When you buy or sell a home, the real estate closing is the final hurdle, the finish line when the property transfers ownership. But instead of a celebratory anticipation of the settlement date, many consumers face the day with trepidation.
In an April speech, Richard Cordray, director of the Consumer Financial Protection Bureau (CFPB), said, “Without a doubt, the mortgage closing process is complicated for everyone involved and is most stressful of all for the home buyer.”
A well-prepared buyer or seller who has seen the documents to be signed ahead of time and understands what will happen at the closing should feel confident that the transaction will be simple. Most settlements are uncomplicated and take about an hour, said Brenda Heffernan, managing lawyer for MBH Settlement Group in McLean, Va.
Beginning in August 2015, the settlement process will be tweaked by new CFPB rules, said Sam Gilford, a spokesman for the CFPB. Called “Know Before You Owe,” the regulations include simplified loan estimate forms and closing disclosures. The loan estimate form, which will replace the Good Faith Estimate, will be given to consumers within three days of submitting a loan application. Three days before the closing, consumers will get the new closing disclosure form that replaces the Truth-in-Lending and HUD-1 statements.
“Getting the closing disclosure early will ensure that consumers can review their final loan terms and costs before sitting down at the closing table, and gives them time to ask questions,” Gilford said in an e-mail. “The rule also establishes limits on closing cost increases.”
Even before those changes take effect, the best way a consumer can prepare for settlement is to partner with a good real estate agent and loan officer, said Helen Krause, marketing director for New World Title and Escrow in McLean.
“The most important thing to do is to stay in constant communication with your Realtor, your lender and your title company,” she said. “The title company comes into play after the contract is written and is typically chosen by the buyers.”
Preparation before settlement means consumers have a better experience at the closing, said Randy Rothstein, president of Paragon Title in Bethesda, Md.
Krause said consumers need to bring government-issued photo identification to the closing along with a certified check or a cashier’s check for the down payment and closing costs, unless you have made arrangements to wire the money in advance. The exact amount often changes slightly at the last minute, so you also need a personal check to cover extra amounts up to $1,000. If you overpay with your certified method of payment, the title company can immediately write a check or wire the refund to you.
“Buyers are often surprised that you can’t use a debit card, a credit card or even cash at a settlement,” Krause said.
Most title companies send information to buyers long before the settlement day to tell them what to expect and so they can preview sample documents.
“A lot of the documents that you sign at the closing are papers that you’ve already seen and signed during the loan application process,” said Todd Ewing, founder of Federal Title and Escrow in Washington. “It’s a good idea to review what you signed at the initial loan application just before you go to closing and to bring those documents with you on a mobile device or printed so you can compare them to make sure everything’s consistent.”
The most important papers to understand and read at the settlement are the HUD-1 Settlement statement, the Deed of Trust and the note, Ewing said.
Said Heffernan: “The HUD-1 settlement statement summarizes all the fees you and the sellers pay at the closing. On the third page, you can compare the final statement with the Good Faith Estimate you have from your lender. The note contains the terms of your loan, so you need to confirm that they’re the same. You should also check the first payment letter because that spells out your mortgage due date and your payment.”
The Deed of Trust, which establishes the right of the lender over the property if the loan is not repaid, is a long document that some buyers find intimidating, Heffernan said.
“The most important part is on page two, where it shows the details pertinent to the transaction, but none of it can be negotiated at this point without canceling the transaction,” she said.
The deed, a separate document from the Deed of Trust that transfers ownership from the sellers to the buyers, is signed only by the sellers. The Truth-in-Lending disclosure shows the annual percentage rate (APR), which is different from the interest rate you’re paying because it wraps fees into the rate.
In addition to reviewing paperwork before the settlement, staying in tight communication with the professionals involved in your transaction and asking questions if you don’t understand something, you can take steps to avoid some of the most common issues that cause delays.
“Don’t present any last-minute elements at the settlement table,” Rothstein said. “One of the most common problems is that someone who’s on the loan or on the title doesn’t show up, but the other buyer will have a power of attorney. Unfortunately, there are very specific requirements for a power of attorney for a real estate transaction and often the one they have is no good. We can usually accommodate someone but we need time to coordinate this in advance.”
Krause said that anyone listed on the loan or on the title must be at the closing or have a valid power of attorney arranged in advance, even if they’re just co-signers.
Said Ewing: “Sometimes we have problems when two buyers both want to be on the title but only one is on the loan. Some lenders won’t allow that at all, but even when they do everyone needs to know that before the settlement.”
Another common problem that delays settlement is when the buyers go on a walk-through of the property and find problems with items that have not been fixed in accordance with the home-inspection contingency or something that broke after the inspection.
“In the old days, lenders would let us escrow money from the settlement to let the sellers fix something or allow us to give a credit to the buyers, but with very few exceptions this isn’t permitted anymore,” Rothstein said.
Ewing said buyers simply have to trust that the sellers will do as they ask or they have to reschedule the settlement.
Said Heffernan, “I recommend that buyers schedule two walk-through appointments, one about five days before the settlement to check on home-inspection items and get receipts for completed work and then a second one early on the day of the closing to confirm that the condition is still the same.”
Although escrow accounts for repairs are rarely allowed, most lenders require borrowers to establish an escrow account to collect money on a monthly basis for property tax and homeowner’s insurance bills.
“Buyers have to prepay their homeowner’s insurance for one year at the settlement and then the lender starts collecting one-twelfth of the bill with each mortgage payment for the following year’s insurance premium,” Heffernan said.
Home buyers who are financing their purchase are required to buy lender’s title insurance that protects the lender in case there are future claims against the title to the property, but most buyers also purchase optional owner’s title insurance, Krause said. She recommends requesting a renewal rate if the sellers bought the home within the previous five to 10 years.
Although your arm may be sore after settlement from signing a stack of papers, with good preparation the session should go smoothly and you’ll walk away with your new set of keys.
Lerner is a freelance writer.
● Amortization schedule: A list of each monthly payment for principal and interest and your loan balance for the length of your loan.
● Annual Percentage Rate (APR): The combined interest rate including all fees that have been wrapped into your loan.
● Appraisal: The value of the property as determined by a professional appraiser.
● Deed: Document used to transfer ownership.
● Deed of Trust: Document that establishes the rights of the lender if you don’t repay your loan.
● Escrow: Account established by your lender to hold monthly payments for property taxes and homeowners insurance until the bills are due.
● Good Faith Estimate: Document provided by your lender when you apply for a loan that estimates the entire cost of buying a home, including your down payment, mortgage and closing costs.
● Homeowners insurance: Insurance required by the lender to protect the value of your property and personal possessions.
● HUD-1 statement: Document signed by buyers and sellers at settlement that includes a line-by-line explanation of all costs to each side of the transaction.
● Mortgage insurance: Required on loans with a down payment less than 20 percent.
● Note: Document that you sign to promise to repay your mortgage.
● PITI: Principal, interest, taxes and insurance; all the elements on your monthly mortgage payment. Condo or HOA fees are paid separately.
● Points: Borrowers sometimes pay one or more points, equal to 1 percent of your loan amount, to reduce their interest rate.
● Survey: An optional professional survey to establish the legal boundaries of your property.
● Title: The document that proves ownership of property.
● Title insurance: Lenders require title insurance to protect themselves against a claim on the title; buyers can purchase optional owner’s title insurance to protect themselves.
● ● Truth-in-Lending statement: Buyers sign this to reconfirm their loan terms.