HOW DOES THE CLOSING PROCESS WORK?

Following the completion of all inspections (and assuming you want to continue with the transaction), you must undergo one of the most complicated components of the entire experience: the closing. At the end of it though, you'll become the proud owner of your new home.

Understanding the Basics

Also known as the settlement, the closing is a multi-step process during which the initial payment takes place and the title to the home is transferred from the seller to you, the buyer.
The closing process typically involves a variety of different parties and can include:
  • You (the buyer)
  • Your agent
  • Your mortgage lender
  • Closing agent (this individual might work for the lender or the title company)
  • Attorney (both the buyer and seller may have lawyers present)
  • The seller
  • The seller's agent (the person who arranges the transaction between buyer and seller)
  • Title company representative (the title company insures the title status during the closing process)

What Closing Entails

Don't immediately try to cancel the contract if your inspection report shows up with some problems. Remember that it's the job of the inspector to point out all problems, no matter how small, and chances are your house will have at least a few minor issues. No home is perfect.
Closing includes a number of essential exchanges and document verifications, which can be broken down into three basic steps:
1.Signing mortgage documents
2.Completing paperwork to transfer the property
3.Exchanging payment

Movoto's Buyer Tip:

Title insurance is your guarantee that the home you are trying to purchase actually belongs to the individual who is selling it. Without title insurance you can't buy the home, because you don't have proof that the seller is legally able to sell the property. The insurance will also protect you from purchasing a home with deed problems, which could spur legal ramifications.

Signing Mortgage Documents

Typically you'll close on your loan first, allowing your lender to help pay the down payment during the transfer of estate. At this time, you will complete and sign all documents for your loan, including:
  • Actual mortgage: This paper secures the house as a form of debt payment, meaning the bank can foreclose on the property if you default on the loan.
  • Monthly payment letter: This reveals the breakdown of your monthly mortgage payment, and you should read it carefully for any confusing costs or surprise additions.
  • Note: This document signifies your borrowing of the money and your guarantee to repay it.
  • Name affidavit: This paper certifies that you are who you say you are.
  • Truth-in-Lending statement: This document provides specifics for the interest rate, annual percentage rate, amount financed, and total cost of the loan over its lifetime.
You should mentally prepare yourself for a cramped hand and sore eyes during the closing, because chance are you'll have to review anywhere from seven to 20 documents.

Movoto's Buyer Tip:

If you have any questions about paperwork, either relating to your loan or the purchase itself, ask during the closing process. This is your absolute last chance to clear up any misunderstandings or confusing components. Once you sign on the dotted lines, you're obligated to follow through with the terms--even if you didn't understand them at the time of signing.

Completing Paperwork for Property Transfer

uring the second portion of closing, you, the seller, and the title company representative will review all of the relevant documents prior to signing.
You will likely exchange, verify, and endorse some or all of the following:
  • Acknowledgement of reports: This document acknowledges that the buyer has seen all reports relating to the property, including surveys and inspections.
  • Bill of sale: This piece of paper is your equivalent of a receipt for the home--it documents the details about the sale, including the date it takes place.
  • Deed: This paper is your proof that ownership of the home has been transferred to your name, and it guarantees that the seller has the right to sell the property. It includes the names of both buyer and seller, as well as a description of the property.
  • HUD FORM 1 or Disclosure/Settlement Statement: This gives an overview of the actual settlement costs and amounts, and should be explained by the closing broker or agent.
  • Insurance certificate: This certificate is your proof that you have purchased homeowner's insurance for the property—most mortgages require it, because your lender wants to see that the investment is protected.
  • Proration agreements: These documents detail how you and the seller have agreed to divvy up property-related costs for the month in which you purchase it (i.e. the seller may have already paid property taxes, so the buyer might agree to reimburse the seller for a portion of it or cover insurance for that month).

Exchanging Payment

The last step includes the transfer of necessary payments to the designated parties. This primarily consists of the costs relating to the home-buying process and the closing transaction.
There are three primary types of costs that you should be aware of:
  • Closing costs: These can include appraisal fees, title insurance costs, inspection fees, attorney fees, and application costs. You'll be expected to help cover these costs, if not completely cover them. Read on for details about how to estimate the total of your closing fees.
  • Property Payment: You will hand over the down payment for the property at this time, and your lender may be paying a portion of it, depending on your arrangement.
  • Escrows: The lender may or may not cover the buyer's annual taxes, insurance, and other additional costs.

Sources:

Tips & Traps When Buying a Home: 4th Edition, by Robert Irwin
Home Buying Guide for Dummies: 3rd Edition, by Ray Brown and Eric Tyson
100 Questions Every First-Time Home Buyer Should Ask, by Ilyce R. Glink
Understanding the Closing Process, http://www.realtor.com/home-finance/pre-funding-closing/understanding-closing-process.aspx?source=web
Preparing for closing: Understanding the process, http://www.bankrate.com/brm/news/real-estate/buyerguide2004/closing-process.asp
Survival guide to a real estate closing, http://www.bankrate.com/brm/news/real-estate/buyerguide2004/closing.asp
Closing basics, documents and costs http://www.homefinder.com/content/Buying-Guide:Closing_Basics,_Documents_and_Costs