Closing day marks the time when all accounts are settled and title to the house passes to the buyer. In one simultaneous procedure:
- The seller receives the price of the house and retires the old loan (unless the buyer is assuming the loan).
- The sales agent receives a commission. (The commission may be split between a listing broker and a selling broker.)
- All fees are paid. These include title insurance premiums, survey costs, and fees for filing documents. They may also include attorneys' fees and inspectors' charges if these have not been paid previously.
- The lender supplies the proceeds from the loan and collects origination fees and discount points. This is the first day of the new loan which from then on begins to accrue interest. The lender usually requires interest be paid at the closing to cover the period from closing day to the end of the month. All other interest payments are made at the end of each month.
- The buyer receives documents which signify the passage of ownership of the property from the seller to the buyer.
The closing marks the end of all negotiations and contingencies associated with the transaction. For that reason, it is important that all parties clear all these matters before the closing day. If not, the closing may be delayed, which can be very inconvenient for both seller and buyer.
Reasons For A Delayed Closing
The most common reasons that closings do not proceed as scheduled are connected with failures to make the necessary preparations. Sometimes the seller has a problem clearing a title. There may be existing liens, claims filed by those with partial interests in the property, or an ex spouse with community property rights that complicate the process. If the property becomes involved in a lawsuit, the title may be impossible to clear for several years. Problems also occur when the buyer has trouble arranging a mortgage loan. The appraisal may be too low to justify the loan amount requested, or the buyer may not qualify. When loan activity is heavy, approval times can be delayed because the lender's staff is inadequate.
The seller can entertain contingent contracts from other buyers after the first contract is signed. These contracts have no effect on the original contract as long as the deadlines on contingencies are not exceeded. However, if the buyer turned down for a mortgage, the house may be sold to another buyer before the first buyer can reapply.
Taking Steps to Prepare for a Closing
Here is a good way that you, as the buyer, can prepare for a closing. Assume you have a mortgage commitment already approved. The following steps should be followed.
- Get a good estimate of the cash required at closing. The title company handling the closing can provide a reasonably accurate accounting. Make sure you can provide a certified check for your share of expenses on closing day.
- Have all inspections made and make sure all required repairs are completed. Unless agreed to in writing, the seller has no responsibility for repairs after closing. If any condition of the property is misrepresented, however, you still have remedies against the seller. Basically, the property is yours as is after closing.
- You may want to get an attorney to review all documents and represent you at the closing. Arrange for this beforehand.
- Arrange for a hazard insurance policy to be written on the property. The lender will require the house to be insured for at least the amount of the loan. At closing you will have to pay the first year's premium plus an amount to start the escrow account (usually two or three months prorated premium).
- Make sure the survey is completed as required by the lender.
If it looks as if the closing will be delayed due to some problem in getting everything done, it may be possible to move the closing date. The date stated in the sales contract is understood to be an approximation. Unless the market is unusually active, with many buyers vying for each home, the seller should be willing to comply. If the closing is delayed, you may be caught without a place to move into after vacating your previous residence. You may arrange with the seller to lease the new house on a temporary basis prior to closing if the home will be vacant during that time.
Common Documents Signed At A Closing
At closing, you will sign several documents. The following are most common:
- Settlement statement. This shows the closing costs charged to each party in an itemized list. Of special note are the various prorated expenses. Property taxes, insurance premiums and other recurring expenses are generally paid once a year. If already paid by the seller, you are charged a proportional amount based on the remaining number of days in the year. If due after the closing, you will be given a credit for the days in which the seller owned the home.
- Loan disclosure. This gives you certain information about the mortgage loan. The Annual Percentage Rate (APR) of interest is calculated. This amount takes into account the discount points paid at closing assuming their costs are spread out over the term of the loan. Also shown is the total amount of interest paid over the loan term, the monthly payment of interest and principal, the number of payments over the term and the date at which the first payment is due.
- Mortgage note. This signifies your responsibility to pay back the amount borrowed on the mortgage.
- Deed of trust (security deed, bond, etc.) This pledges the house as security for the mortgage loan.
- Deed. This transfers the title of the property to your name. In most cases you will receive a general warranty deed, meaning that the seller guarantees that the title is clear and will be clear in the future (not clouded by prior claims). In some cases, the seller may give a special warranty deed, which guarantees that any claims arising during the seller's ownership have been settled. Any additional liability stemming from a warranty deed are assumed by the title company.
- Title policy. This provides protection should legitimate claims to the title of the property arise.
- Additional documents. You may request copies of other documents associated with the transaction. These include the survey map, the appraisal, and any inspection certificates prepared. These are desirable to have for future reference.
Source: Barron's Real Estate Handbook, Third Edition