The Closing Table – What to Know
June 29th, 2009
Categories:Home Buyer Education
Once the contract has been accepted its time to focus on getting across the finish line. Often the anticipation of moving in creates a rush to wrap up the transaction as quickly as possible.
No matter how exciting the finish line may look, it is important to keep in mind the most critical part of the transaction occurs at the closing table. Once you sign the loan documents and record title, the home is yours along with all the responsibilities and any details hidden in the paperwork, which is all too often over looked.
Here is an outline of what is covered in this article:
- Preclosing Procedures -What the buyer and seller need consider and do before closing
- Closing Figures and Fees – What to numbers to look for and double check
- Prorations - And explanation and definitions
- Closing Time – What to expect when it comes time to sign your loan docs and who should be there
- Sample Closing Statement – Get a sneak peak at what you’ll be looking over
- RESPA and Closing - RESPA is on your side and here’s why
- Closing Table Resources – Links to the U.S. Department of Housing
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Preclosing Procedures
Before getting to the table and signing the documents involved with the transaction, the buyer, seller and the title company need to do their due diligence to make sure the home closes on time and without any issues.
Buyer’s Issues
The buyer should ensure the property is going to be delivered in the conditioned promised by the seller. This involves looking over all the documents, reports and paperwork provided by the title company and any professionals hired to do research on the home.
This involves inspecting the following:
- The title evidence (any documents presented by the title company)
- The seller’s deed
- Any documents demonstrating the removal of undesired liens and encumbrances
- The survey (a survey tells the homeowner exactly where his or her property is)
- The results of any required inspections such as termite inspections, structural inspections, or required repairs
- Any leases if tenants reside on the premise
- Inspect the closing statement for any errors
Seller’s Issues
The seller’s main concern is ensuring payment is received for the home and the buyers do not have any reason to back out last minute.
They should be sure:
- The buyer has obtained the necessary financing
- They have done everything necessary to help the buyer with their inspections
- They have not encumbered the home with additional liens since opening escrow
Title Procedures
The title company is responsible for making sure the title is clear and free of any liens. A preliminary title commitment is run at the beginning of the transaction to identify any liens on the property. The title company should run the title commitment again before closing to ensure no liens have been placed on the property over the past month. This is important because liens that are put on the home will be the new owner’s responsibility.
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Closing Figures and Fees
In addition to the purchase price of the home, additional costs are involved with purchasing a home. These costs can be in the form of fees or prorated items such as property taxes, or HOA fees. It is important to understand how these number are calculated and the amount each party is paying is correct.
Here is a list of items to look:
- Broker’s Commission - In a normal transaction the home seller pays the commission to both broker’s involved in the real estate transaction. The broker’s commission line will tell you how much each agent is earning and who is paying for their fees.
- Recording Expenses – The seller typically pays for any recording fees, since recording fees are incurred in the event the seller has to clear any defects on the title.
- Title Expenses – Depending on the contract, the expenses incurred for the title company’s services can be paid by: the seller, the buyer or both.
- Loan Fees – These are any fees charges by the lender. They can include the loan origination fees, discount points, recording fees and more. All of these fees should have been disclosed prior to the statement being presented to you.
- Tax Reserves and Insurance Reserves – Most mortgage companies require the home buyer to keep a set number of months in an escrow account for future real estate taxes and insurance premiums.
- Appraisal Fees – Typically the buyer pays for the appraisal fee. The appraisal is normally ordered by the loan officer, and the fee can be paid before or at closing.
- Survey Fees – Any fees involved with conducting the survey of the land
- Additional Fees – FHA, Mortgage Insurance Premiums (MIP), and PMI may involve additional fees.
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Prorations
At closing there are several financial items that need to be split between the buyer and seller. Splitting these items is called prorating. Prorating is necessary to ensure the expenses are divided fairly between the parties.
Here are the two types of prorations and the math involved with calculating prorations. If you have any questions regarding these numbers, the title representative should be able to explain everything to you.
Accrued Items
Accrued items are expenses to be prorated and are owed by the seller. An example would be a water bill that has to be paid at the end of the month, however the transaction closes in the middle of the month. In this situation, the cost of the water bill has accrued over the first portion of the month and the seller owes the buyer to cover the water bill that will come at the end of the month.
