Congratulations. Your mortgage loan has been approved and you have received a commitment from your lender. Now, only the closing remains before you can call the house your own.
Remember, even though you have signed purchase agreement, you have no rights to the property, including access, until the legal title to the property is transferred to you and loan is closed.
The closing procedure is fairly complex and work remains for you to prepare for the closing. Your preparation will help assure a smooth closing. 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.
Settlement of a mortgage loan is a legal process, so specific procedures and requirements will vary according to local laws, but the following outline of closing practices will help you through the process.
Between Commitment and Closing
As soon as you receive a firm approval from your lender to confirm the actual date of loan closing. An estimated closing date was probably specified in the purchase contract, but a firm date needs to be set by you, the seller of the property and lender.
You want to make sure that settlement will take place before the real estate contract expires, before your loan commitment expires and before any rate lock agreement (guaranteed terms of the loan) expires. While you may be able to extend your real estate contract, rate locks are more difficult, especially in a rising interest rate environment.
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 your Mortgage Processor at Your lender are the best people to coordinate the closing arrangements. Your lender 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 closing agent.
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. In many areas of Florida, the seller typically pays 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.
Your lender will require homeowners’ insurance on the property in at least 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 provide a copy of your insurance binder to your lender prior to closing. You are free to select the insurance carrier, but your lender will require the company to be satisfactorily rated by a recognized insurance rating agency.
Termite Inspection and Certification
Depending on the age of the house, the property may have to be inspected for termites and the inspection is frequently required in the Real Estate contract. The report is required on all FHA and VA loans as well as many conventional loans.
Survey or Plot Plan
Your lender will 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
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.
If your lender determines that your property is located within a defined flood zone, Federal Regulations require a flood insurance policy. The policy must remain in force for the life of the loan. Interestingly enough, in Florida your closing may be delayed by an approaching hurricane. Flood Insurance will not be issued when a hurricane threatens Florida. And Your lender will not close your loan without this insurance if you are in a flood zone.
Certificate of Occupancy
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.
Additional documentation required for closing will be set out in the commitment letter from your 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, you and your real estate agent should make a final inspection of the property to make sure any required repairs have been completed. Verify that all property described in the Real Estate contract, such as kitchen appliances, carpeting and draperies are present and that no recent fire or storm damage has occurred.
At the Closing Table
The actual loan closing procedure, including who will actually conduct the closing and who is present, depends upon local law and custom and lender practices. Even if law does not require it, you may want to have an attorney, review the closing documents.
Your lender use title companies and will send your loan closing instructions and documents to the title company for the closing.
As soon as you receive your commitment letter from your lender, you should determine who is responsible for closing arrangements. Since the seller is probably paying for the title insurance, the title agent will be someone the seller selects.
A closing agent who is an employee the Title Company will conduct the actual closing, or it may be an attorney representing the seller. Your lender will be represented by the title agent at the closing. The seller, or their representatives, and the real estate agents may or may not be at the actual closing.
The closing agent will have received instructions from your lender on how the loan is to be documented and the funds disbursed. The closing agent will have collected all of the necessary exhibits from you, the seller and your 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 prior to the closing from the closing agent.
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 opp
ortunity to check them before signing. A brief description of the major documents may help you understand their purpose and significance.
Settlement Statement – HUD-1
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, pro ration 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 your lender’s permanent loan file.
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. Make sure you know exactly when your first and subsequent payments are due and what the penalties are for being late.
Private Mortgage Insurance
If your loan is greater than 80 percent of the value of the property, you will have to pay for mortgage insurance that protects the lender in case you default. One year’s premium will usually run .5 percent to .75 percent of the loan amount.
Premiums for private mortgage insurance included in your monthly escrow payment
In addition to your monthly payments on the loan, your lender will require you to maintain an “escrow”, or “impound,” account for real estate taxes, homeowners insurance and private mortgage insurance if required. 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 (TIL)
Federal law also requires this form. 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 at closing.
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.
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), and some 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.