The Closing

At the closing the buyer buys, the seller sells, and the lender lends. Here’s what you can expect.

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What happens at the closing?

The real estate closing is the final stage in the process of buying a home. The closing is a meeting at which the buyer and seller, usually accompanied by their respective lawyers and real estate agents, complete the sale. At this meeting, the buyer usually makes all the required payments. The seller produces all documents necessary for the transfer of good—that is, marketable—title and delivers a deed that transfers the title to the buyer.

What is the closing statement?

Before the closing, the parties and their lawyers will review all documents to see that everyone is fulfilling all conditions and promises of the contract. A closing statement or settlement sheet is prepared, fully listing the financial aspects of the closing. The Real Estate Settlement Procedures Act (RESPA) will apply in any transaction in which a buyer is obtaining a federally insured mortgage from a financial institution. This requires use of a settlement sheet developed by the Department of Housing and Urban Development. In other closings in which the buyer is not obtaining a mortgage, another form of settlement sheet is usually prepared.

What are some of the key documents signed at the closing?

Both buyers and sellers should expect to sign a lot of papers at the closing. Buyers might be asked to sign the following:

• A promissory note promising to pay in full the loan and interest.
• The mortgage document which secures the promissory note by giving the lender an interest in the property and the right to take and sell the property—that is, foreclose—if the mortgage payments aren't made.
• A truth in lending form which requires the lender to tell you in advance the approximate annual percentage rate of the loan over the loan's term.
• A typed loan application form.
• A payment letter telling the buyer the amount of the first payment and when it is due.
• An affidavit that the buyer's various names (if he or she has used more than one) all refer to the same person.
• A survey form stating that the buyer has seen and understands the survey of the property and that it fairly depicts the property.
• A private mortgage insurance application, usually required on loans with a down payment of less than 20 percent.
• A termite inspection or other inspection form, indicating that the buyer has seen a report of any inspections that were made.

The seller can expect to sign the following documents:

• The deed transferring title in the real estate from the seller to the buyer.
• A bill of sale transferring ownership of any personal property that may be included in the sale of the real estate.
• An affidavit of title in which the seller states that he or she has the legal right to sell the real estate and that there are no liens or encumbrances (judgments, mortgages, or taxes owed) on the property.
• An affidavit as to mechanic's liens and possession indicating that the seller has not had any work done on the property that would give rise to a mechanic's lien and that there are no parties other than the seller entitled to possess the property.
• An occupancy certificate indicating that a new home complies with the local housing code.

Both buyer and seller will also sign the following:

• An affidavit specifying the purchase price and indicating the source of the purchase price. (This affidavit assures the lender that the buyer has not received any undisclosed loans from the seller that could negatively affect the buyer's ability to repay the lender's loan.)
• A RESPA form developed by the federal Department of Housing and Urban Development and sometimes a separate closing statement, specifying all costs associated with the transaction.

What are some financial aspects of the closing?

At the time of closing, the seller and buyer will total up various credits in order to determine how much money the buyer must pay. The seller will receive credits for such items as fuel on hand (such as oil in the home heating tank), unused insurance premiums, prepaid interest, and escrow deposits for insurance, taxes, and public utility charges such as water and sewer fees. These credits also will include any other items prepaid by the seller that will benefit the buyer.

The buyer normally will receive credits for such items as the earnest money deposited and taxes or special assessments that the seller has not paid. The settlement sheet also will specify who is responsible for the payment of various expenses. These will include the sales commissions and the costs of the title search, inspections, recording fees, transaction taxes, and the like.

The allocation of such expenses will depend on the terms of your contract as well as the law and customs in your area. Your real estate agent or attorney should advise you ahead of time of how much money you will need at the closing. Typically, you will be required to have a certified check in the amount required to meet these expenses.

What are some typical closing costs?

Appraisal fee

This is the fee paid for an appraisal of the property. It is required by the lender and often is paid for by the buyer. The Federal Housing Administration and Veterans Administration establish the appraisal fees for mortgages that they guarantee.

Attorney's fee

The buyer and seller pay the fee for their own lawyers. In some states, buyers are required to pay for the lender's attorney. This fee may be a certain percentage of the mortgage or a fixed fee.

Survey fee

If the lender requires a registered survey, the buyer probably will pay the fee. You may be able to avoid this fee if the lender agrees to accept a recent survey done for the seller. However, the seller must sign a document stating that the property lines have not changed since the completion of the survey and there have been no additional improvements to the property since the survey was taken. Even then, a title insurance company may require a new survey unless the survey is current or has been recertified recently.

Loan discount fee (points)

This is the lender's charge to the buyer to obtain the loan. The buyer may have paid some of this fee in advance to secure the loan.

Inspection fees

Charges for general inspections or inspections required by local laws. The buyer or seller may be responsible for these fees depending on the contract and local law and custom.

Title fees

Cost of title search.

Title insurance

The cost of title insurance, usually divided between the seller and buyer. The seller pays for the buyer's policy and the buyer pays for the lender's policy.

Recording fees

The cost for recording change of ownership such as a deed; the cost of recording the buyer's mortgage; recording the release of the seller's mortgage by the seller's lender; and recording the release of any liens found in the record of title.

There can’t possibly be any more closing fees, can there?

The unhappy answer is, yes there can. Other common fees include:

• loan origination fee to cover the lender's administrative costs in processing the loan;
• credit report fee;
• lender's appraisal fee;
• mortgage insurance application fee;
• mortgage insurance premium; and
• hazard insurance premium.

Buyers also may have to put money into escrow to assure future payment of such recurring items as real estate taxes. Also, there often are separate document fees that cover the preparation of final legal papers such as the promissory note and mortgage or deed of trust.