Almost at the finish line!
Closing is one of the most anticipated parts of the home buying process because this is when the purchase is finalized and the keys are handed over. But, this process isn’t without its share of potential stress. There are far too many stories of home buyers who left the closing without the home they worked so hard to purchase.
In this final section, we will review the mortgage closing process so you, the buyer, will know what to expect. Topics will include:
- The Closing Process
- The Revised Loan Estimate – What Happened?
- Closing Disclosure – Verifying Everything Is Correct
The Closing Process
The closing is what the entire home buying process leads up to. This is a sit-down meeting during which all parties sign the papers, officially completing the deal, with the ownership of the property being transferred to you.
But, before the closing can begin, an inspection of the home should be made to determine whether the home is suitable for occupying and if there are any major home improvements that need to be made. A home appraisal is also performed to ensure that the home you are buying is priced accordingly against the actual value of the property.
The Home Inspection and Appraisal
It is important that you have completed the home inspection, conducted by a professional home inspector, prior to the closing. The reason for this is because there may be issues that the seller isn’t informing you about, such as a leaky roof, an HVAC system that needs replacing, plumbing problems, or a cracked foundation.
Although it is not always required to have the home inspected, should you not have it done, you will be personally responsible for any major repairs needed after you take ownership. By having the home inspected, you can use the inspector’s report to negotiate with the seller. For instance, if the report recommends a costly repair, you can negotiate for the seller to pay to have the repairs made prior to closing. Or, you can request a lower price for the home, or that the seller should pay your closing costs.
The appraisal is another important piece of information you will need to have before closing. Usually, it is the lender who has the appraisal performed by a professional home appraiser. The appraisal is an unbiased estimate of the true value, or fair market value, of the home you’re purchasing. The lender uses the appraisal to ensure you, the borrower, are requesting a loan amount that is appropriate.
Who Is Present at the Closing?
Every state has its own requirements for who needs to be present at a home closing, but in general, the people who are usually there include:
- You (the mortgagor)
- Your real estate agent
- The home seller
- The seller’s real estate agent
- The lender (the mortgagee)
- The Title Company’s representative
- An attorney (if you want one to represent you)
- The closing agent
How the Closing Process Works
For the buyer, the home closing process actually starts the day before the closing. On this day, you should collect and organize all of the paperwork you have received over the course of the home buying process. Some of the important documents you’re going to want to gather together include:
- The Loan Estimate
- The Contract
- Proof of Title Search
- Proof of Homeowners Insurance
- Flood Certification (if required)
- Proof of Mortgage Insurance (if required on the loan)
- The Home Appraisal Report
- The Home Inspection Report
- The Closing Disclosure
You also have the right to walk through the home 24-hours before the closing. This is so you can verify that the previous owner has left the premises, removed all of their belongings, and left the home in the condition that was specified in the contract.
If new problems are discovered during the walkthrough, you can request the closing to be delayed or you can request the seller to put a certain amount of money into an escrow account for covering the costs of the necessary repairs.
The last phase of the closing process occurs when the seller hands you the keys to your new home. Closing day is over and you’re free to move into the home.
The Revised Loan Estimate – What Happened?
Generally, once you receive your loan estimate from your lender, the lender is bound by the fees and charges included. A lender is not allowed to make revisions in the event they make mistakes, miscalculations, or underestimate the charges. But, there are some instances in which a loan estimate may be revised.
According to the TILA-RESPA Integrated Disclosure (TRID) rule, there are six events that justify a revision of the loan estimate. These events include:
- Interest rate locks – If the interest rate is not locked when the Loan Estimate is issued, then the lender can revise the estimate once the rate is locked.
- Changes in the buyer’s eligibility for the loan or changes that affect the value of the property being purchased – A buyer can experience certain changes that can affect their eligibility, such as a credit rating drop, becoming unemployed, a divorce, etc. A revision is also usually required if the lender is unable to verify the buyer’s income. If the appraisal for the property comes in higher or lower than expected, that too could result in a revised Loan Agreement being required.
- Buyer-requested changes – If the buyer requests certain changes that impact the credit terms or the settlement costs, the lender may want to revise the original Loan Estimate.
