9.How to Navigate the Closing Process

Prepare for Your Closing. What to bring?

Before closing on your home, you will want to be certain that you have fulfilled all of the responsibilities you have as part of the loan closing process. 

Closing Items Checklist:

  • Guaranteed funds for the remainder of your down payment and closing costs
  • The sales contract (which you or your realtor will likely have provided to the closing or escrow agent in advance of the closing)
  • Proof of homeowner’s insurance (which you will likely also have provided to your lender in advance of the closing)

At the time of your closing  you will also need to bring:

  • Government-issued photo identification

Guaranteed Funds: This includes obtaining and providing verified funds for the amount of the home purchase that you are not financing as well as to cover all of your closing costs.  The amount of money that you are providing from your own funds is otherwise known as the down payment.  If you are putting $20,000 down to purchase your new home, you will need to provide those funds to the closing or escrow agent in a guaranteed format.  Guaranteed funds formats include certified checks (a check written on your account that is certified by your bank with a stamp or seal indicating that the funds to cover it are on hold in your account), cashier’s checks (a check issued by your bank using funds that were withdrawn from your account by your bank — cashier’s checks are as good as cash) or wired funds. You are responsible for providing these funds to the closing or escrow agent in advance of the loan closing.  If using a certified or cashier’s check, you can bring it with you to the closing, but you will want to check with the closing or escrow agent to find out to whom the check should be made payable.

What are closing costs? What are referred to as closing costs include fees paid by the buyer of a home for title insurance, taxes, stamps, recording fees, homeowners association processing (if the property is subject to an HOA), condominium association processing (if the home is a condominium), wire fees, attorney and notary fees and other similar charges.  Additionally, if you are going to establish impound accounts for your lender to use to pay your property taxes, homeowner’s insurance premiums, condo and homeowners association dues, etc., you’ll need to provide funds at closing to establish those accounts and place them into to ensure that the accounts will contain the amounts needed to pay those fees when they are next due.  In addition, the law permits your lender to keep a “cushion” of two months’ worth of these charges in your accounts at all times so your closing costs will include the funds necessary to establish this cushion.  Somewhat confusingly, these accounts and payments are frequently called “escrows,” which is a term also used to describe a type of real estate closing process, as you’ll see in a few pages.  If you are going to pay your real estate taxes, association fees and homeowner’s insurance premiums directly, then these amounts will not be part of your closing costs.  Closing costs can vary widely by state and even within a state, so pay attention to the Loan Estimate that your lender provided to you during your loan application and approval process.  It will contain the best available estimate of what these costs will be when you close your loan.   

Homeowners Insurance: Your lender will require you to obtain homeowner’s insurance before you are permitted to close your loan.  The policy will go into effect from the day on which you close your loan, and therefore must be obtained by you prior to your loan closing.  Homeowner’s or hazard insurance is insurance that provides you with coverage for damage to your property from what are called in the policy “named perils.”  Named perils include wind, tornado, fire, water damage from inside the home (burst or leaking pipe), falling trees, etc.  Your homeowner’s insurance will also provide you with coverage if someone is injured while on your property.  Additionally, your lender may require that you obtain specific insurance for other types of perils that are not covered by your homeowner’s insurance policy.  These could include fire, flood, hurricane, lava, etc. if your home is in a known area at risk for fires, flooding hurricanes or volcanic flow.  Your lender will require that they be named as a “loss payee” on the policy.  This simply means that in the event of a claim, when your insurance company sends funds to pay for the needed repairs, those funds will be made payable both to you and to your lender.  In this way, the lender knows that the funds will be used to actually perform the repair and that their loan collateral (your house) will be repaired to its pre-claim condition.  

The Closing Process and Documents

Depending upon the state in which your home is located, your closing will take place with either a closing or an escrow agent and will usually take place in their office.  The process is largely the same in both instances, but the timing of events differs.  If your property is located in the western or southwestern United States, you will likely have what is referred to as a “dry” closing and it will take place with an escrow agent.  If your property is elsewhere in the country, you will have a “wet” closing and it will take place with a closing agent, who in many states is also a title agent and/or an attorney.  In both cases, all of the documents required to purchase your home and close on your loan will be provided by the closing or escrow agent and they will guide you through the process of executing all of the required documents and transferring any required funds.  

So what is the difference between a wet and a dry closing?  At a wet closing, all of the necessary activity regarding the closing of your loan and the transfer to you of your new property will occur at one time and on one day.  After signing all of the required documents, you will leave the closing with the keys to your new home.  You’re free to begin moving into it whenever you’d like.  At a dry closing, you will sign all of the required documents to transfer ownership and secure your loan, but you will then leave the escrow agent’s office and you will not receive the keys to your new home for a couple of days.  This is because at a dry closing, the funds required to purchase the home from the seller — the funds you are borrowing from the lender — are not disbursed until the mortgage is recorded in the public records.  Once that occurs, funds are disbursed and keys are exchanged.  Dry closings are so-called because the ink on the documents is “dry” before the funds are disbursed.  In a wet closing, the funds are disbursed and keys exchanged while the ink on the documents is still “wet.”  

During the closing process of your house, you will be provided with a number of documents and asked to sign and initial some of them. 

Among the common documents at a real estate closing are:

  • Special Warranty Deed: This special warranty deed conveys the lot and home to you, subject to permitted exceptions. This will not apply if you already own the lot in question.
  • Professional Builders Limited Warranty: (if buying a newly constructed home) You will be provided with a copy of the limited warranty in your homeowner’s manual for your personal review. It is important to review it before the closing.
  • Title Commitment: Before or at the time of closing, you will be given a standard form for an Affiliated Land Title Association (ALTA) owner’s title insurance commitment, which helps to ensure the salable title of the home to you without any liens or easements on the property. Review the Title Commitment carefully.
  • Promissory Note: The promissory note is the contract between you and the lender that documents the terms under which you borrowed the funds to purchase your home.  These terms include the duration of your loan, the rate of interest you will pay, the monthly due date of your payments, amount of your payments, penalty for late payments and other items specific to your transaction.  
  • Deed of Trust or Mortgage: This document pledges your home to your lender as the security for repayment of the promissory note. Whether you sign a deed of trust or a mortgage is dependent upon the laws of the state in which the property is located.  Differences between them are minor and technical, and both documents perform the same role.  
  • Closing Disclosure: This identifies all the monetary flows that are  associated with your transaction and documents what funds you need to bring to your closing. Your lender will provide you with a copy of this document at least 3 days before your scheduled closing date.  
  • Escrow or Impound Disclosure: If you are going to have your lender manage the payment of your property taxes, homeowner’s insurance bills and condominium or homeowner’s association dues, this document details the monthly property-related expenses you’ll be paying into your impound account to cover them.
  • Transfer Tax Declaration: if applicable as per your state
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