Closing on a House – Process, Mortgage Documents & Procedures
By Brian Martucci
Whether you’re a first-time homebuyer, looking to purchase a second home, or downsizing after a life change, you can’t move into your new house until you officially close on the property. Your closing day – the day you meet with the seller, your real estate agents, title or escrow agents, and possibly other parties involved in the transaction – is the day the property officially becomes yours.
However, the closing process begins right after the seller accepts your purchase offer. That’s typically 30 to 60 days before your actual closing date – assuming a loan underwriting snag, low appraisal, or major defect discovered during a routine home inspection doesn’t delay the deal. During this period, the sale of your home is said to be “pending.” If it’s customary in your market to make a substantial deposit (up to 10% of the agreed purchase price, in some cases) into an escrow account once your offer is accepted, you may also refer to the closing process as the escrow period – as in, “the home we’re buying is in escrow until our closing day.”
No matter what you call it, a lot needs to happen between the day the seller accepts your purchase offer and the day you sit down to make the transaction official. Here’s a look at the general sequence of events that occur during the residential real estate closing process, what and how much you can expect to pay before and on your closing day, and the documents and disclosures you need to understand and sign to make your real estate transaction official.
Key Closing Process Milestones
It’s important to remember that the customs and legal requirements governing real estate transactions vary substantially from place to place. While the following is a general timeline and description of what you can expect (and when) between the day you submit your purchase offer and the day you close on the property, your actual experience may vary. To learn more about how the process works in your particular market, consult an impartial real estate professional with experience in the area.
1. Accepted Purchase Offer
The closing process officially begins once the seller accepts, signs, and returns your purchase offer (also known as a purchase agreement). In most cases, the seller then deposits the buyer’s earnest money check – usually 0.5% to 2% of the purchase price – into an escrow account.
Customarily, the purchase agreement can be amended to reflect last-minute negotiations or contingencies, such as a problem uncovered during the home inspection, without sabotaging the deal. However, all parties involved in the transaction – the buyer and seller, their agents, the lender, the title or escrow agent, and possibly the buyer’s and seller’s attorneys – begin the closing process under the assumption that the purchase agreement is final.
In some states and markets, you’re required to make a 5% to 10% escrow deposit (toward your down payment and/or closing costs) shortly after the seller accepts your offer. Buyers working with legal representatives can typically wait until after their attorneys review the purchase agreement to make their escrow deposits.
If you’re not sure whether an escrow deposit is required in your market, ask your real estate agent far enough ahead of time to ensure that you have enough liquid funds in place to clear the deposit.
2. Buyer-Ordered Home Inspection
Within a few days of the seller’s acceptance of your purchase offer, you need to schedule a home inspection with a professional inspector. The goal of a home inspection is to look for minor and major defects, such as structural problems, nonworking appliances, and elements that may violate local building codes.
Many lenders require this as a condition of underwriting your mortgage loan. Even if yours doesn’t, there’s little downside to getting a thorough look at the home you’re about to buy. If the inspection uncovers a major problem that needs to be fixed before closing (or results in a reduction in the agreed purchase price), the standard $300 to $500 inspection fee will seem like a bargain.
3. Loan Origination and Underwriting
Once the seller accepts your offer, send it to your lender. At this point, your lender begins the time-consuming (and costly) process of originating and underwriting your loan.
Unless you’re buying an older home with a lot of physical defects, this is the part of the closing process most likely to produce delays or fatal errors that scuttle the deal entirely – particularly if you have an uneven credit profile or volatile income stream.
Originating and underwriting a loan involves a lot of work on your lender’s behalf. From your perspective, however, it basically boils down to one question: Will you, in the lender’s expert opinion, make good on your promise to repay the many thousands of dollars you’re asking it to lend you?
Though every lender is different, most subject mortgage applicants to intense scrutiny. Your lender is likely to send you a mortgage application totaling 30 or 40 pages and including forms such as a request to release your credit report from one or more credit reporting bureaus, requests for prior-year tax transcripts, and information about your previous places of residence.
Along with the application, your lender is likely to request proof of income and assets, such as the following:
Your most recent tax returns (one or two years)
Your most recent pay stubs (at least the past two)
Your most recent W-2 statements (one or two years)
Your most recent bank statements (one to three months)
If you received preapproval for your mortgage loan, which typically requires a credit check, your lender is likely to set (or “lock”) your loan’s rate around the time it sends out the application materials. If you’re applying for an adjustable-rate mortgage (ARM) or another type of loan without a fixed rate for the entire term, the lock may only apply to the initial rate.
