Understand Your Settlement Documents Before You Sign

By Benny L. Kass
Saturday, September 22, 2007

Q: My wife and I are recent college graduates with decent incomes, and we have decided to buy our first house. We have been reading everything we can find about the home-buying process and have started to shop around for neighborhoods. However, we do not understand the closing process.

Is there a difference between a "closing" and a "settlement"? And exactly how does this work? What is required of us when we go to buy our house?

A: While there may be technical and legal differences between these two terms, for all practical purposes, "closing" and "settlement" mean the same thing. It is the time when buyer and seller get together in the office of a lawyer or a title company and everyone signs all the legal documents required to enable the buyer to take legal title to the property.

In California and other states out West, the process is more commonly called an escrow. This is because the seller puts the deed into an account with the escrow company. When the buyer's funds become available, the escrow agent records the deed and turns over the sales proceeds to the seller.

Many home buyers ignore the importance of a settlement. They think that this is just the place where they have to sign papers, pay the necessary money and then grab the keys.

In fact, a settlement is perhaps the most important aspect of buying a home. Let's see how it works:

You have just signed a contract to buy. The real estate agent will recommend a settlement company or lawyer who can conduct the closing. Keep in mind that you have the absolute right to select where the settlement will take place. You can consider the agent's recommendation, but in many instances, there is a business relationship between the agent's company and the title company. This could mean that if problems arise during the settlement, the title company may side with the seller (or the agent) and not be a neutral party.

When you have made your selection, you or the agent will send the final contract to that company, which will then order a title search. This is important. You want to know that the seller who signed the sales contract is in fact the owner of the property. I know of situations where the seller thought that he was the sole owner, but it turned out that a brother or sister was also on the title.

You also want to know if there are any problems with the title. (We lawyers call these "clouds.") Are there any liens on the property? Have all previous mortgages been paid off, or will they be paid off when settlement takes place? Are there any restrictions on how you can use your home, such as easements for next-door neighbors to cross over your back yard to get to the public alley?

The title company will also obtain a survey of the property. At settlement, you or your attorney should carefully study this document. Are the fences on the property line? Does the house encroach on your next-door neighbor?

You should be concerned about a concept called "adverse possession." This is a legal doctrine that says that if your neighbor has been using a portion your property "openly, hostilely and notoriously" for a period of time that is spelled out in your state law, your neighbor can go to court and claim ownership of that piece of land. And fences often create a presumption in law that the property line is where the fence is, and not where it really is according to the official land records. In the District and Virginia, the statutory period is 15 years; in Maryland, it is 20 years.

The settlement company should send you and the seller -- in advance of the day of closing -- a copy of the title report and the survey. Any problems should be resolved before closing.

On closing day, you sign a slew of documents. Here are the most important ones:

  • Promissory note: This is your IOU to your lender. Read it carefully. Don't let the settlement people rush you into signing. Is the amount of the loan correct? Is the interest rate correct? Is there a grace period before you will be hit with a late fee? How much is that penalty? If this is an adjustable-rate mortgage, read the terms and conditions as to when and how your monthly mortgage payment could increase.

  • Deed of trust: This is the mortgage document. You are giving a trustee selected by your lender title to the property. If you go into default, the trustee can sell your house at a public auction. This is called foreclosure, and, unfortunately, we are seeing too many such foreclosures now throughout the country.

  • HUD-1 (settlement statement): This is the uniform statement used for all U.S. residential settlements, as approved by the Department of Housing and Urban Development. It is a two-page document that shows the buyer's costs and charges on the left-hand column of each page and the seller's expenses and payments on the right.

    Make sure you understand every line. People and computers make mistakes, and the settlement table is the place to correct them. Is the lender requiring too much for escrow for taxes and insurance? Did the lender overcharge you for the appraisal and credit fee? Did the lender credit you for any money you have already paid? Has your earnest-money deposit been credited to you?

  • Deed: The seller will sign the deed, but as buyer, you must review it. Are your names spelled correctly? Is the legal description proper? The deed must reflect how you are going to be taking title. Have you discussed this with anyone? If you are buying your property with your spouse, you probably want to take title as tenants by the entirety. But if you are buying with a friend, title can be held either as joint tenants or as tenants in common. Make sure that you fully understand the distinctions among these arrangements before you agree to accept the deed. If you are in doubt, consult your lawyer for a full explanation.

    When all the legal documents have been signed, you will give a check to the person conducting settlement. The title company will then record the deed and the deed of trust among the land records in the jurisdiction where your house is. Then, perhaps months after settlement, you will receive the recorded deed, as well as a copy of your title insurance policy.

    Before you leave the settlement table, get a copy of every document you have signed. Also, get the keys to the property, unless you have previously agreed to allow the seller to remain in the house for a time.

    It is also a good idea to get the seller's new mailing address and phone number in case you have any questions or problems after you move in.

    A settlement is both an end and a beginning in the home-buying process. Don't take it lightly.

    Benny L. Kass is a Washington lawyer. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, 1050 17th St. NW, Suite 1100, Washington, D.C. 20036. Readers may also send questions to him at that address or contact him through his Web site, http://www.kmklawyers.com.

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