What Happens When Closing on a House
At SIRVA Mortgage, we work with buyers every day to ensure that they understand the process of applying and qualifying for a mortgage, the costs involved, and what to expect when it’s time to close your mortgage loan. With that in mind, here is your guide to what to expect when you close on your new home.
What Happens During the Closing Process?
The closing process is the time when you meet with the settlement agent and a notary to review and sign your loan documents, remit payments, and formally take ownership of your new home.
In practical terms, it’s a meeting – either in person or virtual – that includes you and any co-borrowers, your closing agent or real estate attorney (who is usually a representative from the title company), the sellers and their representatives. This is referred to as a round table closing. In some states, such as California, the parties sign documents separately and are held in escrow by an escrow agent until the close of escrow. Also present at all closings will be a notary public, whose job it is to certify the signatures on certain documents by checking government issued photo IDs verifying the identity of the signers. During the meeting, you will follow necessary steps to transfer ownership of the house from the seller to you.
You should expect to spend at least an hour or more at your mortgage closing. While the lender should provide you with copies of the loan documents ahead of time, we still recommend reading all paperwork before you sign it.
Escrow Accounts and Earnest Money
One of the most commonly misunderstood elements of a mortgage closing is the deposit you make on a house once you have entered into a purchase agreement. This deposit is sometimes referred to as a good faith deposit or earnest money. Earnest money usually equates to 1% or 2% of the purchase price and serves to show sincere intent to purchase on the part of the home buyer.
The earnest money is placed in an escrow account, typically an interest-bearing account held by the title company, a real estate brokerage, or a legal firm. If the earnest money deposit earns more than $600 in interest, the buyer must complete Form W-9 with the IRS to receive the interest.
As the buyer, you will forfeit the earnest money if you back out of the purchase or the deal falls through due to something you do. However, you can protect yourself by writing contingencies into the contract. For example, you could have your attorney or real estate broker specify in the sales agreement that you will get a full refund of the earnest money if the home appraisal or inspection reveals serious defects or the seller fails to make agreed-upon repairs.
Assuming that everything goes according to plan, the earnest money will be used as part of your down payment or put toward other expenses related to the closing.
What to Expect Pre-Closing
As you might expect, there are some preparatory steps required prior to your closing appointment and they are an integral part of the closing process. First, you will need to set a firm date for the closing. In most cases, the closing date is stated in your purchase contract. You may have set a preliminary date but all parties will need to firm up the date, and it needs to be before your loan commitment and rate lock guarantee expire.
In addition to those expiration dates, you’ll need to allow enough time for the seller to make any repairs that may have factored into the lender’s approval. Because of the coordination required, it is typical for the lender and real estate agent(s) to work together to choose a closing date.
The final element of pre-closing that you should be aware of is the Closing Disclosure. It is a five-page document that outlines all of the final costs and terms of your loan. Your loan closer is legally required to provide you with a preliminary Closing Disclosure at least three business days before your closing date. Make sure to review the disclosure in detail to ensure the loan amount, interest rate, other terms of your loan and fees are accurate. If you find any errors, you should notify your lender immediately so corrections can be made before the closing.
Insurance and Closing on a House
In addition to the costs you already know about, you should also be aware of insurance costs related to your purchase.
The first insurance policy you need to think about is homeowners insurance, also called hazard insurance. All lenders require proof of homeowners insurance before the closing can take place. Your coverage should include reimbursement for damage caused by fire, hail, hurricanes, and windstorms, which are all typically included in a standard policy. Depending on where your new home is located, you may also be required to purchase a flood insurance policy. Keep in mind that you’ll need to prepay your first year’s premium and provide a paid receipt or the premium can be collected at closing. You will be required to maintain adequate homeowner’s insurance coverage for the duration of the loan term.
The second insurance policy you will need to purchase is title insurance. Lender’s and Owner’s title insurance is purchased from the title company as part of the closing process. The lender requires title insurance to protect them in the event of an undisclosed encumbrance on the property. In addition to a lender’s policy you may also want an owner’s policy. If a problem arises down the line and you don’t have owner’s title insurance, you could lose the amount of your down payment plus any equity you have in your home.
