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INSTRUCTIONS FOR HOME BUYERS
A- Close the sale:
1- What Is Escrow?
Escrow is a process that provides for a fair and equitable transfer of property from one person to another.
Escrow opens when the buyer and seller sign a sales contract, commonly called a real estate purchase agreement and receipt of deposit. The contract, along with any additional instructions, serves as instructions for the escrow officer.
Escrow assures that the lender releases the home purchase funds at or about the same time that the deed is recorded to reflect new ownership. Escrow includes depositing, with a neutral third party, funds, documents and instructions necessary to complete the transfer.
Because the real estate transaction involves large sums of money and reams of documentation, escrow is not always a predestined, step-by-step process, but can become a confusing end game of details, nit picking and overlapping procedures. It requires preparation, attention to detail, and desire from both sides to close the deal.
Regional custom will dictates who (the buyer or the seller) chooses the neutral third party and who that third party will be. A neutral third party can be an escrow officer from an escrow company, someone from a title company or from a title and escrow company. Some regional areas use title and escrow attorneys. Custom and market conditions also dictate which escrow costs the buyer or seller pays. The amount typically totals about 1 to 2 percent of the cost of the home.
Choosing an escrow officer is much like choosing any real estate professional. Get several referrals from trusted people, then compare services, cost and convenience.
Your escrow officer opens escrow by assigning your escrow an account number and collecting the contract and other instructions, the buyer's deposit and perhaps additional proceeds or documents related to the transaction. Deposits are either applied to the purchase price, or returned should the deal fall through.
The buyer orders title insurance, to protect him or her against blemishes on the title, and he or she orders a preliminary title search to determine if there are any claims against the title.
The contract and escrow instructions likely contain contingencies for home insurance, flood insurance, home inspections, financing, repairs and other tasks either the buyer or seller must complete before the transaction can progress. Each time a contingency is met, the buyer or seller signs off with a contingency release form or letter copied to all parties, including the escrow officer.
At some point, parties will receive a preliminary title report which summarizes the condition of the title, including easements and liens, claims and encumbrances against the property. The seller must resolve any claims against the title, or they could stall the deal.
The title company may check once again and produce a final report to be sure existing claims have been removed and that no claims have been filed since escrow opened.
Once the loan is funded, contingencies are released, the title is cleared, the buyer inspects the property and decides how to take title, only a few loose ends must be tied before close of escrow.
Remaining paperwork to sign a few days before close includes the buyer's grant deed, any final escrow instructions or contingency releases, the settlement sheet of disbursements, title reports, the deed of trust lender forms, inspection reports, tax statements -- and a rental agreement if the seller will live in the home for some time after escrow closes.
Escrow closes and the deal is sealed when the escrow office records a new deed in the buyer’s name, the seller gets paid for the home, and all other moneys are disbursed.
Money may be held in escrow after the close to pay contractors for unfinished work.
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2- Closing Checklist
Review the many activities that you need to make sure are performed before closing.
The final days and weeks before closing can be a stressful period for both buyer and seller. For example, you may have second thoughts about the prospect of taking on such a large debt. Or you may worry that something will happen to prevent the sale -- and indeed the house is not yours until you close on it. The signed sales contract and the signed loan commitment letter obligate both you and the seller to complete the transaction. In fact, if you fail to do so, not only will you forfeit your deposit but you may also find yourself in a lawsuit.
