Closing on a Home

Buying a new home is not exactly an everyday event.  It's one of those financial milestones that most of us look forward too.  Unfortunately, most of us are not prepared for all of the closing on a home jargon we encounter.  And most of us only get one bit of insight from friends and relatives - closings are expensive.

What to Expect at Closing

Well, were going to try and separate fact from fiction a bit and hope to provide you with some insights as to exactly what you can expect to encounter when you're closing on a home.  We'll also help you to understand where all that money goes and let you decide just how expensive a closing really is.

Your attorney will take care of most of the details, but chances are you'll meet for the first time at the closing itself.  We're hoping to make that meeting a bit more comfortable for you too.

Mortgages Documents at Closing

Perhaps the single most important thing that going to happen during a closing is the exchange of money that takes place.  Your financing company or lender and your attorney will have already exchanged information so the paperwork will be all ready for you to sign at the closing.

You'll be handed a large stack of papers and your attorney will suggest (halfheartedly) that you read through all of them.  A record of the mortgage will be filed with the county clerk so you'll be asked to sign around four copies (one for the attorney, one for yourself, one for the seller and one for the county).

First Payment Letters

You may be asked to sign a first payment letter.  This letter spells out how much you'll be paying to your mortgage company each month, where to send the payment and the date payment is due.

Mortgage Agreement with Lender

In addition to the mortgage papers filed with the county you'll also sign an agreement with your lender.  That agreement will spell out in detail your obligation to pay back the money your borrowed on time.  That paperwork will include your total mortgage amount, the term of the mortgage and penalties that apply to late payments.

Affidavit of Title and Title Insurance

Somewhere along the line - whether it's your mortgage company or your attorney - someone is going to talk to you about title insurance.  In order for a home to legally pass from one individual to another, the buyer needs to make sure that the home is free from liens or encumbrances.

What this means is that you need to make sure that no one else can claim all or part of the home belongs to them.  This can happen if a long lost heir is found or if a prior owner owned someone money and put the home up as collateral.

As a buyer, you need to hire a company to do a title search.  That process makes sure there is no claim on record anywhere.  In addition, you need to pay for title insurance that will pay off any claim against the home if something is found after the closing.

HUD Uniform Settlement Statement

This is perhaps the single most important statement you will see when closing on a new home.  This is a standardized document that describes all of the fees you have already paid or are responsible for paying at closing.

This form is broken down into two sections.  The first section contains the amounts due from and paid by the borrower (the person buying the home).  The second section is those amounts due to or paid by the seller of the home.

You'll often see a preliminary copy of this statement before closing on a home.  That's because this document is used to calculate the total settlement costs due at the closing.  These are your actual closing costs.  Here comes our only closing on a new home tip.  If you picked one document to read carefully, this is the one.

All of the fees referred to on this statement should look familiar to you.  After all, you agreed to pay for these costs and you these are the actual closing costs that everyone told you about.

Errors and Omissions Agreement

You'll probably be asked to sign an errors and omissions agreement.  That agreement basically states that if your mortgage company happened to make a mistake on any of the documents you've signed, they have a right to correct those documents.  So if your monthly mortgage payment was not calculated correctly, your lender has the right to fix that error later on.

Escrow Disclosure Statement

Escrow is a fancy name for an account that is held by others to pay for a financial obligation that you have.  In this situation, the mortgage company holds several months' worth of property taxes in an escrow account.

When you close on a home, you'll need to sign an escrow disclosure statement that affirms you understand that this fund exists and how much of your monthly mortgage payments will go towards this escrow account.  This fund usually starts out with three to five months worth of property taxes.

Truth in Lending Disclosure Statement

The truth in lending disclosure statement is but another document that you need to sign at your closing acknowledging that you received a copy of this disclosure.  The disclosure once again talks about the terms and conditions of your mortgage such as the annual percentage rate or APR, the total financing charges over the course of the loan and the total amount financed.

We've got an entire section full of mortgage calculators that can show you how to figure out many of these values yourself.

Servicing Disclosure Statement

Often when you find a mortgage you might be working with a company that is really a mortgage broker.  As such, that mortgage company may decide to immediately transfer your mortgage to another lender.  This is referred to as servicing your mortgage.

If your lender frequently sells or services mortgages to another company, you will have to sign a disclosure statement that tells you this lender may assign, sell or transfer the servicing of your loan to another mortgage company.  That's really not a big deal, because the terms of the mortgage that you've agreed to stay the same with the new company.

Tax and Insurance Sheet

The tax and insurance sheet will show you how much your property taxes are each quarter, the name of the company providing title insurance and the name of the company providing homeowners insurance.

Signature / Name Affidavit

Here's one that pretty funny.  If you're following along, you'll notice that you're signing your name on many different kinds of documents.  Well, this particular document is one that certifies that your legal name and signature is, in fact, what you've been signing throughout this entire process.

Your Right to Cancel

This is another document that is somewhat comical.  After you've gone through all this signing, you now have the legal right to sign a document that states you wish to cancel the whole thing.  Granted, you may be subject to several steep financial penalties for canceling so late in the process.  But even when you're closing on a home, you still have a right to back out of the deal.

Other Documents Produced at Closing

At your closing you'll also get back many of the documents you've already signed as part of the financing agreement and other pre-closing work.  Examples of these documents include:

• Mortgage Lock in Agreements - which you may have signed if you decided to lock in your loan at a certain percentage rate.
• Property Surveys - from companies that have completed a survey of your property.
• Deeds - these are the official transfer of property documents.
• Request for Copies of Tax Forms - your lender may have wanted to obtain proof of your household income from your federal income tax forms.
• Occupancy Statement - this statement tells the mortgage company how you intend to use the home (most often by occupying the house yourself).

Estimated Closing Costs

We are going to follow up on this topic with another one that is dedicated to closing costs.  But as promised in the beginning of this article, we're going to give you a feel for what to expect in terms of closing costs:

• Interest Expense ($200 - $1,000) - you owe interest on the money borrowed until your first mortgage payment is due.  This fee depends on interest rates, the amount of money lent and the day you're closing.  Closing late in the month reduces this fee, but you're hit with your first mortgage payment sooner.
• Homeowners Insurance ($300 - $1,000) - before anyone is going to lend you money, they usually demand that their property is insured.
• Escrow Account / Property Taxes ($1,000 - $3,000) - your lender will usually require three or four months of property taxes held in an escrow account.
• Title Insurance ($400 - $1,000) - money paid to make sure you own the home free and clear.
• Recording Fees ($100 - $300) - these are standard fees charged by your county to record your mortgage.
• Attorney Fees ($300 - $700) - at closing you need to pay your attorney for all their work.
• Postage / Copies ($40 - $100) - believe or not, this is where you see all of the fees for sending packages back and forth between you, your attorney and your lender.
• Mortgage Points ($0 - $3000) - one point is equal to 1% of the total mortgage amount.

In this example, you can see that the closing cost can run anywhere from $2,100 - $9,000.  However, three of the most expensive items are prepaid expenses you'd naturally incur as a homeowner - homeowners insurance, points (prepayment of interest) and property taxes.

In fact, the escrow money is really an asset you own.  When you eventually pay off the mortgage, that money is sent back to you.  So al-in-all, a closing is not as expensive as it might seem because you are prepaying for many of your future expenses.

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