Prepaid Items
Prepaid items are items that have been paid for in advance by the seller and need to be refunded at the time of closing. In this event the buyer would come to closing with additional money to reimburse the seller.
Arithmetic of Prorating
There are two methods of calculating prorations
- The yearly charge is divided by a 360-day year also known as a banking year
- The yearly charge is divided by 365 to determine a daily charge.
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Closing Time
Here’s an insight into what can be expected when it comes to sign the documents and close on your home.
Face to Face Closing
Some states hold the final closing in a face to face situation where everyone from both sides of the parties come together and meet at one time to sign the paperwork and exchange documents. Arizona does not do face to face closings.
Closing Agent
While a closing agent or escrow agent has been involved with researching the property’s title, and helping you through the transaction, it is not likely the escrow agent will attend the signing. Instead a Notary is there to help you sign the documents.
Notary
Taking the place of an escrow agent, a notary is hired to witness and notarize your signature on the documents you sign. The notary is typically a neutral third party that does not know any of the details of your transaction or of the paperwork you sign. For this reason if any questions arise it is important to ask and make any calls necessary.
Loan Officer
The loan officer’s attendance will vary from transaction to transaction and real estate market to real estate market. Regardless of how busy your loan officer is, or how simple the deal is the loan officer should be there to answer any questions you have.
Signing can often take over an hour due to the massive amount of paperwork involved with the loan. If your loan officer will not be able to attend, ask them to be available by phone for the hour or two hours you plan on being at the title company’s office signing papers.
Real Estate Agent
By this time in the transaction, the real estate agent has done everything they can to help you with the transaction. Nevertheless, they know the most about the details agreed upon in the transaction and should be there to quickly resolve any questions or miscommunication that could arise.
Lastly, make sure you understand and feel comfortable with all the documents you sign. While it can be overwhelming to sign all of those documents, remember, you will be legally bound to them.
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Sample Closing Statement
Here is an idea of what a Sample Settlement Statement could look like. Have your title agent go over the statement and use your Realtor and loan officer to answer any additional questions.
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RESPA and Closing
RESPA is the government entity that looks over the closing procedures. Here is an insight to what RESPA looks for and why everyone in the real estate industry is cautious not to cross the line with RESPA.
RESPA Background
RESPA was enacted to protect consumers from abusive lending practices. As a result, most of the regulations and oversight that RESPA is involved with deal with money and disclosure.
Controlled Business Agreements
As the real estate industry becomes more and more of a one stop shopping transaction, the likelihood for kickbacks and referral fees increases. RESPA allows business agreements between businesses in different aspects of real estate. However the buyer must be notified of the relationship and if each party benefits from the other party’s relationship.
Disclosure Requirements
Special Information Booklet
- Lenders must provide a copy of a special information HUD booklet to every person from whom they receive or for whom they prepare a loan application. The booklet provides the borrower with general information about settlement costs.
Good-Faith Estimate of Settlement Costs
- No later than three business days after receiving a loan application, the lender must provide the borrower a good-faith estimate of the settlement costs the borrower is likely to incur. The estimates may be either specific or a range of costs. Sample Good Faith Estimate – GFE. This sample gives you an idea of what the GFE could look like and also points out some excellent questions to ask if your loan officer has not covered them.
Uniform Settlement Statement (HUD-1 Form)
- RESPA requires a special HUD form to be completed to itemize all charges to be paid by a borrower and seller in connection with the settlement. The settlement statement must be made available to the borrower before the close of escrow.
Kickbacks and Referral Fees
RESPA prohibits the payment of kickbacks or unearned fees, in any real estate service. It also prohibits referral fees when no services are actually rendered. The payment or receipt of a fee, kickback or anything of value for referrals for settlement services include activities such as: mortgage loans, title searches attorney services, title insurance, surveys, credit reports, and appraisals.
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Closing Table Resources
Here is a list of websites and documents to assist in further research. This list will be updated periodically, if don’t see what you are looking for on this list, send us an email or leave a comment and we’ll find it for you.
Websites
Related posts:
- What Closing Costs Do You Have to Pay for at the Closing Table?
- The Disappearing Time Table for the Home Buyer Tax Credit
- Survey Results: Downpayment and Closing Costs are the Biggest Obstacles
- The 8 Phases of Stress for Homebuyers
- Title and Deed – What to Know
Would like to link to this post and perhaps re publish parts of it if that is ok?
thanks
Art