This checklist reviews what needs to happen in the final weeks before closing -- such as the title search, a survey of the property, and your final walk-through inspection. Top
Review the commitment letter
Be sure you understand any conditions of the loan offer that are stated in the lender's commitment letter. Check to see if all conditions have been met before closing. For example, if the home you are buying has been found to be in violation of a building code or zoning regulations, the lender may specify that those problems must be corrected before the closing. If the seller has agreed to make repairs required by the lender, you need to make sure the work is finished and done properly before closing. Top
Set the closing date
An estimated closing date usually is specified in the sales contract. After your mortgage loan is approved and the commitment letter is accepted, a firm closing date needs to be set. Usually the real estate sales professional, the lender, and the closing agent coordinate a date with you. You need to be sure that closing takes place before the lender's commitment expires and while the interest rate lock-in, if there is one, remains valid. You should request from your closing agent a statement confirming the date, place, and time and a list of items you need to bring to the closing meeting. Top
Select an attorney
Because the loan closing is a legal transaction, you may want to hire a real estate attorney early in the application process. Your attorney will review your sales contract before you sign it and represent you at closing. Your personal attorney's fee is not part of your actual closing costs, so you will need to budget for this expense separately. If you seek a personal attorney, ask questions such as these: Does the attorney have substantial experience in real estate transactions? What is the attorney’s charge for reading sales contracts or other documents and giving advice about them? What is the attorney’s charge for being present at closing? top
Select a closing agent
You'll need a closing or “settlement” agent to coordinate closing activities, such as preparing and recording the closing documents and disbursing funds. The types of services provided will depend on the closing agent you hire. Usually the closing is conducted by title companies, escrow companies or attorneys, but it can be held at the lender’s or real estate professional’s office. You may be able to save some money by shopping for a closing agent. Your real estate sales professional and lender should be able to give you some recommendations. Or, you can get referrals from a recent home buyer. Top
Secure title services
You need to make sure that a title search on the property has been made and that you have obtained title insurance before the closing meeting. A title search is required to prevent fraudulent sales. Lenders want to be sure that the seller is indeed the owner of the property. The title search also attempts to uncover any liens (legal claims against a property on the title). Any claims against the property must be paid before (or often at) closing. Title insurance is required as further assurance that the seller is giving you a “marketable title.” A lender’s policy protects the lender in the event a flaw in the title is detected after the property has been bought. The owner’s policy protects you. You should get both types of policies. Obtaining a combined lender’s/owner’s policy will save you some money. You may also get a price break if the title company that previously insured the title will give you a "reissue" policy. The buyer typically pays for the title search and both types of title insurance. Your closing agent will coordinate both title services before the closing meeting. Top
Order a property survey
The lender may require a survey, or plot plan, of the property. This is done to confirm that the property’s boundaries are as described in the sales contract. Usually the buyer pays for the survey and the lender orders it. You may be able to save some money by requesting an “update” from a surveyor who has surveyed the property previously. Top
Order a termite inspection
In many locations, homes must be inspected for termites before they can be sold. You need a certificate from a termite inspection firm that states that the property is free of both visible termite infestation and termite damage. Usually the seller pays for this and the seller's real estate sales professional orders the termite inspection. But you will want to make sure that the original certificate is delivered to your lender at least three days before closing. This will give the lender time to review it and address any problems.top
Obtain homeowner's insurance
Your lender will require that you purchase homeowner's or “hazard” insurance, which protects you and the lender from loss in the event the house is damaged or destroyed. Coverage must be equal to at least the replacement costs of the property. Most home buyers purchase a homeowner’s package of insurance that includes personal liability insurance (in case someone is injured on your property), personal property coverage (which covers loss and damage to personal property due to theft and other events), and dwelling coverage (which protects your actual house against fire, theft, weather damage, and other hazards). If you live near a body of water, you may also want to get flood insurance as part of your homeowner’s protection. You will want to get quotes from several insurance companies and compare rates on the same types and amounts of coverage. Lenders typically want the first year’s premium to be paid at or before closing. Your lender may add the insurance cost to your monthly mortgage payments and keep this portion of your payments in an escrow account (or reserve). Then, the lender pays the insurance bill when it is due each year.top
Inquire about mortgage insurance
Mortgage Insurance (MI) helps protect the lender in case of a foreclosure (the legal process that a lender may use to take ownership of your home if you fail to make your monthly payments). Typically, the lender will require this insurance if your down payment is less than 20 percent of the purchase price of the property. The lender orders MI from a mortgage insurance company after your loan is approved. You will not need to apply for insurance yourself. You may be required to pay the full first year's premium at closing. Renewal premiums will be added to the monthly mortgage payments you make to your lender after closing and will be put into an escrow account. Many MI companies offer programs that require no upfront payment at closing, but they may require a slightly higher monthly payment.top
Obtain well and septic certifications
If your property is not served by public utilities, you will need local government certification of the private water source and sanitary sewer facility before closing. Usually the county government performs the certification. Top
Inquire about a certificate of occupancy
If you are buying a new house, a certificate of occupancy needs to be provided at closing. This certificate is legally required before you move into a newly constructed home. The builder obtains the certificate, usually from the city or county. An inspection may also be required to see if the property meets local building codes.top
Go on the final walk-through inspection
Your sales contract should have included a clause allowing you to examine the property within 24 hours before closing. The real estate sales professional usually will accompany you on the walk-through. This is your opportunity to make sure that the seller has vacated the house and left behind whatever property was agreed upon. You will want to check that all lights, appliances, and plumbing fixtures are in working order. You will also want to make sure that all conditions of the sales contract have been met. If you observe major problems, you have the right to delay the closing until they are corrected, or you could ask that the moneys be placed in an escrow account at closing to cover major repairs to be completed. Top
3- Closing Cost Checklist
The following checklist will help you understand all the costs related to your closing. These costs include both mortgage-related costs and government-imposed costs.
