Closing On A House: A Step-By-Step Guide

The mortgage loan closing (or settlement) is the formal meeting when you and all the other parties in a mortgage loan transaction sign the necessary documents and afterwards you take official ownership of the property.

Actual possession of the property varies according to local practice and the terms of the contract. In some areas, possession is given to the buyer on the day of closing. In other areas, this occurs a day or two after. At closing, the buyer requires that the seller prove the title (ownership) is complete and free of anyone else's claims.

The final days and weeks before closing can be a stressful period for both buyer and seller. For example, you may worry that something will happen prior closing to prevent the sale. The following activities must be performed in the final weeks before closing:

Review the Commitment Letter
Be sure you understand all conditions of the loan offer 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 be corrected before the closing. You need to make sure the work is finished and done properly before closing.

Set the Closing Date
An estimated closing date is usually 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. 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.

Select an Attorney
Because the loan closing is a legal transaction, you may want to hire an 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:
1. Does the attorney have substantial experience in real estate transactions?
2. What is the attorney's charge for reading sales contracts or other documents and giving advice about them?
3. What is the attorney's charge for being present at closing?

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. Your real estate sales professional, lender, or a recent home buyer should be able to give you some recommendations.

Title Search
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 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
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.

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.

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.

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.
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.

Inquire about Mortgage Insurance
Private mortgage insurance (PMI) helps protect the lender in case of a foreclosure (the legal process in which a lender takes 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% of the purchase price of the property.
The lender orders PMI from a mortgage insurance company after your loan is approved. 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 PMI companies offer programs that require no up-front payment at closing, but they may require a slightly higher monthly payment.

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.

Inquire about a Certificate of Occupancy
If you are buying a new house, a certificate of occupancy needs to be provided at closing. 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.

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. This is your opportunity to make sure 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 monies be placed in an escrow account at closing to cover major repairs to be completed.