Closing, sometimes called “going to settlement,” on a home is like the part of the wedding ceremony where the bride and groom exchange vows. It’s where you and the seller seal the deal! Closing on a home loan is when you sign all the papers transferring ownership of the property from the seller to the buyer (you!); obtain insurance and write checks to pay the remainder of the down payment and closing costs. This is where all of your work is about to pay off!
But before you get too excited, there’s still a lot that has to take place before you can close on your home. Most likely the closing will be held at the office of a title company or a title attorney. If you and/or your seller are using a Realtor he/she will set up the closing time and location.
There are three last hurdles to clear before closing: financing, obtaining insurance and contract fulfillment.
Unless you’re paying cash outright to buy your home you’re probably going to get a mortgage. If you have already made an offer on a home you have begun the mortgage process. Before you can finalize the home sale you’ll need to make sure that your lender has approved your home loan, which means that the bank has agreed to lend you the money you need to pay for the home. Your lender needs to have completed your loan package and sent it to your closing office. In addition to having your mortgage loan approved, you’ll have two other major categories of expenses to pay at closing: the balance of your down payment and closing costs.
Balance of your Down Payment
At closing you’ll have to pay the remainder of the down payment. Remember that whatever you put down as an earnest money deposit will be applied toward your down payment amount. You’ll need a cashier’s check or certified check (which you can get from your bank) for the down payment.
Your lender, or your Realtor will tell you how much money you’ll need to bring to closing. Remember, closing costs can add up to nearly 3 percent of the sales price of the home so be ready to potentially have to write a large check. When you get to closing you’ll be handed something called a “Settlement Statement.” This is a standard form that details the costs to be paid by the buyer and the seller.
Closing costs are broken down by category:
- Items Payable in Connection with the Loan – these are fees for services provided in connection with preparing your loan for closing, such as points, processing fees, credit report fee, appraisal fee, and loan origination fee.
- Items Required By the Lender to Be Paid in Advance – such as interest on the loan, mortgage insurance and county taxes.
- Reserves Deposited with Lender – hazard and mortgage insurance, city and county taxes, assessments
- Title Charges – settlement or closing fee, title search, document preparation, notary fees, attorney’s fees, lenders’ and owners’ coverage
- Government Recording and Transfer Charges – recording fees, city/county tax stamps, grantor’s tax and re-recording deed fee
- Additional Settlement Charges – such as survey and pest inspection.
Before you can close on your loan you’ll be required to obtain two types of insurance – homeowner’s insurance and title insurance.
(1) Homeowners’ Insurance
Homeowner’s insurance protects your home and possessions in the event of an unfortunate event or accident. There are two components to homeowner’s insurance – casualty or property insurance and liability insurance.
- Casualty/property insurance – covers your personal property (home, possessions) in the event of a disaster or accident
- Liability insurance – protects you in the event that something happens to a person while they’re on your property and they choose to sue you.
You can choose from the one basic policy (called HO-1) or from 5 others which offer several “add-ons” such as coverage in the event of building collapse, renter’s insurance, condo or co-op insurance. Your lender will let you know the minimum amount of insurance that you’re required to carry in order to close on your loan.
Your lender will require you to prepay the entire first year of the insurance policy and perhaps a few initial months at closing to cover any possible raises in the premium or other fees charged by the insurance company. Then your lender will include your insurance payment in with your monthly mortgage payment. That money will be put into a special account called an “escrow account.” That money will be paid out to the insurance company at the end of the year by your lender.
(2) Title Insurance
Your lender requires title insurance to make sure that when you close on the home you own the home free and clear. A title search will make sure that no one else can lay legal claim to the property and that there are no outstanding taxes or personal property issues with the home. The insurance covers the lender in case a problem does arise with legal ownership of the property.