Who pays which closing costs varies in all localities and is open for negotiation between the buyer and seller. It is possible to have a sales agreement in which either the buyer or seller pays all the closing costs. Or, to lower your costs, you may have the seller agree to pay just certain fees. For example, you could negotiate that the seller pay for the title search service, the county and state recording fees and tax, and the closing agent’s document preparation fees. The agreement that you and the seller reach needs to be specified in the sales contract. The success of negotiations depends on such factors as how eager the seller is to sell and you are to buy, the quality of the home and how long it has been on the market, and whether other potential buyers are interested. Top
Mortgage-related closing costs
Depending on your situation, the following costs for getting a mortgage must be paid at or by closing. These costs cover items that were part of the loan application process: top
Loan origination fee --
The loan origination fee covers the administrative costs of processing the loan. It may be expressed as a percentage of the loan (for example, 1 percent of the mortgage amount). top
Loan discount points --
Loan discount points are the dollar amount paid to a lender for making a loan. Each point equals 1 percent of the mortgage amount. For example, if you take out a $100,000 loan, one point equals $1,000. The more points you are willing and able to pay at closing, the lower your interest rate should be. Top
Appraisal fee --
The appraisal fee pays for the appraisal, which the lender uses to determine whether the value of the property is sufficient to secure the loan should you default on the loan. This is usually paid by you when you apply for the mortgage and may appear on the settlement form as “POC,” or “paid outside closing.” Top
Credit report fee --
The credit report fee covers the cost of the credit report, which the lender uses to determine your creditworthiness. You probably also paid this fee when you applied for the mortgage, so it may appear on the settlement form as POC. Top
Assumption fee --
An assumption fee is charged if you take over the payments on the seller’s existing loan. The fee may range from several hundred dollars to 1 percent of the loan amount. Top
Prepaid interest --
Interest is the fee you are charged for borrowing money from your lender. You will probably have to pay the interest on the mortgage from the date of settlement to the beginning of the period covered by the first monthly mortgage payment. For example, suppose you settle on February 10. Your first monthly payment begins to accrue on March 1 and will be payable at the beginning of April. At closing you may be required to prepay the interest for the period from February 10 through the end of February. This means that if you settle later in the month, your closing costs will be less than if you settle early in the month. Top
Escrow accounts --
Escrow accounts (or reserves) will be required if your lender will be paying your homeowner’s insurance and property taxes. Your lender sets up the escrow account by adding the cost of the insurance policy and taxes to your monthly mortgage payments. That portion of your payments is kept in reserve until the bills are due. Each year, the bills will be sent directly to your lender, who will make the payment for you. Top
Government-imposed closing costs
Most state and local governments impose property taxes, recording fees, and transfer taxes. Top
Property taxes --
Property taxes for the real estate you own must be paid annually to the local government. Property taxes are the most common expense to be prorated between the buyer and seller. This process is referred to as an “adjustment.” (Other typical adjustments include annual homeowners’ association or condominium fees and unpaid water or utility bills.) Your closing agent will split the taxes so that you take responsibility for them at closing. If the seller already has paid taxes beyond that date, you reimburse the seller. Or, if taxes for the current period have not yet been paid, the amount owed is deducted from your settlement payment. Your lender may include property taxes in your monthly mortgage payments and put them in an escrow account for you.top
Recording fees and transfer taxes --
Recording fees and transfer taxes are charged by most states for recording the purchase documents and transferring ownership of the property. Your closing agent will usually calculate these costs as a percentage of the sales price. In some localities it is customary that the seller pay one fee and the buyer pay another. Your real estate sales professional can advise you about this. Top
4- Costs Associated with a Home Loan
Closing costs are the actual expenses that the lender incurs in the origination of a new home loan.