Rates are typically locked at a level that factors in prevailing interest rates at the time, plus the borrower’s credit risk. The lower your credit risk, the lower your locked rate is likely to be.
If you’re not preapproved, your lender is likely to wait for the results of your application’s credit pull to lock your rate. This can occur at any time between your application date and a week before closing. In any case, the rate lock is good only for a fixed length of time – 30 to 60 days is typical.
Using the locked rate (or, if not locked, the lender’s best guess of your initial rate), the lender creates a loan estimate for you to review, sign, and return. The loan estimate is a plain-language document that summarizes what you can expect to pay for your mortgage and closing, and when.
It includes the following information:
Loan Identification. This includes the loan’s unique identifying number, type (fixed-rate, adjustable-rate), term length (15 years, 30 years, 5/1), purpose (purchase, refinance), and rate lock duration.
Loan Terms. Outlines your loan’s principal, interest rate or rate range, monthly principal and interest payments, prepayment penalty (if applicable), and balloon payment (if applicable).
Projected Payments. Adds up the components of your total monthly payment, including estimated insurance, taxes, and principal and interest payments. May also specify how taxes and insurance are to be paid – for instance, out of an escrow account.
Closing Costs. Includes a detailed accounting of your estimated closing costs and total cash to close (which includes your down payment). Also indicates which closing costs you’re permitted to shop for, such as title insurance, and which you’re not permitted to shop for, such as your lender’s appraiser.
Comparisons. Contains a snapshot of how much you can expect to pay in principal and interest during the next five years, your loan’s APR, and total interest percentage – the ratio of your total interest payment to your total loan amount. This information is useful for comparing your loan against other lenders’ loans.
Other Considerations. Includes important caveats and information, such as whether the loan can be assumed (transferred to a future buyer without changing the terms), whether the lender plans to transfer your loan to a servicing company, and penalties for late payment.
Prior to October 2015, most lenders used good faith estimate (GFE) documents to provide loan and closing cost estimates. GFEs and loan estimates contain similar information, but GFEs are formatted differently and have fewer plain-language explanations. Once the loan estimate is in your hands, your lender may set a preliminary closing date – contingent on a smooth underwriting, origination, and title search.
mortgage loan application
4. Lender Appraisal
Lenders protect their investments, or at least reduce the likelihood of losses, by commissioning an appraisal at some point during the underwriting process. Buyers usually pay the appraisal fee, either on or before the appraisal date, or on the closing date. The appraisal fee is usually about the same as the home inspection fee.
If your appraiser determines that your home is worth at least as much as you agreed to pay for it, there’s no need to worry. However, if the appraisal comes in low – below the accepted purchase price – the lender will only agree to finance an amount equal to the appraised value. A low appraisal usually requires the buyer and seller to renegotiate the purchase price and amend the purchase agreement, potentially delaying the deal.
5. Getting Homeowners and Title Insurance
Most lenders require buyers to provide proof of homeowners insurance as a condition of loan approval, or at least prior to closing. To ensure that you get a fairly priced policy that meets your and your lender’s needs, start shopping around for homeowners coverage early in the closing process. You don’t necessarily have to pay for the first year right away, though that’s certainly an option – most insurance companies allow you to bundle your first year’s premium with the closing costs to be paid on your closing date.
Even if your lender doesn’t require it, it’s also prudent to purchase a buyer’s title insurance policy. Title insurance covers the cost of resolving any defects with the property’s title, such as unpaid tax or contractor liens, and protects your equity against claims that may arise in the future.
If you’re willing to use the same company your lender is using for its title policy, simply tell your loan processor that you want a buyer’s policy, and both policies can be bundled into your closing costs. If you want to shop around for a better buyer’s policy, your insurer may require you to pay for the policy upfront. Regardless of whether you pay for both policies at closing or pay for your buyer’s policy upfront and the lender’s policy at closing, you can expect to make a total combined outlay of $1,000 (on average), depending on your market and home value.
6. Loan Approval
As underwriting can take a month or longer, your loan approval typically comes through toward the end of the closing process. This is the last major piece that needs to fall into place for your closing to proceed as scheduled.
