutely must or everything goes down the
drain". You will need maneuvering room to solve any last minute
problems that inevitably show up. Donít schedule your closing on the
last day of the year. This allows no time if there is a problem and
you must close by year-end.
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.
- Settlement Statement - HUD-1 For
- This form is required by Federal law and is prepared
by the closing agent. It provides the details of the sale
transaction including the sale price, amount of financing, loan
fees and charges, proration of real estate taxes, amounts due to
and from buyer and seller and funds due to third parties such as
the selling real estate agent. It must be signed by both buyer
and seller and becomes a part of the lender's permanent loan
- Some of your charges on the HUD-1 may have already
been paid, such as credit report and appraisal fees. They will
be noted as P.O.C. (paid outside the closing). You will usually
be charged interest on the loan from the date of settlement
until the first day of the next month and your first payment
will be due on the first day of the month and your first will be
due on the first of the following month. Make sure you know
exactly when your first and subsequent payments are due and what
the penalties are for being late.
- 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 .5 percent to .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
- 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.
When is your dream home finally yours?
Sometime during the day in which you close escrow you will
become the legal owner of the home. The escrow officer usually will
call you after the money has been issued to the seller and the deed
has been recorded. At that point the home is yours.
Obviously you canít move in if someone else is still
living there. Do not attempt to move in on the same day the previous
owners are trying to move out. If youíve done it once, youíll never
do it again.
If the sellers will not deliver possession until the day
that escrow closes youíd be wise to wait and move in the day after. Allow the sellers time to move out on close of escrow day.
This will also give you time when the house is empty to
go through and check for possible damage caused by the
The utilities will become your responsibility on the close
of escrow day. You need to make sure that all services are being
transferred into your name on that day. You would usually set this
up with each utility company several weeks before the close of
Sometimes the seller needs to continue to occupy the
residence even after close of escrow because the home they have
purchased is not yet available for occupancy. If the new owner can
accommodate this, their Realtor will prepare a rent- back agreement. The typical amount of rent collected covers the prorated cost of the
mortgage taxes and insurance so the new owner has not had to pay
these expenses while not having use of the property.
If you purchase a vacant home and are anxious to get into
the house to make improvements, you should always wait until escrow
has closed. What if you spend all kinds of money and the sale falls
through. You would be out all that expense.
It is always best to inspect the property the day before
escrow closes. This is to make sure the property is in the same
condition it was when you bought it. If there is something wrong you
can order escrow to be stopped until it gets resolved. Most of the
time this is not necessary.