You found the perfect home and, after a few negotiations, the seller accepted your offer. You’ve been to the bank and have your mortgage approval in hand. In fact, the only thing standing between you and your new home is the closing.
So just what is a real estate closing? And what exactly happens at closing?
Sometimes referred to as a settlement, your closing is the final step of your real estate transaction. The closing is handled by a neutral third party closing agent such as a title company or a real estate attorney. At a closing, major events include:
- A home’s title (and the keys) are transferred from seller to buyer.
- The proceeds of the sale are distributed to the seller.
- If the home is financed, the buyers sign the mortgage note.
- The buyer and/or seller pay other fees such as real estate commissions, title insurance, and pro-rated property taxes.
Understanding Your Closing
Closings involve loads of paperwork, including the deed, which grants legal rights and is signed by the seller and given to the buyer. The deed will then be registered with the city or county in order to protect the ownership rights of the new owner. Keys are also given from the seller to the buyer. Finally, the seller will get a check for the net proceeds of the transaction; the sales price minus closing costs and what they owe on their original loan, if anything.
The details of the financial transactions that occur at closing are summarized in a document known as the HUD-1 Settlement Statement.
As a buyer or seller, it’s important to review the HUD-1 document before closing. You should get this document a minimum of one day prior to closing, but hopefully several days before. The HUD-1 shows line by line each and every expense as well as who is to pay what amount. Therefore, it’s helpful to review the HUD-1 so you know what you should be expected to pay at closing.
As a buyer, you will typically have to pay your share of closing costs and escrow fees at closing, so you will need to bring a cashier’s check with you for the balance of what you owe for closing costs, as stated in the HUD-1.
As a seller, you may have to pay for a portion of closing costs and escrow fees as well in addition to paying for items such as:
- Real estate commissions
- In some states, a year of a home warranty for the buyer
- In some cases, a title insurance policy for the buyer
Some items are pro-rated, or split between the buyer and seller according to length of use, at closing. Taxes, insurance and homeowner’s association fees are the most commonly pro-rated items.
It’s important to pay attention at closing despite being anxious to finalize the transactions. There are a few things that could potentially go wrong and you can play a role in preventing them. For example, the HUD-1 statement, being essentially several pages of items and their expenses, could have errors. As a seller, if you remember hearing that you were going to have to pay $400 for a home warranty and you see $4,000 listed, point it out! Carefully examining the settlement statement can save you money.
What Buyers Should Bring to a Closing
As a home buyer, your real estate agent and loan officer should provide plenty of coaching on what to bring to your closing. In most cases, you’ll need:
- The big check. A cashier’s check (not a personal check) for the total amount due on the HUD-1 Settlement statement. This includes your down payment and closing costs.
- Your checkbook. You’ll want to be able to cover any last minute changes (although hopefully there won’t be any). You may also need to cut the seller a check for items that aren’t included in the settlement, such as any heating oil left in the tank.
- Your full attention. There are a lot of intimidating legal documents to sign at a closing, and it’s important not to glaze over. Do take the time to read before you sign. Don’t be afraid to ask for clarification if there’s anything you don’t understand.
A Final Caution
One problem I’ve seen arise for homebuyers is if either their loan commitment or interest rate lock expires prior to closing. (If the interest rate that you’ve locked in expires prior to closing, you may be stuck paying a higher interest rate or scrambling to qualify again).
Your closing agent is there to make sure everything goes as planned prior to closing and that the loan commitment doesn’t expire prior to close of escrow. Still, it behooves you to do your own double-checking and to sure you don’t pay for anyone else’s mistakes.
Although buyers, sellers, and even real estate professionals may get nervous about real estate closings, they’re just part of the process of transferring real estate. Knowledge and preparation are all you need to make your next closing go as smoothly as possible!