If you’re getting ready to close on a house, think of all you’ve accomplished so far! You found the right home, were preapproved for a mortgage, saved for a down payment, and made an offer they couldn’t refuse. You can almost hear the keys to your new home jangling in your pocket.
But don’t get ahead of yourself just yet. You still need to go through a few final steps, including the actual closing. Here’s what to expect during this time and how you can work with your lender to help the process run smoothly.
What Is A Real Estate Closing?
After an offer is accepted, closing is the last phase in transferring a home’s ownership from the seller to the buyer. The closing date is set during the negotiation process and usually occurs several weeks after the purchase agreement is signed.
The Home Closing Process: Step-By-Step
During the home closing, documents will be signed, money will change hands and you’ll walk away with the property title of your new home. To help you and the seller conduct the closing, an escrow or closing agent will be present to prepare all documents to be signed and handle all money to be transferred.
Step 1: Sign Documents
The majority of your time will be spent signing a slew of legal documents. As you sit down to sign, read through each one carefully and make sure to ask about anything you don’t understand. During this time, the seller will also be signing documents – though not nearly as many – to transfer legal ownership of the property to you.
Step 2: Disburse Funds
You will have to bring a cashier’s check to the closing table to give to the closing agent. This check will be used to pay for the down payment as well as the closing costs. If you prefer, you can instead choose to wire these funds.
Your lender will give the money from your loan to the closing agent. The closing agent is then in charge of using the funds to pay the real estate agents’ commissions and the seller’s outstanding mortgage balance (if applicable). Once those expenses have been deducted, the remaining balance is paid to the seller. These payments may not be received until after closing.
Step 3: Transfer Ownership
After the seller signs the deed, it will be registered with your city or county. This filing ensures that the public records show that you are now the rightful owner of the property. Once recorded, you are given the keys to your new home and can move in unless a delayed move-in has been stipulated in your contract.
How Long Does It Take To Close On A House?
The amount of time that it takes to close on a house can vary. According to Ellie Mae’s Origination Insight Report, the national average for closing on a new home is 47 days. The reason that closing typically takes so long is that there are often issues that arise, which delay the closing process.
Things That Can Delay The Closing Process
Given all of the moving parts involved in home buying, there can be hiccups along the way that create setbacks for the closing process. Approximately one-third of all home buying transactions encounter delays prior to closing. The most common causes of these delays are financial, appraisal and home inspection issues.
Almost half of closing delays are caused by financial issues. Taking on new debt changes your debt-to-income ratio, a key factor in determining the loan amount you can get approved for. If your DTI increases, you may qualify for a smaller loan amount – which could be a problem depending on your home price. If you push your DTI past about 45%, it's possible you won't qualify for a mortgage at all.
The best way to make sure you don't run into these problems when closing your loan is to avoid any major financial changes or spending. Don't apply for new credit lines or loans, and don't make big purchases that will deplete your assets. You can do these things after your loan closes.
Closings can be delayed when the appraised value of the home is less than the purchasing price. A lower-than-expected appraisal value creates problems for the mortgage process. Since the home will be used as collateral to protect your lender in the event you default, your lender will not offer you more money than the property’s appraised value.
If your appraisal comes back too low, you have a few options:
- Bring more money to the table to make up for the difference in price.
- Negotiate with the seller to lower the home price.
- Contest the appraisal if you think there's an error in the report.
- Walk away from the deal if you have a mortgage or appraisal contingency stipulated in your contract. (Know that you will not be refunded for the inspection or appraisal.)
Home Inspection Issues
Home inspections often reveal unexpected problems with properties. When these problems are minor, closings typically continue according to schedule. However, major issues with the foundation, electrical, plumbing – and even termite or water damage – can lead to significant expenses for home buyers.
Depending on the severity of potential issues, sellers may be willing to pay to eliminate them. Determining how to repair issues and negotiating with the seller to pay for them can prolong the closing process. However, if you have a home inspection contingency, you can break the contract without financial repercussions.
How To Prepare For Closing Day
Some delays are foreseeable. In order to eliminate any potential setbacks to the closing process, you can take steps to get ready for closing day. The following seven steps will provide you with a general overview of how you can prepare. However, the specific legal requirements vary by state, so you should check with your real estate agent or attorney.
