What to expect when closing on a house
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Closing on a house marks the beginning of a new chapter in your life. But this crucial final step towards homeownership includes lots of documents, signatures and fees. Here’s a closer look at what to expect on your closing day.
What is the closing process?
Closing is the final step in what is often a lengthy process associated with a real estate sale: The time between signing a purchase and sale agreement and reaching the closing table can take as least a couple of months. For homebuyers, closing is the day they officially take over ownership of the property and receive the keys. For sellers, meanwhile, closing is the day proceeds from the transaction will be received.
By the time closing arrives, many important steps have to be completed. Unless they’re paying in cash, the prospective buyer will have secured the mortgage needed to purchase the property. An appraisal of the home and an independent third-party inspection of its condition will have been carried out. Any additional discussions of costs, repairs and fixtures will have been satisfactorily settled. The buyer will do a final walk-through of the property. Usually, the seller has packed up and departed.
On closing day itself, the homebuyer will be required to sign a great deal of paperwork that finalizes the deal. Often there are many other parties present for closing day, including the seller, the lender, real estate agents, the closing agent and often an attorney who will also review the paperwork being signed.
How long does it take to close on a house?
The timeline between making an offer and closing a sale can vary. For home purchases financed with mortgages, the average time to close is 50 to 51 days, according to ICE Mortgage Technologies, a mortgage advisory and technology platform. It is possible for closings to be as quick as 30 days, though, especially in all-cash deals.
Securing the mortgage is one factor that often takes the most time in mortgage closings. Applying for a mortgage preapproval before you start shopping for a home can help you close sooner because a few of the verification processes will be completed ahead of time.
What factors may cause closing delays?
A number of things can hold up your closing including a low appraisal, unmet contingencies, title problems, and a foul-up with the mortgage funds.
An appraisal is a professional assessment of the worth of the home you’re interested in buying, ordered by the mortgage lender. The purpose of an appraisal is to ensure that the sale price of the home aligns with its fair market value. This step has the potential to impact closing if the home appraises for less than the purchase price — and/or the amount you’re seeking to borrow. The lender won’t loan you more than the appraisal value. So if you don’t have the cash to make up the difference, called an appraisal gap, your deal could be tanked.
Failure to secure financing
If you don’t secure a mortgage — because something changes in your finances or the money doesn’t come through or is delayed for some other reason — it could slow down your closing or cause it to be scrapped entirely.
Contingencies in a real estate contract allow either one of the parties to back out of the deal if certain specified conditions are not met. This could include a home inspection that reveals serious problems with the home or the purchase being contingent upon the buyer securing financing (see above) or the seller acquiring a new home. If these or other contingency-related challenges arise, it can stall the deal or cause it to fall apart altogether.
In order for any real estate sale to close, the title must be clear — that is, free of any claims or doubts about ownership. That means if there is any sort of lien or claim to the property, the closing cannot proceed until that issue is cleared up. Liens might be placed on a property by the Internal Revenue Service or the state government if back income or property taxes are owed by the homeowner.
Steps to prepare for closing on a house
Closing on a property is complicated. Here’s what you need to do to get ready:
1. Consider hiring a real estate lawyer
Buying a house isn’t just a transaction between the buyer and seller. It’s also a relatively complex legal process. To help you navigate the process, you may benefit from hiring a real estate attorney who can ensure the closing goes smoothly. This is usually optional, but having a lawyer on your side can help you avoid unexpected issues down the line.
2. Open an escrow account
Most homebuyers open an escrow account during the start of the closing process, which is typically managed by a title company. This account holds all the money associated with the sale, like an earnest money deposit, before you officially close on the house. When closing ends, the mortgage provider distributes the funds to the seller and buyer respectively, ensuring a secure transaction.
3. Run a title search
Run a title search on the property you are purchasing early in the closing process. A title search will bring up any issues with the title, such as an existing lien or unpaid property taxes, which could jeopardize your legal right to buy and live in the home. Also consider buying title insurance during this time, which would cover the cost of title claims during your ownership.
4. Get a home inspection
Getting a home inspection is an important part of closing. Even the most beautiful houses can have hidden issues.
During a home inspection, a contractor or professional inspector will check the home for major issues, like foundation cracks, leaks, problems with the plumbing or electrical system, and potential safety hazards. Depending on the results of the inspection, you might decide to back out of the deal or you can ask the seller to fix the issues as a contingency of the sale.
5. Negotiate your closing costs
Although closing costs can be expensive, some costs are negotiable. See if your lender is willing to lower the origination fee or waive an application fee. If lender’s title insurance is required, ask your mortgage company if you can shop around to find the best rate rather than paying a fixed fee from the insurance company of their choice.
6. Confirm your closing date
The next step is to confirm your closing date. This is the date when the seller will be fully moved out of the home, and you will be able to move in. Keep in mind that the closing date is usually at least one month after the purchase offer has been accepted. It can take even longer if you run into unexpected hurdles during the closing process. Once you have confirmed the closing date, you can start packing your things and phoning moving companies.
