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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.
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 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.
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.
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 rating agency.
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 conventional
loans.
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 a survey.
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.
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.
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.
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, you 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
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.
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
arrangements.
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.
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.
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- 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 file.
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- 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.
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- 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.
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- 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.
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- 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.
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- 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.
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- 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.
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- 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.
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