The contract is executed, all of conditions have been met and it is time for the buyers and sellers to go to the settlement table. This is the final step of the Real Estate Transaction and what are the expectations? What documents to be signed and what are closing costs?
The closing is the scheduled meeting where home ownership is officially transferred from the seller to the buyer. A closing agent, usually representing a Title Abstract Company or a Real Estate attorney can conduct the closing. The buyer typically chooses the closing agent who is responsible for the signing of all of the documents and once the HUD1 is signed and approved, the disbursement of funds. The buyers are responsible for signing of the mortgage related documents as well as the other closing related documents as provided by the closing agent.
The other attendees typically include the Buyer & Seller, Realtors, a Lender Representative, an Attorney if chosen or required, and the Closing Agent. The average time for a closing is about 1.5 hours. If it is a cash deal, it could take as little as 30 minutes. The location of the closing is selected by the buyers and is typically held at the buyer agent’s office, a closing/abstract company or an attorney’s office.
The steps below explain what happens during and after the closing actual closing:
- The first step is typically a review of the mortgage related documents by the lender representative or closing agent. This documentation takes the most time and needs to be reviewed, initially and signed by the buyers.
- Next, the closing agent reviews the settlement sheet with the buyer and the seller and answers any questions. Both the buyer and the seller sign the settlement sheet.
- Then, the closing agent asks the buyer to sign the other loan documents, such as the mortgage note and the Truth-in-Lending statement. Evidence of required homeowner’s insurance is also presented (if it wasn’t previously given to the lender).
- After that, if everyone agrees that the papers are in order, the buyer and occasionally the seller, submits a certified or cashier’s check to cover the closing costs and the balance of funds due (if applicable). Then the check from the lender covering the mortgage amount is submitted to the closing agent.
- Next, if the lender will be paying the new owner’s annual property taxes and homeowner’s insurance, a new escrow account (or reserve) is established at this point.
- The closing agent will not disburse the funds to everyone who is owed money from the sale (including the seller, real estate brokers, and the lender) until the all "money due" is received whether it be check or by wire. After the meeting, the closing agent officially records the mortgage and deed at your local government clerk’s office or registry of deeds.
Documents That You Will Receive
You will receive a number of important documents at the closing meeting. Review this list of documents before you go, so that you’ll know what to expect when you’re there.
HUD-1 Settlement Sheet
Buyer & Seller
The settlement sheet itemizes the services provided and lists the charges to the buyer and the seller. It is filled out by the closing agent and must be signed by both the buyer and the seller, or someone who may be representing them. You should have been allowed to review this form on the business day before your closing meeting so that you will be able to know your closing costs in advance.
Truth-in-Lending (TIL) Statement
Buyer (if borrowing)
Within three business days of applying for a loan to purchase a home, the buyer’s lender should have given the buyer this document, which outlines the costs of the new loan. It is provided to compare the loan costs with percentage rate (APR). The APR is the cost of your mortgage as an annual percentage rate. This rate may be higher than the interest rate stated in the 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 the loan application will change at closing. That is why the lender is required to provide the final version of the TIL statement at or prior to the closing meeting.
Buyer (if borrowing)
The mortgage (or promissory) note is a legal “IOU.” The note represents the borrower’s promise to pay the lender according to the agreed terms of the loan, including the dates the mortgage payments must be made and the location to which they must be sent.
The note also details the penalties that will be assessed for failure to make the monthly mortgage payments. It also warns that the lender can “call” the loan (require full repayment before the end of the loan term) if the terms of the note or mortgage are violated.
Buyer (if borrowing)
The mortgage is the legal document that secures the note and gives the lender a legal claim against the house if the borrower defaults on the note’s terms. In effect, the buyer has 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. Failure to meet these requirements means 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.
In some states, a “deed of trust” is used instead of a mortgage. By signing a deed of trust, they borrower receives title to the property but conveys title to a neutral third party (called a trustee) until the loan balance is paid.
Buyer & Seller
You may be asked to sign numerous affidavits. For example, they buyer may be required to sign an affidavit of occupancy, which states they will use the property as a principal residence. The buyer and the seller may need to sign an affidavit that states all of the improvements to the property that were required in the sales contract were completed before closing.
Buyer & Seller
Only the seller signs the deed at closing. It is the document that transfers ownership from the seller to the buyer. The buyer’s name and the names of any other buyers appear on the deed. The buyer receives a copy of the deed at the closing. I would also recommend that the seller and their agent receive a copy of the “marked up” title as well. The closing agent then records the deed with the buyer listed as the new property owner. The deed will be sent to the buyer after it is recorded.
Closing costs are a part of all loans and are normally the buyer’s costs. These are the costs for things like official documents. In the case of Conventional and FHA loans, closing costs may be paid by the seller. If the buyer has a VA loan, the seller may pay closing costs as well as prepaid expenses. Sales contracts should be explicit in stating what charges each party will pay. As required by the Real Estate Settlement Procedures Act (RESPA), the buyer and seller will be given an opportunity to see the “Preliminary Settlement Statement” at least once day prior to closing. This statement will show all costs for both buyer and seller.
Title Insurance is a form of indemnity insurance predominantly found in the United States which insures against financial loss from defects in title to real property and from the invalidity or unenforceability of mortgage liens. Title insurance is principally a product developed and sold in the United States as a result of an alleged comparative deficiency of the U.S. land records laws. It is meant to protect an owner’s or a lender’s financial interest in real property against loss due to title defects, liens or other matters. It will defend against a lawsuit attacking the title as it is insured, or reimburse the insured for the actual monetary loss incurred, up to the dollar amount of insurance provided by the policy.
Typically the real property interests insured are fee simple ownership or a mortgage. However, title insurance can be purchased to insure any interest in real property, including an easement, lease or life estate. There are also different levels of Title Insurance protection.
Some Typical Closing Costs Include:
- Attorney’s Fee- (if used or required)
- Origination Fee – (mortgage fee)
- Title Insurance- Usually is state regulated, at least in Pennsylvania.
- Transfer Tax – Differs for each county, state and area. For example, it is 2% of the sales price of a home in Bucks County, PA, equally split by the buyer and seller.
- Appraisal Fee (typically paid prior to settlement)
- Credit Report Survey- (mortgage fee)
- Recording Fees
- Interim Interest – The amount of interest between the closing date and the first day of the next month.
- Inspections – Home, Termite, Radon, Septic & Water (if required) All are typically paid before settlement.
- USDA/RFCD One-Time Mortgage Insurance Premium (if required and can be financed )
- FHA Guaranty Fee (if required)
- VA Funding Fee (if required and can be financed)
- Underwriting Fee- (mortgage fee)
- Property Tax Escrow – Expect to pay one sixth (two months) of your annual tax payments at closing.
- Prepaid Expenses (such as appraisal, inspections, etc.)
- Flood Hazard Determination- (mortgage fee) Federal regulations require flood insurance if your property is located in a HUD designated flood zone.
- Homeowner’s Insurance – Usually the first year’s premium is paid prior to closing plus two months escrow for the next year’s payment. The lender will need proof of insurance prior to closing.
- Tax Certification – Tax Collector certifies that the Real Estate Taxes have been paid. (seller fee)
- Broker Commission – Paid by the seller as a fee to market and sell their home.
- Conveyancing fees by each Real Estate Broker -
- Notary Fees
- Wiring Fees (if required)
Hopefully this helps to explain the closing process! Please let me know your thoughts!
Frank Dolski MBA, ABR, e-PRO
Previews Luxury Home Specialist
Coldwell Banker Hearthside Realtors
2010-2011 Coldwell Banker International President’s Circle Award