If you’re like most real estate buyers, buying an home is the single largest purchase you’ll ever make. But while you are happy to be buying a new home, unless you’re an attorney, chances are that you’re not a big fan of the paperwork that goes along with it.
Like most things in life, the more you understand, the less there is to fear. This is especially true when it comes to closing on your new home. Knowing what to expect will calm your concerns.
Closing day is when all parties to a transaction meet to finalize the deal. All paperwork that makes the deal official and transfers ownership of the property to you must be signed. Closing day is also an opportunity to make any changes to the transaction that need to be made should the need arise.
Preparing for Closing Day
It’s a good idea to gather all the documents you received throughout the home-buying process the day before closing. Each document serves as a reference in some fashion or another to the documents you will be asked to sign. The real estate appraisal, home inspection report, Good Faith Estimate (GFE), purchase contract, any title related documents, such as the title search, and proof of homeowners insurance as examples of important documents that you may need to refer to at some point in the process.
All purchase agreements vary, but in general, most will allow you to inspect the property 1 day in advance to make sure the property has been vacated by the seller. This walk-through inspection is also an opportunity to ensure the property is in the condition specified in the purchase agreement. Should you discover any problems, you can ask that the closing be put off until the problem has been remedied. Failure to make required repairs is one example of something that could necessitate delaying a closing.
The Day of Closing
Closing day serves a twofold purpose: 1) Signing all required paperwork and 2) Paying any required closing costs and escrows.
Signing the docs. Be prepared to sign a stack of mortgage related documents. These are required by your lender to finalize your loan and disperse funds. Various documents will be presented to you which explain the terms and conditions of the mortgage. You will also be required to sign various documents relating to the transfer of ownership of the property. If you can afford one, it is not a bad idea to have an attorney present to review any documents you do not understand. Do not sign any form that contains blank spaces or lines. And be sure to read everything before signing it.
Pay closing costs and escrow items. Depending on the terms of your loan, as well as any provisions in your purchase agreement, closing costs can be handled in any several different ways. You may, for example, accept a higher interest rate in exchange for having certain costs paid for by your lender, out of Yield Spread Premium (YSP) or Service Release Premium (SRP). The seller may have agreed to pay for some or all of your closing costs. Or, you may have agreed to pay some or all closing costs upfront, out-of-pocket.
Who Attends the Closing
The closing agent is the person who presents and explains all documents to all parties in the transaction for signing. It is the closing agent’s job to make sure all documents are signed, initialed, dated, recorded, and notarized if required. The closing agent also makes sure that all closing fees and escrow payments are paid and properly distributed.
The closing agent may work for the title company or the lender. Attorneys may be present as well, representing you, the seller or the lender. It is possible the seller may have an attorney present. The title company may have an attorney present. They closing agent him or herself may be an attorney. It is always wise to have your own attorney present, that way your own interests are safeguarded.
A title agent will generally be present to provide documentation proving ownership, including a fully insured title report.
The seller or anyone authorized to act on the seller’s behalf will be in attendance to sign all required documentation to transfer ownership.
A representative of the lender will generally be present, although this is not always the case, so long as all required documents are signed. You will also be present, of course.
HUD-1 settlement statement. The HUD-1 is similar to a Good Faith Estimate, except that it is not an estimate, but instead a through itemization of all settlement costs. You should always compare the costs shown on your original Good Faith Estimate to those shown on the HUD-1 to make sure there are no appreciable differences. You should also make sure that all other costs are accurate and consistent with the purchase agreement. You have a legal right to review the HUD-1 settlement statement 24 hours prior to closing. You should always exercise this right. That way, any problems can be rectified, hopefully without the need to delay closing.
Truth-In-Lending (TILA) statement. By law, your lender must supply you with this document 3 days after applying for a loan. The TILA is designed to show the true cost of borrowing, expressed in the form of an Annual Percentage Rate, or APR. The APR shows the interest rate you are effectively paying once various fees and costs, such as points, are factored in.
Mortgage note. This document covers the terms of your loan repayment. It is your promise to repay the mortgage according to certain terms and conditions. It spells out your responsibilities as a borrower and specifies what happens if you default on the loan.
Mortgage. This document pledges the property itself as collateral to the loan. It is what give your lender the right to foreclose on your home in the event that you fail to make payments as agreed.
Certificate of occupancy. This document applies to new construction only. It is required to show that the new home meets all necessary building and safety codes, and is ready for occupancy.
Closing day might seem a little dizzying. But you’ll get through it…one document at a time. Once the paperwork is done there’s only one thing left to do: Give you the keys to your new home!