I want to review some of the costs you can expect to pay associated with any new home loan. With any luck, the builder or seller will agree to pay at least some of these expenses for you. But regardless of who pays them, these costs are part of the price of buying your next home, so let's take a look. They are closing costs, loan discount points and prepaid items.
Closing costs are the actual expenses that the lender incurs in the origination of a new home loan. Some of the costs are related to your loan application, such as the expense of newly updated credit reports on all applicants. Other fees are related to the house itself, such as the appraisal of the property. Others are payment to the lender for processing your application, such as the loan origination fee. All these costs are lumped into a broad category called "closing costs." Unless the seller offers to pay them for you, this area of expenses is charged to the buyer, and often runs between 2 and 3 percent of the amount being borrowed. Because different states have different fees and taxes that are a part of these costs, it's impossible to generalize nationwide. So it's important that you talk with a reputable lender ahead of time about what costs you can expect to pay in your part of the country.
Loan discount points are, in essence, a form of prepaid interest. One discount point is exactly equal to one percent of the amount being borrowed. It is paid in cash at closing to the lender as a form of interest. Discount points have the effect of lowering the stated interest rate you will pay on the loan you obtain. For example, a lender might offer you a 30 year fixed rate loan at 8% with zero points or the same loan at 7.5% with 2 discount points. Because the points are considered interest, the yield to the lender is approximately the same. So why, you are asking, would I want to pay points? You probably won't, but sometimes new home builders or employers will offer to pay up to a certain number of points as an incentive, and I want to make sure you get everything that's coming to you.
Last, there is the issue of prepaid items. Most home lenders want you to set up what is called an "escrow" account. This is nothing more than a savings account that the lender holds. Every month you will, in addition to your regular loan payment, deposit a sum for property taxes and for homeowner's insurance into this account. And when the next bill comes due for taxes or insurance, your lender will make the payment for you. The reason that all this matters today is that, on the day of your purchase, you will be required to set up an escrow account with about 9 months worth of taxes and about 2 months worth of insurance payments. In addition, you will have to pay for the first year's insurance policy in full. These costs are called prepaid items, and you must pay for them yourself.
Because regulations and customs vary from state to state, the amount you need at settlement may be more or less than the amounts I have discussed here. Talk to a reputable lender to get an accurate estimate of how much you will need to buy your next home.top
5- Closing on Your New Home
It is to your benefit to understand the many activities that need to occur before, during and after the closing meeting and their costs.
The mortgage loan closing (or settlement) is the meeting at which you take official ownership of the house. You’ll be required to sign many papers and pay your closing costs at the meeting in order to take possession of your new home. Technically, two separate closings occur at this time: the closing of your loan and the closing of the sale. Then, at the end of the meeting, you get the keys to your new home! Although the closing process varies from state to state, and even within the same county or city, certain activities are standard. It is to your benefit to understand the many activities that need to occur before, during and after the closing meeting and their costs. Top
Closing activities checklist
In the weeks before closing, you’ll need to make some important decisions. Your lender, real estate sales professional, and closing agent will be handling many pre-closing activities. But you still need to be aware of them and know who typically arranges and pays for each activity. We have provided a checklist that will help you prepare for your loan closing. Top
Closing costs checklist
No later than three business days after your loan application was received, your lender should have delivered or mailed to you a “good faith estimate” of the total charges due at closing and a copy of the government publication Settlement Costs: A HUD Guide. Then, one business day before the closing meeting, your closing agent must allow you to review a copy of your two-page settlement form -- called the HUD-1 Settlement Statement. The good-faith-estimate is based on the lender’s typical loan origination costs for the area where your home is located. So the estimate usually changes between application and closing. That is why you’ll want to review your settlement form before the closing meeting. It will show you the actual amount of money you’ll need to bring to closing.
Remember that you’ll need to pay your closing costs in the form of a certified or cashier’s check. Personal checks usually aren’t accepted. Closing costs vary widely depending on price, location, and other factors. Overall, you can expect your closing costs to amount to between 3 percent and 6 percent of the sales price. We have provided a checklist that will help you understand your closing costs. Top
What happens at closing
The closing meeting is where ownership of the home is officially transferred from the seller to you. Your closing agent coordinates all of the document signing and the collection and disbursement of funds. Your main role at the closing is to review and sign the numerous documents related to the mortgage loan and to pay the closing costs. The closing is a formal meeting typically attended by the buyer(s) and the seller(s) (and their attorneys if they have them), both real estate sales professionals, a representative of the lender and, of course, the closing agent. The meeting takes about one hour and usually is held at the closing agent’s office. Or, you may live in an area where there is no formal closing meeting. Instead, an escrow agent processes all the paperwork, arranges for all documents to be signed and collects and disburses the required funds. The steps below explain what happens during and after the closing meeting:
First, the closing agent reviews the settlement sheet with you and the seller and answers any questions. Both you and the seller sign the settlement sheet.
