January 12 2021

Closing on a House: The Most Important Parts of the Process

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Closing on a House: The Most Important Parts of the Process

This article includes general information. Mortgage laws vary by state. Contact a mortgage lender in your state for specific details.

Let’s cut right to the chase here: Real estate transactions can get complicated. Most of us simply don’t purchase enough property to possess an innate familiarity with the process. Whether you’ve dabbled in the market before but never committed, you’re a repeat home buyer, or you’re completely unfamiliar with real estate to begin with, you should start to formulate a plan well in advance of a closing so that when the time comes, you’re confident and ready to rise to the occasion.

Closing may pose a challenge even to seasoned professionals as they navigate negotiations and shop around to compare home insurance quotes, all while keeping in mind that a home and a lifestyle is on the line. It can be tempting to disconnect emotionally in order to seem like a polished and adept negotiator, but it should be noted that many tenured real estate professionals recommend trusting your gut and asking as many questions about the closing process as you need to, no matter how much experience you have.

Above all, it’s important to breathe, and try to learn as much as you can along the way. Below, we’ll cover the basics of closing that you should familiarize yourself with before tackling your own closing.

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Table of Contents

What Is Closing on a House?

Closing on a house is the moment that you, the buyer, acquire the property title from the seller, and it represents the completion of the mortgage loan process. Just as you ‘open’ talks with a seller by placing an offer on their property, closing is the last step in the purchase process that draws the transaction to a close, beginning when the sellers accept your purchase offer. You’ll review, authorize, and date applicable documents as you move toward settling the transaction.

Where Does Closing Take Place?

Typically, the physical location of a closing is determined by the lender you choose for your mortgage loan. It’s possible to complete the closing process at the home in question if it’s convenient, but it’s more common to review necessary documents at an escrow office or a title company.

Currently, it’s possible to complete the entire closing virtually in light of the COVID-19 pandemic that may prevent you from entering an office, depending on your location.

Who Is Present During Closing?

Who will be physically present during your closing will vary based on the state and, in some cases, the county that you’re purchasing a home in. The COVID-19 pandemic might disallow all required parties from congregating in one location, so a virtual meeting may be necessary. Regardless of the exact location, there are certain participants you can expect to be included in the process.

You (the mortgage)
Your lender (the mortgagee, or mortgage company)
Your attorney (not required by every state or jurisdiction, but it’s highly recommended you hire an attorney to represent your interests and your interests alone)
A representative from the title company (giving you written proof of property ownership)
The home seller (it’s also possible that the seller will enlist an agent to represent them during closing, or that both parties will be present)

What Closing Documents Will Be Reviewed?

As we mentioned above, closing on a house is a detailed process that requires copious documentation. There are forms entrusting each step in the process, each relationship you have with the parties involved in your closing. We’ll quickly break them down for you, so you’ll know what to expect:

Deed of Trust / Mortgage

This is your lender’s proof of a lien against your property that is used as collateral for your loan. This document secures your loan if you fail to make payments toward your mortgage, and provides your lender with terms for proceeding in that event.

Promissory Note

This document is your agreement stipulating that you will pay your lender for what you owe toward the mortgage against your home.

Closing Disclosure

A closing disclosure, also called a settlement statement and officially designated as Form HUD-1, is a list of itemized charges and other relevant details about your mortgage. This should include your mortgage payment schedule, but it also may include any commissions to be paid by the buyer, and any other terms of your loan. It’s required by law that you receive an itemized closing disclosure at least three business days before the closing date. Confer with your agent or representative to make sure you submit a request with ample time for the lender to respond.

There are other documents that you may encounter during closing, contingent on applicable laws in your state or standards held by your lender. These can include:

Loan Estimate

Also called a good faith estimate, this is an estimated, itemized list totaling your closing costs that should be finalized in your closing disclosure. It’s crucial to review this document carefully and make sure it’s reflected in the final closing disclosure, and that there are no major discrepancies between the two.

