Buying a home? Here's what to expect at the closing
Closing on a house marks the beginning of a new chapter, but the final step before becoming a homeowner includes lots of documents, signatures and fees. Here's what to expect in the mortgage closing process, and how long it will take to make those keys yours.
What are closing costs?
Closing costs are the fees and expenses you must pay before becoming the legal owner of a house, condo or townhome. According to Freddie Mac, you can expect to pay 2% to 5% of the mortgage loan in closing costs. These can include:
• Origination fee.
• Underwriting fee.
• Appraisal fee.
• Credit report fee.
• Title search fee. Whether you are purchasing a new home or refinancing an existing mortgage, closing costs need to be paid.
How much does it cost?
Closing costs are typically thousands of dollars and can vary widely by state. For example, in Indiana, the average closing costs (excluding taxes) in 2019 were $1,909, while in New York, those costs averaged $5,612, ClosingCorp data shows. Nationally, the average closing costs in 2019 were $3,339 excluding taxes, and $5,749 with taxes, according to ClosingCorp.
Some states and localities charge mortgage and transfer taxes that increase the costs in that state, says Jared Maxwell, vice president of consumer direct lending at Embrace Home Loans in Middletown, Rhode Island. In New York, for instance, when factoring in taxes, the average closing costs in 2019 shot up to
$12,847, ClosingCorp reports.
Lenders are required to provide an estimate of your closing costs early in the loan process, and, closer to the closing date, the amount you can expect to bring to closing.
Closing costs can be rolled into the mortgage amount (known as a no-closing cost mortgage) or paid upfront to avoid paying additional interest. If you roll the closing costs into the mortgage, it's important to note that, while it helps avoid handing over additional cash, the costs will incur interest over the long term.
How long does it take?
As of May 2020, the average time it takes for homebuyers to close on a home purchase is 47 days, and 44 days for refinancing, Ellie Mae reports.
Applying for a mortgage preapproval before you start shopping for a home can help you close sooner, since a few of the verification processes will be completed ahead of time, says John Schleck, a senior vice president in consumer lending at Bank of America in Charlotte, North Carolina.
A mortgage preapproval is much more meaningful than the “You're preapproved!” messages you might see on a credit card promotion. With a mortgage preapproval letter, you can show the seller that your lender has reviewed your finances, conducted a hard credit inquiry and determined how much money you can have for a home purchase.
While the preapproval can save some time, closing on a house can still be a lengthy process overall, however. Planning is crucial, especially if you are currently renting a home or an apartment and your lease is almost up. Renters should aim to close toward the middle to end of the month, Maxwell says.
“This will help prevent paying your final month of rent for an apartment or house you aren't using,” Maxwell says.
The homebuyer, though, isn't the only party that dictates the timeline. If the seller is unable to vacate the home quickly, the closing process may drag on longer.
“There are certainly instances where lenders can close in as fast as 15 to 20 days, but this assumes documents are returned quickly and there are no unforeseen hurdles that occur with the condition of the home or the title report,” Maxwell says.
How to prepare
Homeowners can prepare for the closing to help speed the process. Buyers should obtain beforehand all the documents that the loan officer will request, Maxwell says.
They will also want to make sure nothing in their finances changes before closing day, because the lender may (and often does) make last-minute checks of vital information. Changing jobs is one of the mistakes to avoid in the closing process. If that happens, the lender will need to verify the new employer, creating a hiccup in the final stage.
In addition, “you should refrain from making any large undocumented deposits such as cash deposits and opening any new credit card accounts,” Maxwell says.
What you will need
At the closing, you will have two primary responsibilities:
• Sign legal documents.
This process falls into two categories: the agreement between you and your lender regarding the terms and conditions of the mortgage, and the agreement between you and the seller transferring ownership of the property. Be sure to read all documents carefully before signing them. Do not sign forms with blank lines or spaces.
• Pay closing costs and escrow items.
There are numerous fees associated with getting a mortgage and transferring property ownership. The funds are usually a certified/ cashier's check made out to the escrow company or a wire transfer of funds to the banking institution. Personal checks are often not allowed.
Be sure to find out what type of identification is required before you arrive. Usually, only one type of identification is needed, though some companies require two. Government-issued identification, such as a driver's license or passports, is normally accepted.
Who is present
Closing procedures vary from state to state and even county to county, but the following parties will generally be present at the closing, (sometimes called the settlement meeting):
• Closing agent, who might work for the lender or the title company
• Attorney (The closing agent might be an attorney representing you or the lender. Both sides may have attorneys. It's always a good idea to have an attorney present who represents you and only your interests.)
• Title company representative, who provides written evidence of the ownership of the property.
• Home seller.
• Seller's real estate agent.
• You, also known as the mortgagor.
• Lender, also known as the mortgagee.
The closing agent conducts the settlement meeting and makes sure that all documents are signed and recorded and that closing fees and escrow payments are paid and properly distributed.
What to expect
There are three main documents to sign during closing. The first is a deed of trust or mortgage, which is a document that puts a lien on your property as collateral for your loan, Schleck says. The second document is the promissory note, a legal agreement to pay the lender, including when you will make your payments and where you will send them. The last is the closing disclosure, an itemized list of your final credits and charges.
At the closing, you will receive the following key documents:
• Loan estimate: This document contains important information about your loan, including terms, interest rate and closing costs. Make sure all the information is correct, including the spelling of your name.
• The closing disclosure: Like the loan estimate, the closing disclosure outlines details of your mortgage. You should receive this form at least three days before closing. This window of time gives you a chance to compare what's on the loan estimate to the closing disclosure.
• The initial escrow statement: This form contains any payments the lender will pay from your escrow account during the first year of your mortgage. These charges include taxes and insurance.
• Mortgage note: This document states your promise to repay the mortgage. It indicates the amount and terms of the loan and what the lender can do if you fail to make payments.
• Mortgage or deed of trust: This document secures the note and gives your lender a claim against the home if you fail to live up to the terms of the mortgage note.
• Certificate of occupancy: If you are buying a newly constructed house, you need this legal document to move in.
The buyer will also conduct a final walkthrough with their Realtor to confirm the home is in the condition promised.
In addition, you may receive an offer to purchase a home warranty. These plans vary, but they all aim to offer some sort of coverage for the bigger systems that are key to making your home comfortable — the HVAC system, water heater, plumbing and major appliances. If one of these items breaks due to typical wear and tear, the warranty may help pay for repair or replacement.
However, it's important to note that warranties may offer limited protection and payouts, so be sure to assess this option carefully.
Possible delays
Many factors can cause delays to the closing. One common issue that can cause a delay is if there is a repair that the appraiser believes needs to be addressed, Maxwell says.
Another factor is a lien on the title that the seller is unaware of that must be satisfied before the closing can take place.
The homeowner can also cause delays if they lack some of the documents that the lender needs to conduct the closing.
In peak real estate season, there can also be delays simply due to volume.
“Throughout the mortgage process, it's important to complete applications accurately and upload documents in a timely manner to ensure things move smoothly,” recommends Schleck. “Depending on market activity, there may be some delays as third-party providers such as appraisers tend to get very busy during peak homebuying season.”