A real estate closing – also known as settlement or escrow in different areas – is like the last act in a play. In Act I, you got pre-approved with a lender to ensure you had the financial capacity to buy a home. In Act II, you looked for the home and wrapped established a purchase agreement. In the end, Act III, you have settlement, a process that ensures all the promises made in the sale agreement are fulfilled.
Despite efforts to automate settlements, the reality is that closings generally involve a lot of paper. According to David Stevens, a former FHA Commissioner and now the president and CEO of the Mortgage Bankers Association, a loan application by itself can run 500 pages – and financing is just one part of the closing process. The good news is that most of the paper shuffling takes place out of sight, and buyers see only some of it.
Despite the blizzard of paper you may encounter at the settlement table, there are ways to help make closing quick and easy. Here are some basic tips to follow:
- In the same way that it makes sense to get pre-approved for a mortgage before you enter the housing market, it’s also a good idea to look at different settlement providers in advance. Depending on where you live, settlement providers can include lawyers, escrow companies, lenders, banks and real estate brokers. Ask about prices and services.
- Get to know what the settlement provider does. For example, is the settlement provider an “agent of the settlement process,” who is there to make sure all the paperwork is correct, or does the closing provider represent you? Can you ask the settlement provider questions – and get answers?
- Be cautious with spending. Do not open new credit accounts, avoid big purchases and try not to use credit cards during the time between signing a sale agreement and before closing. The reason is that lenders check credit levels before closing, so any new debt could push you above allowable mortgage program guidelines and sink the loan application.
- You are a principal in the transaction and you have the right to read every piece of paper presented at closing, so take as much time as you want. That said, whether closing documents actually make sense to regular folks is a different story. Mel Martinez, a former secretary of the Department of Housing and Urban Development, once explained to The Washington Post, “I’m a lawyer and the secretary of HUD, and I’m not reading this junk,” referring to all of the closing documents when he purchased homes himself.
- Be aware that beginning in August 2015 the government is replacing the Truth-in-Lending disclosure (TIL) and the Good Faith Estimate of Closing Costs (GFE) with a single Loan Estimate form. Also, instead of the HUD-1 Settlement Statement there will be a new Closing Disclosure form. Why the new forms? They're supposed to help consumers better understand the closing process.
- Think of the sale agreement as an outline that describes what to expect at closing. For instance, if the contract says certain closing costs will be divided 50/50, that should be reflected in the settlement statement. Did you get a “seller contribution” in the sale agreement to offset closing costs, something that is sometimes possible in a “buyers” market? If so, you will see a credit on the closing statement. Did the seller make promised repairs? If not, you may be able to have the settlement provider set up an escrow account from the seller's funds to ensure the work is completed.
- When you buy real estate you have the right just before closing to see that the property is essentially in the same condition as when you signed the sales contract perhaps four or six weeks earlier. This check is done through a pre-settlement walk-through of the property. It's important to schedule the walk-through properly; if there's a 1 p.m. closing, don’t schedule the walk-through for noon because there may not be enough time to have a thorough examination of the property and get back to the settlement office on time. Instead, schedule the walk-through earlier, like 10 a.m., and bring a camera.
- Timing is a huge settlement issue. Instead of an agreement that says closing will be on the 12th, some experienced buyers prefer to say that settlement will take place “on or about the 12th” to get a little flexibility. The reason is that you and the seller may need to overcome barriers between the signing of the contract and closing. The seller may not be able to move out until the 15th, for example. The solution to that one is usually a post-settlement or pre-settlement occupancy agreement. For details, speak with your broker, settlement provider or attorney.
- Another timing issue concerns the mortgage. In many cases, borrowers will lock-in an interest rate for a given period, like 30 or 45 days. The lock-in deadline is absolute, so if closing is late, the locked rate will be lost. That is a serious issue if current mortgage rates are rising. Be sure to schedule closing well within the lock-in period.
- As a buyer, you will likely need to bring certain items to closing, such as a government-issued photo ID and a certified check. You want to get the final pay-off amount from the settlement provider as soon as possible so that your check or wire transfer has time to clear the system.
- Be nice to the sellers. Really. A little courtesy and grace can go a long way because it's entirely possible that minor settlement glitches will pop up and such problems are much easier to work out if everyone is friendly.
- Lastly, we live in the Internet era, where many documents can be handled electronically. Your settlement provider is likely to offer electronic copies of all the paperwork on a disk. If you want such a disk, that's fine. However, you should also insist on a paper copy of all documents.The reason is that you will likely need your documents far into the future, possibly 20 years or more, for tax and estate purposes. While a disk is convenient, it may be that the electronics in use many years into the future will not be able to read your disk. Think about the storage mediums used two or three decades ago; for the most part today's computers do not have the drives to read them. Because of changing technologies, it is paper – the stuff used by Gutenberg more than 500 years ago – that may actually be the better storage medium.
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