You have spent countless hours looking for the perfect house…getting pre-qualified from your lender so you know how much house you can afford, searching many websites for houses, meeting with your real estate agent to see houses in person, providing everything except a blood sample to your lender (even though you have a great credit), and making an offer on a house only to find out that there are 10 other offers on the same house. With all of that time invested, you finally found your dream house and agreed on a price with the seller, so now it is time to close on the house. But wait, what does that mean? What should you expect at closing?
In this post, I will talk about what a buyer can expect at a real estate closing and what they typically need to bring to the closing.
Today, you are going to sign a mountain of paper. You have already seen some of the documents from the lender as you have gone through the loan process, but a lot of them you will be seeing for the first time. You should plan to spend at least an hour at the closing agent’s office, but it may take a little more or a little less time than that. Be sure to stretch your hands before you go into the closing…they will have quite a work out.
You may be wondering why you need to go in and sign in person at all. After all, we’re getting used to handling most everything online. Electronic signing is now allowed by the federal government and someday it may become the norm. But for now, physical signatures are still preferred to ensure that everyone has been able to read and verify the documents.
Who is going to be there?
In some states, the buyer and seller sit down at the same closing table. In other states, you’ll never see the seller, as you each have a separate title company. The closing agent is usually either an escrow officer or an attorney. The important thing is that the closing agent is a neutral third-party who has the knowledge and training to get everything completed according to the contract and the lender’s closing instructions. In addition to the closing agent, you may also have your real estate agent and loan officer present. In a few states, an attorney must be present at closing.
What should you bring?
In addition to patience, you absolutely must have the following:
Photo ID: The closing agent has to verify that you are who you say you are. A driver’s license or current passport will do. Sometimes, a lender will require a second ID, but that will depend on the lender’s closing instructions.
Closing funds: This is to cover any down payment and closing costs you owe. You’ll know exactly how much you need once the lender approves the final figures. Do not bring a personal check or cash for the closing funds. The closing agent will tell you whether you need to send a wire transfer or get a cashiers check. Most title companies must have the funds in a wire if the amount you need to bring is over a certain amount. If you wire the funds please verify the wiring instructions over the phone with someone at the title company, as fraudulent wiring instructions sent by email are unfortunately very common scams. I will talk in more detail about these scams in a later post, but for now, just be sure you talk to someone from the title company on the phone about the correct account number for sending the wire.
What will you be asked?
If you haven’t already established this, you’ll need to tell the closing agent how you wish to take title to the home. You will likely decide between these common selections (although there may be differences in different states, so be sure to talk to your title company about ways to take title in your particular state):
Sole owner: An unmarried person buying a house alone has the easiest choice. Title is taken as a sole owner in that individual’s name.
Joint tenancy or Tenants-in-common with right of survivorship: When two or more people who are not married to each other buy a house together, things get more complicated. They can choose to take title with the right of survivorship, meaning that if one of them dies, full ownership goes to the survivor. They could also choose to take title without survivorship…for that option, see Tenants-in-common below.
Tenants by the entirety: When two people who are married to each other buy a house together, they typically take title as Tenants by the entirety, which automatically has a right of survivorship. However, they can choose to take title without survivorship, but must let the closing agent know that that is their wish.
Tenants-in-common: When two or more individuals buy a home together as tenants-in-common, they are partners who may own equal or unequal shares and who can sell their shares of ownership independently. There is no right of survivorship in a tenancy in common.
***Before you attend the closing, decide how you wish to take title to the property and talk to your real estate attorney about it for an explanation of the law in your state. Different states may have similarities regarding how you can take title to property, but there are some differences about which you will need to talk to a local attorney.
How many papers will you sign?
More than you could ever have imagined. I have been told by military buyers that when they joined the military, they didn’t sign nearly as many documents as they did at a closing. The number of documents will vary based on where you live and the specifics of your loan, but I have found that the average loan package is about 100 pages. Of course, you don’t necessarily need to sign every single page, some may require initials and others may not require a signature or initial. Here are some documents you’ll likely encounter:
Promissory Note: The Note contains the terms of your loan with the lender and provides a means for the lender to transfer or collect on the debt. It should state the amount of the loan, the initial interest rate, the terms of any interest rate changes (there should not be interest rate changes if the loan is for a fixed rate), and the time and place that you must repay the loan. It is common for the lender to sell the loan, and if they do, they will physically give the note to the purchaser of the loan. The purchaser of the loan will then be entitled to collect on the loan under the terms you had agreed upon with the original lender.
Mortgage or Deed of Trust: Some states are considered “Mortgage States” while others are considered “Deed of Trust States”. Both the mortgage and deed of trust are instruments where you pledge the real estate as collateral for the loan. The primary difference between a mortgage and a deed of trust is whether or not a lender must file a lawsuit in order to foreclose on the property. With a mortgage, a lawsuit would be necessary, while with a deed of trust, the Trustee has the power of sale and can conduct a foreclosure sale without filing a lawsuit under the terms in the deed of trust and according to the laws of that state. Once you sign the mortgage or deed of trust, that document is recorded in the public record as a lien against the property. When you pay off the loan, the lender would release the lien on the property, meaning that you would then own the property free and clear…provided there were no other liens against the property.
Monthly payment letter: This document gives a breakdown of your monthly payment, showing the amount going toward principal and interest, taxes, insurance, mortgage insurance and any other figures the lender has included in the monthly payment.
Closing Disclosure: The closing disclosure is also referred to as the CD. This provides detail of your loan terms and the closing costs for your transaction. It was designed to help you better understand the fees associated with the closing. By law, you are entitled to get this form three days before closing and it should be in the same format as the Loan Estimate you received after applying for the loan. You should have already had time to look this over before closing, but your closing agent should go over the numbers with you in detail.
Loan Application: It may seem silly that you have to sign a loan application at closing because you probably already completed an application when you actually applied for the loan. However, the lender will have a new application for you to sign at closing with the information that you gave in your original application and information that was found on your credit report. If your financial situation has changes since you applied for the loan (for example: if you lost your job, changed jobs, or incurred more debt) you must inform the lender before signing.
There are many other disclosures and agreements that will be included in your loan package. Those include, but are not limited to: a compliance agreement, where you agree to cooperate with the lender in fixing any mistakes in the documents; IRS forms 4506 and W-9, which allow the lender to obtain copies of your tax returns and report the mortgage interest; a servicing disclosure to inform you whether your lender is going to use a servicer to collect payments or if the lender intends to sell the loan; an initial escrow agreement, which shows details of the first year of payments into the escrow account and disbursements out of the account for taxes and insurance; the lender may also have name affidavits showing different variations of your name as shown on the credit report and an affidavit that you intend to occupy the property as your primary residence.
When do I own the house?
You’ve signed all of the papers and paid the funds you needed for closing, but when is it all finally over and you get to take possession of the property? The answer to that question may depend on local laws and customs and the language in the contract. Typically, the transaction is complete when both the buyer and seller have signed, the disbursing title company has received all of the funds and the warranty deed has been delivered. There is some debate about what constitutes delivery of the warranty deed, but when there is a separate title company for the buyer and a separate title company for the seller, my opinion is that it is delivered when the seller’s title company (as an agent for the seller) delivers the deed to the buyer’s title company (as an agent for the buyer). However, I suggest that you ask your agent and title company about the language in the contract and about the local customs regarding possession of the property.