7. Closing Notice & Disclosures
Once all the pieces are in place for your closing, your title or escrow agent (or attorney) must send you a formal closing notice with the time, date, participating real estate agents (buyer’s and seller’s) and location of the closing, which is typically the title or escrow agent’s office, or the office of an attorney involved in the transaction. The notice also explains what you need to bring to the event, usually including the following:
Both buyers (if a married couple), or notarized power of attorney documentation permitting the present buyer to sign for the non-present one
Photo ID (passport or state-issued ID)
List of your residences over the past 10 years
Sufficient payment to cover closing costs (usually a bank check or wire transfer)
Your title or escrow agent is also required to send an official closing disclosure at least three business days prior to the closing date. Before October 2015, the HUD-1 or “settlement statement” served the same purpose as the closing disclosure.
Like the loan estimate, the closing disclosure is a plain-language document that outlines all of your actual financial obligations related to the transaction – your actual closing costs, ongoing tax and insurance obligations, and a breakdown of your mortgage loan. It roughly follows the template of the loan estimate, though it’s generally more detailed and often contains accounting line items or disclosures and caveats that weren’t present in the estimate.
Review Your Closing Disclosure Carefully
Once you receive your closing disclosure, review it carefully to ensure that the outlined obligations are roughly in line with those described in your loan estimate. Also, make sure that the terms of your mortgage loan are as expected – for instance, that your rate or rate structure hasn’t changed from the loan estimate.
If your closing costs vary significantly from the estimates or your mortgage loan is different than originally described, your lender or title or escrow agent could be breaking the law. That’s why it’s a good idea – and often financially worthwhile – to retain an attorney for the duration of the closing process.
Common Closing Costs
Though buyers are expected to pay all closing costs in the absence of other arrangements, buyers and sellers do often agree to split closing costs – especially in buyer’s markets. That agreement is typically outlined in the accepted purchase agreement and may be amended at any time prior to closing. In many cases, the parties don’t get into the specifics of who pays which closing costs – they simply agree upon a ratio, such as “seller pays 40% and buyer pays 60%,” or agree that one party pays a fixed sum toward closing and the other picks up the remainder.
In many cases, closing costs are paid by bank check or wire transfer. A bank check is generally a better deal, as they rarely cost more than $1 or $2, while banks often charge $10 or more for a same-day wire transfer. If your title or escrow agent absolutely requires a wire transfer, make sure they send you complete instructions (including receiving account number and bank routing number) with the closing notice.
No matter how you negotiate and execute payment, you can expect to pay the following costs at closing. Some may require action on your part, such as setting up a homeowners insurance policy, prior to closing day. Others simply appear as line items on your closing disclosure, and don’t require direct action.
Home Inspection and Appraisal. If these haven’t been paid upfront, they’re added to your closing costs. Between the two services, expect to pay a total of $600 to $1,000.
Loan Origination and Underwriting Fees. These fees cover the cost of your mortgage loan origination and underwriting services, not including credit reports and other fees. Most origination fees are calculated as a percentage of the total purchase price, typically ranging from 0.5% to 1.5%. These percentages are sometimes referred to as “points” – for instance, a 1% origination fee would be one point. Underwriting fees can be charged as a percentage of the purchase price or a flat fee. In either case, underwriting usually costs less than 1% of the home’s purchase price. Note that some mortgage loans, known as “no cost” or “no fee” loans, don’t have origination or underwriting fees. However, “no cost” loans generally have higher interest rates than comparable traditional loans.
Credit Report. Buyers generally have to pay for their lender’s credit checks and reports – anywhere from $20 to $60, depending on how many the lender runs and with which reporting bureaus.
Flood Certification. This is a small fee – usually around $20 – that covers the cost of checking your home’s location relative to local flood hazard maps. Flood certification is critical if you end up needing flood insurance. In some areas, you may be required to pay a one-time flood monitoring fee (often between $25 and $50) as well.
First Month’s Interest. Many lenders require advance payment of the mortgage interest set to accrue between the closing date and the date of the first payment. Note that if you close in the middle of the month, you likely won’t have to make a principal payment until the beginning of the month after next, assuming your payments are due on the first of the month. For instance, my wife and I closed on a house in early August and didn’t make our first principal payment until the first of October – but at closing, we did have to pay the interest set to accrue in August.
Initial Escrow Deposit. Lenders require an advance deposit, into a secure escrow account, to cover tax and insurance obligations set to accrue between closing and their respective payment due dates. In practice, this means you need to deposit about a full year’s worth of homeowners insurance premiums – unless you paid in advance – and anywhere from 1 to 12 months of property tax premiums. Though property taxes are typically paid every six months, lenders are reluctant to start a new escrow account with a balance barely sufficient to clear the first tax payment. My wife and I ended up depositing enough to cover seven months’ worth of property taxes, for instance.