The closing agent then asks you to sign the other loan documents, such as the mortgage note and Truth-in-Lending statement.
Evidence of required insurance and inspections is also presented (if it wasn’t previously given to the lender).
If everyone agrees that the papers are in order, you (and the seller) submit a certified or cashier’s check to cover the closing costs and the balance of funds due (if applicable). And, the check from the lender covering the mortgage amount is submitted to the closing agent.
If the lender will be paying your annual property taxes and homeowner’s insurance for you, a new escrow account (or reserve) is established at this point.
You receive the keys to your new home.
After the meeting, the closing agent officially records the mortgage and deed at your local government clerk’s office or registry of deeds. This legal transfer of the property may take a few days after closing. The closing agent usually will not disburse the funds to everyone who is owed money from the sale (including the seller, real estate professionals, and the lender) until the transaction has been recorded.
It is at the point of deed recordation that you become the official owner of the home. Top
Closing documents
You will receive a number of important documents at the closing meeting. Review this list of documents before you go to the closing table, so that you will be prepared for the documents that you will receive. Top
HUD-1 Settlement Sheet --
The settlement sheet itemizes the services provided and lists the charges to the buyer and the seller. It is filled out by your closing agent and must be signed by both you and the seller. You should have been allowed to review this form on the business day before your closing meeting so that you will be able to know your closing costs in advance. Top
Truth-in-Lending (TIL) Statement --
Within three business days of applying for a loan to purchase a home, your lender should have given you this document, which outlines the costs of your loan. You receive it at that time so that you may compare the loan costs with those of other lenders. The TIL statement also discloses the annual percentage rate (APR). The APR is the cost of your mortgage as a yearly rate. This rate may be higher than the interest rate stated in your mortgage because the APR includes any points, and certain other costs of credit. The TIL statement also discloses the other terms of the loan, including the finance charge, the amount financed, the payment amount, and the total payments required. It is possible that the APR calculated at your loan application will change at closing. That is why your lender is required to give you the final version of your TIL statement at or prior to the closing meeting. Top
The note --
The mortgage (or promissory) note is a legal “IOU.” The note represents your promise to pay the lender according to the agreed terms of the loan, including the dates on which your mortgage payments must be made and the location to which they must be sent. The note also details the penalties that will be assessed if you fail to make your monthly mortgage payments. And, it warns you that the lender can “call” the loan (require full repayment before the end of the loan term) if you violate the terms of your note or mortgage. Top
The mortgage --
The mortgage is the legal document that secures the note and gives the lender a legal claim against your house if you default on the note’s terms. In effect, you have possession of the property, but the lender has an ownership interest (called an “encumbrance”) until the loan has been fully repaid. The mortgage restates the basic information found in the note. It also states your responsibilities to pay principal and interest, taxes, and insurance on time; to maintain hazard insurance on the property; and to adequately maintain the property and not allow it to deteriorate. If you consistently fail to meet these requirements, the lender can demand full payment of the loan balance or foreclose on the property, sell it, and use the proceeds to pay off the outstanding loan and the foreclosure costs. In some states, a “deed of trust” is used instead of a mortgage. By signing a deed of trust, you receive title to the property but convey title to a neutral third party (called a trustee) until the loan balance is paid. Top
Affidavits --
You may be asked to sign numerous affidavits. For example, you may be required to sign an affidavit of occupancy, which states that you will use the property as a principal residence. Or you and the seller may need to sign an affidavit that states that all of the improvements to the property that were required in the sales contract were completed before closing. Ask your lender whether you’ll be required to sign any affidavits at closing.top
The deed --
Only the seller signs the deed at closing. It is the document that transfers ownership from the seller to you. Your name and the names of any other buyers appear on the deed. You’ll receive a copy of the deed at the closing. The closing agent then records the deed (with you listed as the new property owner). The deed will be sent to you after it is recorded. Top
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