There is closing and there is "the closing," the ultimate moment when you finally and legally become the owner of your new home. As with all things real estate, how the real estate closing is handled and by whom depends on where you live and local custom. But everywhere, when the deed is recorded, the title passes from seller to buyer.
This is called "closing" or "settlement" or "close of escrow." It sounds so simple, as if a single piece of paper could be handed from one person to another along with the keys to the front door! To that we say: Dream on. During the closing phase of your transaction, there are lots of folks involved in everything from making sure the seller really has the right to sell you the house to recording documents at the proper county office.
Let's begin by explaining who handles the closing and what happens leading up to “closing day."
When you and the seller signed the purchase and sales agreement, you kicked off the closing phase. In fact, you even agreed on who would handle your closing in the contract. Often that's an escrow or title company recommended by one of your real estate agents. In some parts of the country an attorney handles closing. The point is that an impartial third party, the closing agent, will take care of things from now on. The closing agent handles all the paperwork, money and instructions.
Things will move along several tracks toward closing day, which is typically four to six weeks after you and the seller sign the contract. So what's happening during those weeks?
- The closing agent, among many other tasks, is talking with the seller's lenders to get loan payoff amounts, receiving instructions from your lender, prorating the property taxes and preparing instructions for you and the seller.
- The title company is researching the ownership of the property, which is to say doing a comprehensive title search for the final title report.
- The lender is preparing your loan documents and sending them to the escrow company.
- The seller is attending to repairs, pest control or whatever you agreed needed to be done so the inspection contingencies can be removed, and calling utilities with a final billing date.
- You, the buyer, are completing your loan application, buying a homeowner's insurance policy and calling the utilities to get service set up in your name as of the closing date.
- The real estate agents are supreme coordinators, making sure the closing agent has the essentials and the buyer and seller are in the loop so everybody knows when to show up, what to bring and what needs to be completed before then.
- When the closing agent has all the documents prepared, you will be told how much money you need to bring to settlement in a cashier's or certified check.
- If your contract calls for a final walk-through of the house within 24 hours of closing, your agent should go with you and help mitigate anything that's not right. You may discover the air conditioner has quit or the gas stove won't light. Did the seller leave all the items specified in the contract? Problems at this point could delay closing or mean having the escrow agent hold back money due the seller until repairs are made.
When the closing agent is satisfied that everything is in order and all the instructions are prepared and distributed, it's time for "the closing."
The closing meeting structure varies by region. In many places the buyer and seller never see each other. You and your agent or attorney may meet with the closing officer, or just you and the escrow officer may take care of closing.
If you live where an attorney handles closing, all parties may be gathered around the same table.
Or you may be buying a house across the country and your closing is being handled by a branch office of a title company.
Because the federal government allows electronic signatures, it is now possible to conduct a paperless, online closing. Some experts are predicting a revolution in how real estate transactions are done in the near future; others see this day farther out because original signatures are the preferred method of document preparation so as to ensure that every interested party involved in the closing was able to read and verify all the documents. Closings usually take from one to two hours.
What to bring to closing
- A certified or cashier's check. Federal law requires that you be told the amount you need to bring to closing at least one day before settlement. You will have to pay the down payment, plus the closing costs, which are 3 to 5 percent of your home purchase price minus your earnest money deposit. The closing agent will tell you whether you need one check or two and to whom they should be payable. Do not bring personal checks or cash.
- Proof of insurance. Your lender requires you to buy a homeowner's, also called hazard, insurance policy. The closing agent needs to see proof that you have the insurance in effect on closing day and a receipt showing you've paid the policy for a year.
- Photo ID. The escrow agent needs to confirm who you say you are. A driver's license or current passport will do.
- Your agent or attorney. Especially if you are a first-time buyer, you should have someone with you who understands the process and represents your interest.
- Purchase and sales contract. Just in case you need to double-check a detail against closing costs.
As the buyer, you actually have two closings: The closing on your loan AND the closing on your real estate transaction. Again, the documents you sign vary by where you live and the specifics of your transaction. Some may have different titles than those used here.
Documents related to closing your mortgage
You could have up to 24 different documents to read and sign related to closing your loan. Usually the number is smaller. Here is a description of a handful of them.
- Promissory Note: When you sign this paper, you are promising to pay back the sum you're borrowing. This is important. Be sure to check it over before using that pen.
- Truth in Lending Statement: Prior to signing your mortgage contract, you will be given a federal "truth in lending" statement, also known as Regulation Z. This sheet of paper shows your interest rate, annual percentage rate, the amount being financed and the total cost of the loan over its life. You definitely should give this document a close look to make sure there are no surprises.
- Mortgage or Deed of Trust: This is another big step. When you sign this document you are putting your new home up as security for the debt you now owe. Technically, the lender puts a lien on the property.
- Monthly Payment Letter: This paperwork breaks down your monthly mortgage payment showing how much goes to principal, interest, taxes, insurance and anything else you are paying as part of the payment.
Documents related to your real estate closing
Now that you've signed for the money you have borrowed to buy the house, it’s time to sign the documents that make the house legally yours. Again, there may be a dozen different documents that need your signature.
- HUD-1 Settlement Form: This multi-page form is the granddaddy settlement statement of fees. It itemizes the buyer's and seller's closing costs separately. This is the form you reviewed a day or two before your closing meeting. But, to err is human. Look it over carefully again. If you are closing electronically on a house in another part of the country, there is a chance you won't see the settlement statement in advance. Review everything carefully before signing.
- Warranty Deed or Title: This piece of paper transfers the title from the seller to the buyer. It also contains the legal description of the property.
- Proration Papers: These agreements explain how the buyer and seller are dividing up the property taxes, interest and perhaps homeowner association dues for the month in which the transaction is taking place. Buyer and seller might also sign an agreement stating how current utility bills are being split.
- Statement of Information: This document may be called a statement of identity. The title company uses this personal information to eliminate any confusion between you and anyone with a similar name. No deadbeats allowed.
- Declaration of Reports: An acknowledgment that the buyer has seen, and signed off on, all the inspection and survey reports done on the property.
- Abstract of Title: The abstract lists all recorded documents affecting title to the property.
- Certificate of Occupancy: A legal document issued by the building department that allows buyers of new construction to move in.
Buyer's tips for "the closing day"
- Allow plenty of time. This is not a lunch-hour errand. Plan on at least two hours.
- Take your real estate agent or attorney with you, especially if you are a first-time buyer.
- Read every piece of paperwork before you sign it. Don't feel intimidated if the other people there watch you read in silence. Take your time. This is serious stuff.
- Go celebrate the purchase of your home!