Escrow Buffer. Many lenders require buyers to deposit an additional buffer to cover upward adjustments to taxes and insurance premiums in the short-term, and to reduce the likelihood of a late payment causing a negative escrow balance. The buffer’s size is typically a function of monthly tax and insurance obligations – ours was about twice the size of our monthly obligations.
Homeowners Association Dues. If you live in a community served by a homeowners association (common with condos), you must pay HOA dues monthly, annually, or biannually. Some lenders bundle your dues into your escrow account and pay them on your behalf, as with your taxes and insurance premiums. If this is the case for your HOA, you’re likely to have to pay your HOA dues through the end of the first payment period (possibly up to a year after closing). In other cases, whether due to lender or HOA policy, HOA dues aren’t included in escrow and must be paid separately.
Title/Escrow Services and Insurance. The cost of lender’s and buyer’s (if purchased) title insurance is bundled into this category – an average of $1,000 covers both policies, but is highly variable depending on location and property value. This category also includes the cost of additional title work executed by your title company, escrow agent, or attorney (depending on your jurisdiction) – another highly variable cost that’s likely to be higher if you use a licensed attorney. Finally, this category usually includes a settlement fee, which basically pays for your title or escrow agent’s time on closing day, and typically ranges from $200 to $400.
Recording Fee. The city or county office responsible for recording real estate transfers in your area charges a fee for the work involved. Fees vary widely from place to place and may depend on the value or size of your property.
Transfer Taxes. Your local and state governments likely also levy transfer taxes on real estate transactions, based on the value of the property and possibly the parcel’s zoning designation. Total state and local transfer taxes on residential real estate usually range from the high three-figure to mid-four-figure range.
Broker Fee. Buyers’ agents take their commission from seller proceeds, meaning buyers don’t pay them directly. However, agents’ employers – realty groups or brokerages – often charge relatively small service or referral fees directly to the buyer. These can range from nominal sums ($100 or less) to $500 or more.
Depending on where your transaction takes place, your closing fees could vary significantly from those described here. To get an even better read on what to expect, talk to a trusted, impartial real estate professional or attorney in your area.
mortgage broker meeting with a couple
What to Expect on Closing Day
On closing day, the house you’ve agreed to buy becomes the house you proudly own. However, there’s plenty to do before you can sashay through the front door and truly make it your home.
Your final walk-through is your last opportunity to make sure the house remains in good condition – or, if you’re buying a fixer-upper, in the condition you agreed to purchase it in. In most transactions, the final walk-through can occur at any point within 24 hours of the scheduled closing time.
During your final walk-through, make sure of the following:
All requested repairs have been made
All light fixtures and outlets are working
Home mechanicals (heating, air conditioning, water heater) are working
Faucets and plumbing fixtures are functional
Kitchen and laundry appliances are hooked up and functional
There hasn’t been any new damage or wear (such as holes in the wall, missing floorboards, damaged roof shingles, and so on) since your home inspection
The home is clean and tidy inside and out
The seller’s personal possessions are gone or in the process of being moved out
If you encounter any unexpected problems during the walk-through, it’s not too late to make things right. Contact your real estate agent or closing agent to discuss your options. In most cases, the seller will agree to pay for the necessary repairs or cleaning tasks, even if it means delaying the closing by a few days.
At Closing – Signing Key Closing Documents
At the appointed closing time, you sit down and sign numerous documents with your title or escrow agent, real estate agent, and possibly attorney. Sellers bring their counterparts as well, though sellers don’t have quite as much paperwork to sign and therefore often don’t show up until you’re well into your signing odyssey.
Given the gravity of the transaction, and the amount of money involved, take as much time as you need to read and understand everything you’re signing. Some closing documents are written in dense legalese, so ask your attorney or real estate agent if you’re not clear on anything. Don’t let the title or escrow agent rush you – they’ve done hundreds of closings in the past, and are likely more concerned about making their next appointment or getting out of the office on time than ensuring that you’re 100% on the up and up.
What follows are the most important documents to read and sign during closing:
Promissory Note. This represents your binding commitment to repay your mortgage loan. It includes the total amount you owe on your loan, your loan’s interest rate, your monthly payment dates, the duration (term) of your loan, and acceptable payment methods (with a physical address to send personal checks). If you have an ARM or variable-rate mortgage, your promissory note will also have a detailed explanation of how, when, and by how much your rate and payments can change.
