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Closings: A Home-Buyers Seminar

Preparing for closing is stressful for both the buyer and seller. The Seller is anxious for the sale to go through, while the Buyer has second thoughts about taking on a large debt. You as the Buyer should keep in mind that once the sales contract and loan commitment letter have been signed and accepted, and you fail to follow the transaction through, you will lose your deposit and face possible litigation (a lawsuit).

Setting the Closing Date
The Lender and your agent may set a tentative Closing Date. The Closing Date is set after the loan has been approved and the Buyer's commitment letter accepted. The Buyer must make sure the closing takes place before the Lender's commitment expires and the Buyer's rate lock expires which is usually either 30, 60, 90 or days.

Securing Title Services
Generally, your attorney, real estate agent or lender will assist you in selecting a title company. Closings may be held at your attorney's office, lender's office, realtor's office, or title company.

Title Search
The Lender requires a title search for both your protection and theirs. A title search prevents fraudulent sales (i.e., from bad marriages, wayward kids, etc.). It makes sure the seller is the property owner and has the legal right to sell the property. A title search uncovers any encumbrances on the title, such as liens by creditors. These liens must be paid before or at closing.

Title Insurance
two types of title insurance policies: Lender's and Owner's. Generally, the Buyer pays the cost of both types of policies; combining both policy types (lender's and owner's) can save money.

Types of Ownership
The names appearing on the deed are generally those whose names that are on the mortgage. There are four types of ownership highlighted below. Examine these closely to better understand the various options that are available for those seeking homeownership. Please contact Collegiate Title Corporation on the options available in your particular state.

  • Sole Ownership is property is in the name of one party.
  • Tenancy by the Entirety is conveyance to husband and wife only. Neither spouse can sever, alienate or affect the marital property without the consent of the other party. In this type of ownership, if one spouse dies, the property automatically goes to the surviving spouse without going probate (a legal process of distributing property after death).
  • Joint Tenancy is where any of the owners may sell their interest to anyone during their lifetime. If one owner dies, the surviving owner(s) automatically get the deceased owner's share in the property.
  • Tenancy in Common means that the property is owned jointly between parties. However, if one owner dies, the deceased owner's share goes to his or her heirs rather than the surviving owner(s).

Homeowner's Warranty
Homeowner's warranty is a warranty that protects against certain defects in the home. This kind of warranty is usually offered on new homes, although now it is offered for older homes. The covers the Buyer for major house systems during the first year of ownership.

Final Estimate of Closing Costs
The Lender is required to provide the Buyer with an estimate of closing costs soon after Buyer has filed the application. Estimates are subject to change, and you have the right to review the Settlement Sheet (HUD-1) one business day before closing. The Estimate is sometimes called the Good Faith Estimate. The Buyer is required to pay the remainder of the down payment(minus the deposit) and closing costs with a Cashier's Check. Personal checks are usually not accepted.

Most often, the closing is a formal meeting between all parties (i.e., Buyer(s), Seller(s), listing agent, and lender). It is recommended that you have an attorney represent you at closing to read and interpret the documents, and advise you on exactly what you are signing. Note that the closing agent is not allowed to give you legal council. You should bring proper identification (photo driver's license, passport, etc.). Once you sign the documents and pay the closing cost, you get the keys to the property (if applicable).

Actual Closing Costs
The Bottom Line on the settlement sheet begins with the sales price, plus total Buyer's closing costs, plus any pro-rations payable by Buyer, minus the Buyer's deposit, minus the principal amount of the mortgage, minus any adjustments payable by Seller, equals the amount the Buyer pays at settlement.

Closing Documents
The HUD-1 Settlement Statement is a form required by law which itemizes the services provided. It lists charges to both Buyer and Seller. The settlement agent completes the HUD-1, which the Buyer and Seller both must sign.

  • A deed is a conveying instrument, given to pass title from the seller to the buyer. The Seller must bring the deed to the closing, properly signed and notarized.
  • The Truth in Lending Statement is a part of the Consumer Credit Protection Act, which is Federal legislation designed to protect borrowers by requiring lenders to furnish information about the cost of the loan. The law calls for interest to be expressed as the annual percentage rate (APR) to the nearest 1/8th of one per cent. The APR must include charges such as loan fees, discount points, servicing fees, etc., as well as interest. The law applies to 1 to 4 family residential property only.
  • The Note is given to the lender by the borrower and is their written promise to pay back the mortgage by a certain date. This is signed by the borrower then sent back to the lender for them to hold.
  • The Mortgage is also held by the lender. This creates a lien on the property which must be paid one way or another. If the borrower does not pay the their mortgage company, this enables the lender to take the property through foreclosure.
  • Affidavits of Title are oaths given by the buyer and seller to say that they are the only people with an interest in the property, to the best of their knowledge. This means for the seller that all liens are being satisfied on the closing date and there are no judgments or other liens against the property that are not disclosed. If there is an open lien against the property the seller did not disclose, legal action can and will be taken against the seller through the Affidavit of Title.

The Lender's Closing Costs
The lender will charge various fees in connection with giving a loan. Some of the common charges will be explained below.

  • The Loan Origination Fee covers administrative cost of processing a loan. May be expressed as a percentage (%) of the loan amount (e.g., 1%). Loan Discount Points are charged by the Lender to adjust the yield (ratio of income from an investment to the total cost of the investment over a given period of time), on the loan to market conditions. Each point equals 1% of the mortgage amount.
  • The Appraisal Fee pays for the appraisal. An appraisal is the act of setting a value on the property. The lender has to confirm that the appraised value of the property is enough to cover the loan.
  • Credit Report Fee
  • An Assumption Fee is charged for taking over the payments of the seller's existing loan (if applicable).
  • Advance Payments include two types:
    1. Pre-paids-Lender requires payments at settlement
    2. Interest-Buyer pays on mortgage from date of settlement to period covered by the first payments.
  • Mortgage Insurance Premiums (MIP) protects the Lender against loss incurred by mortgage defaults. Enables the Lender to lend a higher percentage of the sale price. Lender may require first year premium or lump sum at closing.
  • Hazard Insurance Premiums
    Escrow Account or Reserves are required if Lender is paying property taxes, Mortgage Insurance, or hazard insurance.

Title Charges include:

  • Settlement/Closing Fee
  • Search/title insurance premiums
  • Attorney fees (legal services for the Lender); do not include Buyer's or Seller's attorneys.
  • Recording Fees are items such as Transfer Tax, and the fees charged by the county for recording the deed and mortgage.

Additional Charges include:

  • Surveyor Fees
  • Termite and Pest Inspection
  • Other lender-required inspections

Adjustments may include Items paid in advance by Seller that are reimbursed by Buyer or vice versa.

For more information about closing costs and the HUD-1, please read our Guide to Title Insurance Fees and Costs.