Closing Your Mortgage Loan

Introduction

Although you have signed a purchase agreement and your loan is approved, you have no rights to the property until the title to the property is transferred to you. This takes place at the loan closing. Here, we will endeavor to give you an understanding of what is involved to close your loan. There are many things that you can do to ensure a smooth and timely closing.

What happens at closing? At closing the mortgage loan documents will be signed, the seller will execute the deed to the property, funds will be collected from the buyer (and sometimes the seller) and disbursed and the closing agent (notary or attorney) will record the necessary instruments to give legal ownership of the property to the buyer. Settlement is a legal process. Specific procedures and requirements do vary according to state and local laws.

What to do between Commitment and Closing

As soon as you receive firm approval from the lender, confirm the actual date of the loan closing. In most cases your purchase and sales agreement specifies a closing date, however a firm date needs to be set by you, the seller of the property and your lender. You want to make sure that settlement takes place prior to your loan commitment expiration and before any rate lock agreement expires. There must be time to complete any repairs or maintenance on the property, if that has been stipulated within the lender's commitment. 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 that are commonly required for a loan closing. Some of these items are the responsibility of the buyer, while others are of the seller. The following are usually required for closing.

• Title Insurance Policy
  Every lender requires 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.
• Homeowner's Insurance
  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.
• Termite Inspection and Certification
  In most of the country, a property must be inspected for termites and the inspection is specified within the purchase contract. The report is required on all FHA and VA loans as well as many conventional loans.
• Survey or Plot Plan
  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.
• 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. Properties with well and septic water sources are usually governed by county codes and standards.
• Flood Insurance
  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.
• Certificate of Occupancy or Building Code Compliance Letter
  On new construction a Certificate of Occupancy must be obtained by the city or county before the loan can be closed. 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 is normally spelled out in the purchase contract.

You and your real estate agent should make a final inspection of the property to ensure that required repairs have been completed, those items described in the sale contract, such as kitchen appliances and other negotiated items are present and that no recent damage has occurred, at least 24 hours prior to the closing. The lender often will make a similar inspection before closing.

The Loan Closing

Lenders can have loans closed in several ways. They can close the loan in their offices, some use title or escrow companies and some will have their attorney or yours conduct the closing. As soon as you receive the commitment letter from the lender, you should determine who will be conducting the closing.

The person conducting the closing 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. He/She will ensure that all of the necessary papers are signed, will record the required documents, and ensure 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.

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.

The Mortgage or Deed of Trust

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), 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.