Closing on a home is both a celebratory and a stressful moment, especially for first time homebuyers. Often, they’ve pored over home buying tips related to finding the perfect home and placing an offer. Unfortunately, those home buying tips often stop short of describing what happens next.
As a result, many first time homebuyers have only a general, somewhat frightening idea of what a closing is, fed by their friends’ tales of signing papers until their hands cramp. The truth is, there’s nothing to dread. A closing is simply the meeting where ownership of a property is transferred from the seller to the owner. These meetings are sometimes referred to as a settlement.
What your builder should do before closing on a new construction home:
For a new construction home, the closing date will typically be determined by the date when construction is complete. An important step before closing—typically a week or two ahead—is for the builder to take the homebuyer on a tour of the finished home. They can discuss any unfinished items or touch ups that still need to occur. A final walk through just before closing allows the homebuyer to see these items have been completed.
For existing construction, wise homebuyers hire an inspector to look for any issues, then negotiate with the seller to have these addressed or to change the sales price accordingly. This step should be completed early in the contract phase to allow ample time for repairs or contract changes.
What your lender should do before closing:
Within three business days of making a mortgage application, your lender will provide a loan estimate. This document outlines the amounts you can expect to pay for your home loan. It tells you which ones may change, which ones are set, and which you can shop for on your own.
At least three business days before closing, your lender provides a closing disclosure with the final numbers. Review this carefully before your closing and compare it with the loan estimate initially provided. The closing disclosure tells not only what your loan costs over its full term, but also what costs you are required to pay on or before closing.
What you can expect to pay at closing:
The costs outlined on your closing disclosure may include some fees you’ve already paid, such as an appraisal fee. Your down payment (minus any earnest money you deposited), loan origination fees, title fees, real estate taxes and other costs are collected at closing. Closing costs (not including the down payment) are typically 3 to 5% of the loan amount. Sometimes these fees are added to the loan itself, so only a down payment is required at closing.
Lenders and closing agents handle collection of closing costs differently. Sometimes, a cashier’s check is provided at closing, and sometimes the buyer makes a wire transfer just before closing. Again, specific instructions are provided.
For first time buyers, collection of fees is pretty straightforward. However, if you are selling your current home just before closing on a new home and you’re relying on the sales proceeds to make your down payment, check with your lender for special instructions.
Closing documents to expect
Here are some of the closing documents you will sign and receive:
An escrow statement showing you how much you can expect to pay into your escrow account for taxes and insurance each month and how much your mortgage servicer expects to pay out.
Mortgage documents outlining the amount owed, your interest rate, and how much you will pay over the life of your loan if you keep it the full term; your promise to repay the loan; and a deed of trust giving your lender a claim the property if you fail to meet the terms of the agreement.
For newly constructed homes, a certificate of occupancy issued by the local government inspectors assuring your home is complete and safe.
You will also receive documents related to the title/ownership of your property, possibly including a survey showing the borders of your property. If you don’t receive it, you can request a copy of your property appraisal, too.
Home buying tips for closing:
To ensure a smooth closing, be sure to review all documents as they are provided to you, including the closing disclosure you receive from your lender three business days prior to your closing. Ask questions about anything you don’t understand. First time homebuyers may hesitate to ask questions because they feel like they should already know, but don’t be shy! It’s better to ask early than to be surprised at the closing table.
Double check the spelling of your name, your social security number, birthdate, and the street address of your new home. Typos or other errors in these details could cause problems later if overlooked now.
IMPORTANT: Finally, remember that mortgage wire fraud is real. If you receive a phone call or email changing the instructions for making your wire transfer, do not make any changes until you have called or personally spoken to your lender or closing agent. Do not rely on an email confirmation or digital confirmation of the change.