1. Accept The Purchase Offer
After you make an offer on the home, the seller must agree to the purchasing price and terms. If your offer is accepted, your real estate agent will draw up a purchase agreement. This agreement is a binding contract that stipulates the price, any contingencies and the timeline for the sale.
Sometimes both parties will be present to sign the purchase agreement. However, if you and the seller are unable to sign at the same time, you will sign it first and make a good faith deposit, also known as earnest money. The good faith deposit is used to demonstrate that your offer is serious. It will be held in an escrow account and later used to pay for part of your down payment.
Once you and the seller have signed the purchase agreement, the closing process will officially begin. However, the purchase agreement can be altered to reflect later negotiations if issues arise.
2. Order A Home Inspection
Once you've had an offer accepted, it's time to schedule your home inspection. While this step is usually not a requirement for getting a mortgage, it's a way to protect yourself from buying a home that will cost you more money than you originally thought due to necessary repairs down the line. It will be your responsibility to find an inspector and pay for the inspection. However, your real estate agent may be able to help with this. They can recommend an inspector and possibly even set up the appointment for you.
A typical inspection will cover surface-level elements of the home, such as structural components, outlets, heating and cooling systems, and appliances. However, the inspector can't check out aspects of the house that aren't easily accessible or visible. For instance, you'll need a specialized inspector to identify lead, mold, asbestos, radon and pest problems.
Be sure to attend your inspection and ask all the questions you can think of. This is your chance to walk through your new home with an expert. They can tell you about any potential red flags they see and make recommendations for what to fix first and how to go about it.
3. Complete The Appraisal
The home appraisal is a required part of the home buying process because it protects both you and your lender from paying more for a home than what it's worth. Your mortgage company will order the appraisal for you, but you will be responsible for paying the appraisal fee out of pocket.
The appraiser is always an independent third party. By law, appraisers can't be affiliated with you or your mortgage company. This ensures the appraisal process is fair and unbiased.
If the appraised value of the house comes back higher than your purchase price, good news! You just snagged a deal and some additional equity in your home. It’s important to remember that you’re not obligated to share the appraised value with the seller. As long as you have a signed purchase agreement, the seller cannot raise the price of the home if an appraisal comes back higher than the accepted offer.
4. Underwrite The Loan
While the inspection and appraisal are happening, your mortgage company will work on underwriting your loan. This is the process of verifying your income, assets, debt and property details to ensure you are financially able to enter into this loan. Your mortgage company uses information from the underwriting process to issue final approval for the loan.
Much of the process happens behind the scenes, but your mortgage company may ask you for additional documents during this time. For instance, they could ask for documentation that shows where deposits in your bank account came from or provide proof of additional assets. It's important to stay on top of your lender's requests so you don't slow down the loan process.
5. Purchase Homeowners Insurance
In most cases, your mortgage lender will require you to purchase homeowners insurance and show proof of coverage before closing on your loan. Homeowners insurance not only provides a financial safety net for you but also your lender. In the event the home is sold, and there is still a balance on the loan, you’ll want the home to sell for at least the amount owed to the lender. If an event causes significant damage to the home, the value of the home may drop considerably. Homeowners insurance helps you repair those damages and improve the value of the home without depleting your finances.
You’ll likely be required to get a plan that covers the full replacement value of your home, at a minimum. If you live in a location that has additional risks – such as a flood plain or areas prone to natural disasters – you may be required to get other coverage, such as flood, fire, hurricane or hazard insurance.
6. Acknowledge Your Closing Disclosure
After the loan has been approved, you'll receive a Closing Disclosure, which will include a summary of the final costs of your loan.
It's important to acknowledge that you received the document as soon as possible. Your lender is legally required to give you the Closing Disclosure 3 business days before closing, so if you don't acknowledge receipt of your Closing Disclosure quickly enough, your closing could be delayed.
7. Attend A Final Walk-Through
In most cases, you'll get to do a walk-through inspection of the property up to 1 day before closing to make sure everything is in order, and the property is in the condition that was stated in your purchase agreement. As you take one last look at the property before closing, answer these questions:
- Were all the agreed-upon repairs completed?
- Did the seller leave behind all appliances, window treatments, etc. that were specified in the purchase agreement? Are these items in the condition you expected them to be in?
- Did the seller damage the property in the process of moving out?