7. Do a final walk-through
Even if your initial home inspection went smoothly, it’s still a good idea to do a final walk-through right before you move into the new house. It is always possible that damage could have occurred between the first inspection and your move in date. During the final walk-through, make sure the seller made all the necessary repairs and removed everything that was not included in the purchase and sale agreement from the house and the property.
8. Understand your closing documents
At the closing, you will receive a number of important documents to sign. It could be upwards of 100 pages, so make sure to ask your real estate attorney or realtor to explain what each document is for. Here are some of the documents you can expect to receive:
- Loan estimate: This document contains important information about your loan, including terms, interest rate and closing costs. Make sure all the information is correct, including the spelling of your name.
- Closing disclosure: Like the loan estimate, the closing disclosure outlines details of your mortgage. You should receive this form at least three days before closing. This window of time gives you a chance to compare what’s on the loan estimate to the closing disclosure.
- Initial escrow statement: This form contains any payments the lender will pay from your escrow account during the first year of your mortgage. These charges include taxes and insurance.
- Mortgage note: This document states your promise to repay the mortgage. It indicates the amount and terms of the loan and what the lender can do if you fail to make payments.
- Mortgage or deed of trust: This document secures the note and gives your lender a claim against the home if you fail to live up to the terms of the mortgage note.
- Certificate of occupancy: If you are buying a newly constructed house, you need this legal document to move in. Ask for a copy of the title policy and survey, as well.
- Purchase agreement: A binding contract that spells out the terms of a real estate transaction. Signing it finalizes the purchase of a property.
What happens at the closing of a house?
On closing day, you will have two primary responsibilities: signing legal documents and paying closing costs and escrow items. The documents that you’ll sign pertain to the agreement between you and your lender regarding the terms and conditions of your mortgage and also the agreement between you and the seller, who is transferring ownership of the property. It is important to read all of these documents carefully so that you know exactly what you’re agreeing to.
Additionally on closing day you’ll be required to pay all closing costs and escrow items. There are a number of fees associated with obtaining a mortgage and transferring property ownership. These fees include property taxes, utilities bills and HOA fees. The funds are usually provided via a certified check or cashier’s check made out to the escrow company or a wire transfer of funds to the banking institution. Personal checks are often not allowed.
It’s also important to find out what type of identification is required before you arrive on closing day. Usually, only one type of ID is needed, though some companies require two. The items you’re typically required to bring include:
- Government-issued identification, such as a driver’s license or passport
- Marriage certificate if you’re purchasing the property with a spouse and do not have the same last name
- A certified check for the down payment and closing costs
- Proof of homeowners insurance
You may be able to move into the home on the very same day that closing is complete—perhaps as soon as you finish signing the paperwork. This timeline however, may be impacted by any contingencies in the contract related to the seller staying in the home for a period of time after closing. This scenario is often referred to as a rent-back and is typically requested so that the seller has time to find a new home or ready it for occupancy.
Who is present at the closing?
Closing on a home is often done in steps and on different days. All parties do not have to be present, but the following parties often are:
- Closing agent, who might work for the lender or the title company
- Attorneys: The closing agent might be an attorney representing you or the lender. It’s always a good idea to have a real estate lawyer present who represents you and only your interests.
- Title company representative, who provides written evidence of the ownership of the property
- Home seller or their representative
- Seller’s real estate agent
- You, the buyer, or your representative
- Your real estate agent
- Your lender
The closing agent conducts the settlement meeting and makes sure that all documents are signed and recorded and that closing fees and escrow payments are paid and properly distributed.
How much are closing costs?
Closing costs are the fees and expenses you must pay before becoming the legal owner of a house, condo or townhome. You can expect to pay 2-5 percent of the mortgage loan in closing costs. The 2021 national average for closing costs including taxes was $6,905 including transfer taxes, according to CoreLogic. Washington D.C. had the highest average closing costs at $29,888, while Missouri had the lowest at $2,061, according to the same report.
Closing costs vary depending on the purchase price of the home and how it’s being financed but typically, closing costs include:
- Origination fee, which you pay to your lender to start the loan application
- Underwriting fee, which you pay to your lender to process the application
- Appraisal fee, which you pay to your lender to get an estimate of the property’s value, to ensure you’re paying a fair price and they’re not lending you more money than the house is worth
- Credit report fee, which you pay to your lender to have your credit checked
- Title search fee, which you pay to an agency to make sure the seller has the right to sell you the property
- Recording fee, which you pay to the local municipality to make the transaction official and enter it in its records
- Transfer taxes, which you pay to the relevant local or state government agencies
Closing costs can be rolled into the mortgage amount (known as a no-closing cost mortgage) or paid upfront to avoid paying additional interest.
Some of the additional costs you might encounter on closing day include an attorney’s fee, notary’s fee and city or county fees/taxes that some municipalities have on real estate transactions.