How to Close on Your Mortgage
Almost at the Finish Line!
Closing is one of the most anticipated parts of the homebuying 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 homebuyers 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 culminates with. This is the meeting during which all parties sign the documents to officially complete the deal, transferring ownership of the property to you.
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 needed. A home appraisal also ensures that the home you are buying is priced accordingly with the actual value of the property.
The Home Inspection and Appraisal
A home inspection, conducted by a professional inspector, is a crucial step to complete prior to the closing. If there are undisclosed issues with the home, such as a leaky roof, a faulty HVAC system, plumbing problems, or a cracked foundation, the inspection will identify them. Home inspections are not always required, but should you not have it done, you will be personally responsible for any major repairs needed after you assume ownership of the home
Once you have the inspector’s report, you can use it to negotiate with the seller. For instance, if the report recommends a costly repair, you can request that the seller pay for it prior to closing, to lower their asking price for the home entirely, or that they pay your closing costs.
The appraisal is another important piece of information you will need before closing. Usually, it is the lender who has the appraisal performed by a professional. 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 an appropriate loan amount.
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 received over the course of the homebuying process. Some of the important documents to gather 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 to 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 be delayed or the seller to put a certain amount of money into an escrow account to cover 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. At this point, the closing is over and you’re free to move into the home.
The Revised Loan Estimate – What Happened?
Usually, once you receive your loan estimate from your lender, the lender is bound by the fees and charges included. A lender is not permitted to make revisions in the event they make mistakes, miscalculations, or underestimate the charges. However, 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, 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, getting 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 could also require a revised loan agreement.
- 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 the settlement doesn’t take place within the 60 days, the lender can revise the estimate.
If you receive a revised loan agreement not tied to a request from you, ask your lender to explain the reason for the revision. Find out how the revised estimate will affect your loan transaction, including your loan amount, the interest rate, your monthly payment, and closing costs. The more you know prior to closing, the better off you will be.
Closing Disclosure – Verifying Everything is Correct
A multitude of documents are required for the homebuying process, and with them come ample opportunities for mistakes to be made. Everything may not be 100% accurate on all of the documents, so you or your attorney must verify that everything is correct on your closing disclosure prior to signing.
Some of the most important things 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 you will pay on your loan.
- Prepaids – Prepaids are costs associated with your home that need to be paid in advance when 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. 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 held in a secure non-interest bearing account, overseen by an escrow company to protect them from chargebacks, fraud, and illegal usage.
- 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 all transparent information regarding 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 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 you will need for closing day, use 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 the number calculated in Step 2 and subtract the deposit amount you made when the offer was accepted.
- Step 4: Take the number calculated in Step 3 and subtract any seller credits.
- Step 5: Take the number calculated in Step 4 and add or subtract any adjustments, overpayment refunds, and any other credits. This final total 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!