Initial Escrow Statement

Many states require you to open an escrow account, or an account managed by a neutral third party, to safeguard your closing transaction against fraud. In that case, the escrow statement defines exactly how much will be drawn by your lender from your escrow account in the first year of your mortgage repayment plan to cover taxes, insurance payments, or other fees.

Certificate of Occupancy

This is a specific document that authorizes you to inhabit a newly constructed house. You should confer with your agent, attorney, or representative to determine whether obtaining this document is necessary for you.

What Are Closing Costs on a House?

Don’t pull your hair out fretting over closing costs — as with the overall process, try to exercise caution and patience when reviewing what you owe. Closing costs are any expenses incurred by the buyer in the purchase of a new home. These are charged to the buyer by the lender and the title company; they represent the cost to complete the title transfer to the buyer and initiate the mortgage loan.

It’s important to note that there are numerous costs that could be itemized in the closing disclosure, to be determined by what your lender requires. Here are some common examples:

Loan origination fee: This is an application fee charged by the lender upfront for processing your loan application.
Credit checks: Any fees the lender incurs in determining your creditworthiness as a buyer, they will pass along to you. This can affect your credit score; you may want to consult with a financial advisor to determine your credit health before applying for a loan.
Land survey fee: A land surveyor will verify the property boundaries so the lender knows they’re financing it accurately.
Inspection fees: These are any fees the buyer incurs in hiring professionals to inspect the property in question. Inspections are required by lenders in most cases and are preventative. See our closing checklist below for more on inspections.
Mortgage points: Sometimes called discount points, these are credits you can purchase to lower the effective interest rate you’ll pay on your loan.

How Much Are Closing Costs on a House?

Like most steps in the closing process, closing costs are conditional based on your location, your chosen lender, and any third-party vendors you shop around for in advance of the title transfer.

An April 2020 survey by ClosingCorp, a real estate data and technology firm, determined that the average American purchasing a $200,000 single-family home in 2019 paid $5,749 in closing costs including taxes, and $3,339 without. The survey also discovered that closing costs haven’t changed much in recent years, rising by 0.52 percent on average between 2018 and 2019.

The state or locale you’re purchasing a home in will end up being one of the greatest determinants for variations in total closing costs, dramatically changing the estimated fee for each itemized closing cost. In Washington, D.C., where average values of home sales near the top of the list among U.S. states and municipalities, 2019 closing costs on average topped $25,000, a whopping 1,351 percent increase over average costs for closing on a home in Indiana.

Tips for Reducing Closing Costs

While the locale you’re moving to may be out of your control, remember these controllable tips to help keep your closing costs as low as possible:

Budget Appropriately

You’ll have to provide proof to your lender of all debts you’re responsible for, as they’ll want to calculate your debt-to-income ratio to determine your ability to manage monthly payments (aim for your ratio to come in under 43 percent for the best chances of approval). Budgeting for your home mortgage payment reduces the risk of applying for a loan that’s unaffordable for you in the long term, and increases the likelihood that your lender will see you as a viable partner.

Keep Your Credit Healthy

Borrowers with high credit scores (typically 740+) can be some of the most attractive prospects to lenders because they might have more responsible loan repayment histories. It’s possible to secure a loan with a lower credit score, but you could end up paying thousands of dollars more in interest if your lender deems you a greater risk!

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Choose Third-Party Vendors Wisely

By shopping around for home inspectors, insurance providers, value appraisers, land surveyors, or anyone else you’d rely on to vet your property and help you reach the finish line, you give yourself a chance to save more money upfront by paying less for these required costs. Remember, your lender might recommend a specific third party vendor, but it’s only a recommendation — you have the decision-making power.

How Long Does It Take To Close on a House?

As we’ve pointed out, a variety of factors can contribute to variations in the closing process that you can expect to see. Depending on all conditions, closing could take a week or more than two months.