- Changes that cause an increase in settlement charges – If a change causes the settlement charges to increase beyond the tolerance variations set out in the TRID rule, the lender is granted the right to revise the loan estimate.
- The original loan estimate expires – If the buyer does not provide the lender with a Notice of Intent to Proceed with Loan Application (NIPLA) within ten business days of receiving the Loan Estimate, then the Estimate can be revised by the lender if necessary.
- Construction loan settlement is delayed – In new construction, settlement typically occurs within 60 days of receipt of the Loan Estimate. If settlement doesn’t take place within the 60 days, the lender can revise the estimate.
If you receive a revised Loan Agreement and it has nothing to do with a request made by you, then you should ask your lender to explain the reason for the revision. Find out how the revised estimate is going to affect your loan transaction, including your loan amount, the interest rate, your monthly payment, and closing costs. The more you know before you go to closing, the better off you will be.
Closing Disclosure – Verifying Everything is Correct
There are a lot of documents included in buying a home. This means there are ample opportunities for mistakes to be made. You can’t proceed through the closing expecting everything to be 100% right on all of the documents. Before you sign, you or your attorney must verify that everything is correct on your Closing Disclosure.
Some of the most important things you are going to want to verify for accuracy on your Closing Disclosure include:
- The Loan Terms – The Loan Terms include details such as the length of time the loan will last if you make just the minimum monthly payment. This is usually 15 or 30 years depending on what type of loan you choose. This part of the Disclosure also details the loan’s interest rate, your monthly payment amount, and any prepayment penalties or balloon payments.
- Closing Costs – The Closing Costs are all of the fees related to the purchase of your home. These fees include everything from the application fee to the underwriting fee and the amount can be anywhere from 2% to 5% of the selling price of the home.
- Total Loan Cost – The Total Loan Cost is what you will actually pay for your home over the life of your mortgage loan. This total is significantly higher than the purchase price because it includes the interest that you will pay on your loan.
- Prepaids – Prepaids are costs associated with your home that need to be paid in advance when you are getting a loan. Prepaids include costs such as your property taxes, homeowners insurance, and mortgage interest that will accrue between the closing date and the end of the month. So, the earlier in the month you buy your home, the more you will have to pay in Prepaids.
- Escrow – Escrow is a complex financial arrangement in which a third party account holds and regulates the payment of the funds required for the buyer and seller during the closing process. The funds are overseen by an Escrow Company; they protect the funds from chargebacks, fraud, and illegal usage in a secure non-interest bearing trust account.
- Summaries of Transactions – The Summary of Transactions is a table included on page 3 of the Closing Disclosure that shows a line-by-line comparison of the buyer’s and seller’s transaction details.
- Loan Disclosure – The Loan Disclosure is a document in which the lender provides completely transparent information about all of the terms included in the loan they are offering the buyer.
- Finance Charge – The Finance Charge is the total amount of interest and loan charges the buyer will pay over the life of their mortgage loan, assuming that the buyer will keep the loan through the full term until the last payment is paid. Finance Charge also includes any and all pre-paid loan charges.
- APR – The APR is the loan’s annual percentage rate. This is essentially the amount of interest the buyer will pay annually on their mortgage, averaged over the full term of the loan. The difference between interest rate and APR is that the interest rate pertains to the current cost of borrowing while the APR uses the interest rate as a starting point and takes into account the lender fees required to finance the loan.
How to Calculate Cash to Close
To calculate the Cash to Close amount that you will need to have on Closing Day, you can do the following equation:
- Step 1: Take the total closing costs and subtract any closing costs that are being rolled into the loan amount.
- Step 2: Take that number and add the down payment amount.
- Step 3: Take that number and subtract the deposit amount that you made when the offer was accepted.
- Step 4: Take that number and subtract any seller credits.
- Step 5: Take that number and add or subtract and adjustments, overpayment refunds, and any other credits and the number you are left with will be your Cash to Close amount.
You should now be ready for your Closing Day. Remember, carefully review all of your documents so the mortgage you get is the one you wanted.
Congratulations on financing and buying your home!