Mortgage/Deed of Trust. Also known as the security instrument, the mortgage (or deed of trust) is a contract that gives your lender the right to seize your property through foreclosure if you fail to pay your mortgage as agreed. The mortgage reiterates the information contained in the promissory note, but also goes into greater depth about your rights and responsibilities as a homeowner and borrower – for instance, describing how you are to occupy the property (as a primary residence, rental property, and so forth) and outlining how and when your lender can declare you in default.
Initial Escrow Disclosure. This describes how your lender plans to distribute the money in your escrow account. It includes a breakout of your principal-plus-interest and escrow payments, plus 12 months of expected monthly escrow balances. The escrow disclosure also shows when and how much each escrow item (property taxes, insurance, and possibly PMI and HOA dues) is to be paid.
Additional Closing Documents to Read and Sign
The closing process involves reading and signing a slew of additional documents as well. Again, take as much time as you need to read through and understand each item, asking questions if necessary. After all, one thing the closing process doesn’t include is the chance for a do-over.
These documents are commonplace at closing, but your transaction may involve a somewhat different mix based on the rules in your area and the type of home you’re buying.
Signature/Name Affidavit. This is basically the signature proof that the lender, loan servicer, government entities, and any other relevant parties use to determine the legitimacy of your signature on all other closing documents. It’s particularly useful during mortgage fraud investigations.
Certificate of Occupancy/Occupancy Statement. If you’re buying a new construction home, you need to sign a certificate of occupancy indicating that the home is ready and safe for occupants. Technically, a missing certificate of occupancy can delay the closing process. If you’re buying an existing home, you need to sign an occupancy statement outlining the home’s purpose, how soon you’re required to move in, and what can happen if you use the home in a manner inconsistent with the stated purpose (for instance, foreclosure).
First Payment Notification. This restates the amount (with an escrow, principal, and interest breakdown) and date of your first mortgage payment. It also includes information about how to make your payment, including the servicer’s physical and web address.
Seller/Lender Concessions. This document outlines which closing costs, if any, the seller and lender pay.
Servicing Disclosure. This identifies your loan’s servicer – either the originating lender or a company that subsequently purchases the mortgage – and confirms your understanding that the loan can be transferred in the future.
Private Mortgage Insurance Disclosure. If your loan-to-value ratio (LTV) is greater than 80%, your lender likely requires private mortgage insurance (PMI). This disclosure defines PMI and describes your relevant rights and responsibilities, how and when it’s paid (typically monthly, into escrow), and when you can request that it be dropped (typically after passing the 80% LTV threshold).
Flood Hazard Statement. This confirms that your home is or isn’t in a special flood hazard zone. If your home is in a flood zone, it likely requires flood insurance.
Appraisal Acknowledgement. This confirms that you have a right to receive a copy of your home’s appraisal. It’s often included in the mortgage application as well.
Equal Credit Opportunity Act Disclosure. This federally mandated form reiterates that your loan can’t be denied based on any protected status, such as race or creed. It’s often included in the mortgage application.
Truth-in-Lending Disclosure. This is another federally mandated document that spells out the characteristics of your mortgage loan, your monthly payments, and the total amount (including principal and interest) you can expect to pay over the life of your loan.
Mortgage Fraud Statements. This document defines the various forms of mortgage fraud, lists potential penalties for those found guilty of mortgage fraud, and outlines the steps taken by the U.S. government to investigate and prosecute people suspected of fraud.
Homeowners Association Covenants and Agreements. Contracts applying to your membership in a homeowners association sometimes appear at closing, though they’re often dealt with prior to closing day too.
Hazard Disclosures. Although the purchase agreement typically includes all necessary hazard disclosures for your home, don’t be surprised to see the same, or additional, ones in your closing packet. Common disclosures cover lead paint (for homes built before 1978), radon, and subterranean wells.
young couple moving into new house
My wife and I closed on our first house in the summer of 2015. Our closing day was a whirlwind: a hectic final walk-through; a traffic-choked drive to the title company’s distant headquarters; an endless procession of forms and disclosures to be signed and initialed; the confusing jumble of keys, handwritten notes of explanation, and last-minute advice from the seller – it was a lot to process.
And yet, closing day was just the start of a lengthy moving and settling period. All we can hope is that we channel the same diligence, organization, and raw energy that got us through to closing day into the hard, often tedious work required to turn an ordinary house into an extraordinary home. If you’re in the process of buying a home, remember that it’s perfectly fine to celebrate on closing day – as long as you get right back to work afterward.
Do you have any advice about the closing process?