- Do the lights and faucets work?
- Does the garage door open?
- Has the seller removed all hazardous materials, such as old paint cans and construction materials?
If there are any major issues, you can ask to delay the closing or contact the listing agent to negotiate a fair solution.
What Happens On Closing Day?
During the closing, you’ll sign the final paperwork, become the legal owner of the new home, and complete your exciting home-buying adventure. With the finish line in sight, you don’t want anything to cause you to trip, so prepare for closing day by knowing what to expect, what to bring to the table, and what costs – if any – you’ll need to settle at that time.
Where Closing Day Takes Place
Your closing will most likely be held at a title company, management firm or escrow office. Depending on your lender, closing day can take place at the home being purchased or another convenient location.
What To Bring To Closing Day
You’ll have a million things on your mind the day you close, but keep these items at the forefront. If you don’t bring them to closing, you may not be able to complete the process.
- Identification such as a driver's license, government-issued photo ID or passport
- A cashier's check to cover your closing costs (if applicable), laid out in your Closing Disclosure
- Your Closing Disclosure to double-check the final paperwork
- A copy of your homeowners insurance policy
- A list of key contacts, like your agent or lawyer, in case any questions come up
Who Should Attend The Meeting On Closing Day
Anyone who's listed on the loan will need to attend the closing. It's still possible to close on your mortgage if you aren't able to make it in person, but you'll need to grant someone power of attorney. You can also expect a representative from the title company to be at closing, and some states require a witness or attorney to be present, as well.
In some states, the buyer and seller will be at the same closing, whereas in other states, each party attends separate ones. In other words, you might see the seller at closing, but it's not a guarantee. Your real estate agent can also attend, although this is not required.
What You’ll Pay On Closing Day
Your Closing Disclosure, sent at least 3 days before you close, will list your closing costs and tell you how much you owe. Sometimes, per the agreement, the seller may pay part of the closing costs. The amount you owe will depend on your loan, your location and what you have agreed upon with the seller. Here's a breakdown of the most common closing costs on a house you can expect to pay:
- Down payment: Your down payment will become the equity you have in the home.
- Escrow funds: Your lender may collect a portion of escrow funds at closing to ensure there's enough money in your account to pay tax and insurance bills as they come due. Your lender may also roll a portion of these costs into your monthly payment to fund your escrow account throughout the year.
- Third-party fees: This covers costs from third parties your lender used to process your mortgage loan. Third-party fees typically include appraisal fees, title insurance costs, and credit report fees.
- Prepaid interest: You'll pay daily interest upfront to cover the period between closing and the date your first mortgage payment is due.
- Homeowners Association dues: If you're moving somewhere that has HOA dues, you may be required to pay the annual fee at closing.
- Discount points: A point (or discount point) is a fee paid to lower your interest rate. If you've chosen to pay points, you'll pay for them at closing.
What You’ll Sign On Closing Day
As discussed, there’s a lot of paperwork associated with closing on a home. As the seller signs documents to transfer ownership of the property, you’ll have to sign paperwork associated with the property, as well as the mortgage you’re obtaining to purchase it.
Some of the documents you will sign include:
- Settlement Statement: Lists all of the costs related to the sale.
- Promissory Note: Details the terms of your mortgage and commits you to repaying your loan amount.
- Mortgage: Gives your mortgage lender authority to foreclose on your new home should you default on your loan – also known as the Deed of Trust.
- Initial Escrow Disclosure: Outlines how your lender will disburse the funds in your escrow account.
Once these documents are signed, the title company will register a new deed in your name. At this point, you will gain full ownership of your new home.
Final Thoughts On Closing
While every closing experience is different, it typically takes about an hour or two to complete. After weeks of waiting for this day, you may want to skip over the piles of paperwork and get to the homeownership part. But don’t race through the documents. You are entering into a legal agreement and making one of the biggest purchases of your life. You’ll want to understand what you’re agreeing to and feel comfortable with that commitment.
Take your time reading through the documents. Verify the spelling of your name and such terms of the agreement as your interest rate, the balance owed, and term of repayment. Most importantly, ask questions if something doesn’t seem right. You’ll get to the end eventually. Make sure you arrive feeling confident.
With your questions answered, documents signed, and closing costs paid, you’ll complete the home buying process and move onto the next journey: homeownership!