The closing or settlement of a home is when the transaction for purchasing a property is completed.
Once the buyer has paid the seller for privileges, rights, property, or goods and services and the seller has transferred money or other considerations for their goods and services then the closing is complete.
The buyer, seller, lender, and both agents will all be present to make sure things go smoothly, that property is transferred, and that everyone is paid for their goods or services.
Closings usually occur at the offices of the title or escrow company. Both the seller and buyer offer title insurance in the event that anything happens during the exchange of the title or escrow.
A title company collects information about the chain of title to the home and presents it to the attorney. The attorney looks over everything from the title company to ensure that there are no errors in the title that will stop you from owning your property at closing.
If any errors are found, they’ll be corrected then the title company will insure the title in your name for the purchase price.
Lender’s title insurance protects the lender’s losses on a property if there is ever a dispute on the title. If you want to protect yourself from any outside claim to the title, then you should invest in an “owner’s” policy. This title policy insures your losses losses in case hidden title problems such as undisclosed heirs, mistakes in examining records, forgery, or errors or omissions in deeds come up once you have the title to the home. It means that your title insurance company will protect you monetarily with legal defense if necessary once a problem arises after the purchase of your home.
Title or escrow companies look out for the lender’s best interest and facilitates the closing by hosting the exchange of documents and releasing of funds.
Before October 3, 2015, the seller was the one who purchases title insurance and therefore selects which title company is used.
Starting October 3, 2015, the mortgage lender will decide which title company to facilitate the closing process. Before the governmental changes, the seller could’ve picked a separate title company. Mortgage lenders are only allowed by law to work with ONE title company.
This is huge in the real estate world!
If the title company cannot facilitate the closing of a property, then the closing could take place at the lender’s office or another place acceptable to the lender.
Some states have what’s known as an escrow closing. During an escrow closing, the title company uses a document called an escrow agreement. This benefits both the buyer and seller because if any problems come about during the transfer of the escrow and title, the title company will return the closing funds to the buyer, and records a deed from the buyer back to the seller, thereby protecting both parties.
There are three steps of the closing from the buyer’s perspective:
First, there’s a review and signing of the loan documents. There are many different forms you will be signing including the actual mortgage, a Truth-in-Lending statement, estimate of closing costs, and many others.
Second, the buyer and seller sign paperwork with the title company’s representative. This solidifies the relationship between the buyer and the seller.
Depending on where you live you that step also includes transferring over important documents such as a signed deed, a bill of sale, an affidavit of title, any documentation that was required in the contract, insurance certificates, and other types of forms. Your spouse or partner will also need to sign these documents.
Once you have completed the exchange of documents, your title company will present you with more paperwork to sign. Some of these documents include information about the title, while others that discuss the purchase and sale of a home are sent to the IRS.
After the notarization process, you’re ready for the final part of the closing, disbursement of funds.
After the correct documents have been signed and everything has been notarized and transferred to the right party, then the title company will disburse the funds.
The title company will take money from the buyer and create checks to give to the seller, the seller’s lender, the brokers, and the title company.
Everyone usually gets paid out of the closing proceeds, so make sure that if you’re a seller you have payment in the form of a cashier’s check, certified check, or wire transfer, which are all backed by cash.
Now, not everyone uses a lender when they purchase a home, although most first-time home buyers do. If you don’t require a lender and want to purchase a home, or if the seller is financing the home purchase, the buyer and seller simply have to meet and exchange and sign documents. The closing is quicker when there’s no financing involved and takes fewer steps to complete.
How can I figure out my closing costs?
The closing costs can add up significantly and include but aren’t limited to the lender’s fees, title fees, recording fees, and city and state transfer fees. The majority of your closing costs come from your mortgage costs. The points that you pay for a home is usually the largest fee that you’ll pay, which is usually around 1 to 3 percent of the loan amount, but could also be less or more.
Depending on the situation, you might want to pay as many points as you can. The more points that you pay, the lower the percentage rate on your loan. This is a great way to save money if you are planning to be in the home for a long time.
However if you believe that the amount of money you’ll earn in the years to come will increase and are currently strapped for cash, then you can decide to pay 0 points and refinance when you’re in a better financial situation.
Normally, a lender will give you a written fee estimate when you are preapproved for the loan, however this doesn’t always accurately state all of the fees that you’ll have to pay at closing.
If you don’t have a good understanding of the different fees that you’ll pay at closing, then it’s easy to be caught off guard when the charges arrive.
Let’s discuss the different fees that you might have to pay during closing. Have an attorney go over the different types of fees and let you know what each item would cost you, so that you have a better understanding of all the fees you’ll need to pay.
- Loan fees including lender’s points, loan origination, and loan service fees. This could be anywhere from 0 to 3 percent of the loan or greater.
- A loan application fee, usually ranging from $0 to $500.
- A lender’s credit report, usually $25 to $65.
- The lender’s processing fee, around $75 to $350.
- The lender’s document preparation fee, anywhere from $50 to $250.
- The lender’s appraisal fee, a standard $225 to $400 cost.
- Prepaid interest on the loan is paid per day until the end of the month that the closing takes place.
- The lender’s insurance escrow usually runs around 15 to 20 percent of homeowner’s insurance policy for one year.
- The lender’s tax escrow, if this exists will cost anywhere from 33 to 50 percent of the annual property taxes.
- Lender’s tax escrow fee, from $40 to $95.
- Title insurance covering the lender’s policy costs between $150 and $500. The seller might pick this up depending on the part of the country that you live in. It could also be more or less than this amount depending on the cost of the home that you purchase.
- Special endorsements to the title costs $100 or more for each endorsement. Depending on the type of property that you are buying, a lender may request that you put special endorsements on the title.
- Unpaid home inspection fees, from $250 to $400.
- Closing fees for the title company, from $200 to $500 and up.
- Recording fees for the deed or mortgage costs around $25 to $75.
- Any local city, town, or village transfer taxes, county transfer taxes, and state transfer taxes depend on where you purchase property and could be $0, a certain dollar amount per $1000 of the sales price, or a flat fee per transaction.
- Flood certification fee, paid if your home is in a floodplain for around $10 to $50.
- Your attorney’s fee, paid if you live in a non-escrow closing state could be $300 or higher.
- Condo move-in fee, if you’re moving into a condo building you can expect to pay anywhere from nothing to $400.
- An association transfer fee, if you’re moving into a condo or townhouse, could cost anywhere from nothing to $200.
- Co-op fees, if you are moving into a co-op then you can expect to pay $50 to $200 depending on your purchase price.
- Credit checks for co-op or condo boards depend on the building you’re moving into.
These are the fees that the seller ends up paying, but they aren’t the only fees that are associated with buying and selling a home. The seller pays survey costs, title insurance, recording release charges for the mortgage, broker’s commission, transfer taxes, property tax fees, and FHA fees.
Once all of these fees are collected, then the buyer owns the property, and the seller has access to the funds that were used to purchase the home.