The time it takes to close on a house is reliant on these factors that are independent of your choices as a home buyer, like the time it takes your lender to process your application, but your individual decisions can also expedite the process or slow it down. The more time you spend getting ready for your closing, the faster it will likely be. Here are two quick tips to help your closing move swiftly:

Hire an attorney: The more experts on your side, the greater the possibility that proceedings might move quicker.
Get recommendations on inspectors: Again, an expert’s familiarity with your property and location means they may be able to more quickly recommend repairs — and they just might have contractors to recommend for those repairs who work quickly.

It’s critical to anticipate that the COVID-19 pandemic may halt or slow down your closing process while lenders continue to adapt to new scenarios. Having patience here for what you can’t control may ease the stress the settlement can cause, acknowledging that all parties involved are working with some unknown variables.

Closing on a House Checklist: How to Prepare

The work you’ve put in is so close to paying off, but preparation and patience are your keys to get you through the entire process. Don’t give up yet! Now that you’re familiar with the basics of closing on a house and you know your way around standard terminology, we’re going to break down steps you can take to get ready to embark on a journey of your own toward closing on a home.

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Open an Escrow Account

While not required by law in every state, opening an escrow account to conduct any closing transactions can be a positive step toward safeguarding your money from fraudulent activity. Escrow accounts are operated independently from both the buyer and seller; a third party holds the account that the buyer funds as pertaining to the itemized total that’s agreed upon in the closing disclosure document.

Conduct a Property Title Search

This is your verification that the property title is clear, through a search of public records to determine if any other party holds claim to any part of the property you’re looking to purchase. A clear title won’t have any claims against it, meaning there are no active liens or encumbrances on the property, there is no forgery or fraudulent activity detected, and no third party is in any way involved in the property’s ownership.

Hire an Attorney

Again, this may not be required by law in the jurisdiction of your purchase. That doesn’t mean you should forego the step, though: An attorney who’s familiar with your state’s mortgage and real estate laws might help you save big bucks when negotiating closing costs, not to mention an expert to field your questions could be a major stress relief.

Assess Home Repairs

Here’s where your third-party vendors come in handy. You’ll want to consider finding a home inspector and pest inspector that are familiar not only with the geographic location, but also with the type of property you’re purchasing. The inspector might notice hard-to-catch damage from a previous flood, fire, or earthquake that could need to be addressed before closing on the property. In many cases, lenders may even require that repairs be assessed and fixed before closing can continue.

It’s important to note that your purchase agreement with the seller may have a contingency for you to walk away from the purchase if necessary repairs are deemed too costly, or if the seller refuses to pay for the repairs. This contingency could save you from a potential headache once you’ve already moved in!

Conduct the Final Walkthrough

This is your moment to shine! All the blood, sweat, and tears you’ve poured into preparing for closing led you right to the final walkthrough. This is the penultimate step in the process before the official closing and title transfer. The inspections are done, repairs are hopefully finalized, and you’re triple-checking to make sure the value of the home checks out for what you’re about to pay for it. Tip: Check every light switch, run every faucet, flush all toilets, check all appliances, and test every door. Anything caught at this stage that’s not a deal-breaker could be tabulated and deducted from the sale price of the home — or fixed outright, if there’s time.

Gather Your Closing Documents

Now you should be ready to proceed with settlement. Here’s a shortlist of documents and people to remember to bring to the official closing proceedings:

Cashier’s check / wire transfer receipt (proof of funds for the transaction)
Closing disclosure (to compare with your loan estimate)
Checkbook / mobile access to your bank account (just in case there are last-minute changes)

Lastly, don’t forget to ask your attorney to join you at closing (or a friend or trusted advisor).

While closing on a home may seem daunting, there are many resources available to make the process run smoothly. There are a number of elements within your control, like the vendors you choose, and making the right selections for your lifestyle can help you rest easy while you await moving into your new home.

Sources: ConsumerFinance.gov 1, 2, 3, 4, 5 | HUD.gov | Closing.com | EllieMae | Investopedia 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11