Finally, depending on the amount of your down payment or the type of mortgage you choose, you may also be required to purchase private mortgage insurance. Mortgage insurance protects the mortgage lender in the event you are unable to make your monthly mortgage payments. For any conventional, non-government loan, mortgage insurance is generally required if your down payment is less than 20%. If you are granted an FHA loan, you will be required to buy mortgage insurance as well, regardless of your down payment. If you qualify for a loan guaranteed by the DVA, you may or may not be required to pay a loan guaranty fee at closing or the fee can be financed into the loan.
Closing Costs Explained
There are costs associated with the closing process. Closing costs are usually between 3% and 6% of the purchase price of your new home.
Keep in mind that in some cases, you may be able to include your closing costs in your mortgage loan. However, if you have the money saved, you can reduce the amount of money you need to borrow and save money on both the principal and interest of your mortgage over the life of the loan.
It’s important for you to understand what goes into the closing costs and which services you can shop for. Your closing costs may include the following charges:
Lender origination charges
Title company fees, including title insurance
Prepaid interest, reserves for mortgage and/or homeowners insurance if being escrowed
Most lenders have a preferred title company or closing attorney. You are not required to use these lender preferred providers; you can shop around for these services if you prefer. Your lender will provide you with an estimate of all the closing costs on the Loan Estimate. If you choose a title company or closing attorney not on the lender’s preferred provider list then your lender cannot guarantee their fees will be the same as what was disclosed on your Loan Estimate. You can find a more detailed explanation of what’s included in closing costs here.
Which Documents Will You Be Required to Sign?
Your lender will prepare all required closing documents and have them ready for you at the closing. A real estate closing requires you to sign loan and title documents and provide proof of insurance, as well as the funds required for the down payment and closing costs.
There are many documents that will need to be signed at closing. In addition to the mortgage and promissory note, there are other state and federal disclosures you will be required to sign. Your lender and closing agent will provide all of these documents for your closing.
You should have reviewed your preliminary Closing Disclosure before the closing, but you should still plan to read the final Closing Disclosure and the other documents before signing them to ensure the information on them is correct. If the information is not accurate, it can cause problems for you and your co-borrowers down the line. Borrowers are often hesitant to take the time required to read everything, however we want to make sure you understand everything you are signing and we are always happy to answer questions. For that reason, you should set aside at least an hour for your closing to ensure you have the time needed.
It should be noted that your closing process may still be able to be completed even if you are unable to attend in person. You may be able to assign a limited power of attorney that enables a representative you choose to sign the documents on your behalf. You will need to let the lender and your representative know ahead of time if you will not be able to attend the closing in person.
When you are closing on a property, it doesn’t officially become yours until you have signed all necessary documents and the money has changed hands. Before the closing date, you will need to get instructions from the closing agent on how you will transfer funds to them. Down payment funds are typically provided in one of two ways. The first option is a cashier’s check and the second is through a wire transfer from your bank. Most title companies are now requiring wire transfers in lieu of cashier’s checks. Due to the risk of wire fraud be sure to call the settlement agent or closing attorney directly to verify the wiring instructions. Please note, there typically is a charge for your bank to wire funds and you will need to set this up several days before closing.
The earnest money will be credited toward your funds to close on the Closing Disclosure. The seller will receive their funds and the closing costs are paid to your lender and other third parties listed on the Closing Disclosure.
The closing agent will take care of transferring the balance of your funds to the appropriate parties and closing escrow. After the money has been transferred and the closing process is complete, you will receive your keys and officially be a homeowner!
The process of closing on a house is exciting. It is the final step before you take ownership of your house. The guidance we have provided here will help you understand what to expect so you can have a smooth transition into your new home.
SIRVA Mortgage offers an array of competitive mortgage loan products for both first-time buyers and experienced homeowners, including competitive refinancing rates. Click here to read about our loans and begin the application process. We look forward to hearing from you!