Steps to the Settlement Process
After you find a home and submit an offer to purchase, the final hurdle you will jump is the settlement or closing. This is the final legal process that makes your dream home all yours. Here we will outline some of the steps to getting your keys.
After you find a home and submit an offer to purchase, the final hurdle you will jump is the settlement or closing. This is the final legal process that makes your dream home all yours. Here we will outline some of the steps to getting your keys.
- Open Escrow. Usually a neutral third party named to hold any monies and documents related to the transaction until the day settlement occurs. This prevents both the buyer and the seller from getting ripped off during the transaction.
- Title Search and Obtain Title Insurance. A process usually performed by a title company where they do a background search on the property to ensure there are no liens or other claims to the property. This ensures you, the buyer, a clear title to the home you are buying.
- Find an attorney. If your closing company is not an attorney you can option to hire a real estate attorney to review your real estate contract.
- Negotiate Closing Costs. When buying a home the mortgage company and/or title company will charge fees. It is your responsibility to review these fees to make sure they aren’t inflated and other “junk” fees have not been added.
- Home Inspection. Although not required it is a smart and often inexpensive investment to make sure that the home you are buying is in good working condition with no major issues. Seek a professional home inspector to do the inspection. You can also set a contingency that the purchase will only continue after the completion of a satisfactory inspection.
- Pest Inspection for Wood Destroying Organisms (WDO). This inspection is often required and a good idea. A pest company or specialist will come out to the property and inspect for Termites and other wood-destroying pests. Often if any issue is found, the financing company will insist it be fixed before going to closing.
- Renegotiate the Offer. After receiving the home inspection and WDO reports, you may have the opportunity to renegotiate the offer depending on the results of those inspections. If you had set these as contingencies, you may also decide to back out of the purchase deal completely without any penalty.
- Lock your Interest Rate. Seek the advice of your mortgage professional on when to lock in your interest rate. A good loan officer will keep an eye on the rates for you and give you a suggestion on when to lock.
- Remove Contingencies. Any contingencies, such as mentioned above, made on the purchase offer must be removed in writing. The sooner you can remove the contingencies, the happier your seller will be.
- Funding Escrow. You began escrow by turning over an earnest money deposit. This deposit is often used toward the down payment on your home. You will need to further fund the escrow by turning over the rest of your down payment and by paying any fees or closing costs required.
- Final Walkthrough. Just before closing you will need to perform the final walkthrough. Here you will do a final inspection of the home to ensure there is no damage that has occurred since you submitted your offer and to make sure nothing was removed from the home.
- Sign the Papers. Finally, it is time to sign the papers. Make sure to take your time and read everything completely. Don’t feel pressured to hurry through the process. These papers are legally binding and will stand for as long as you own the home.I can answer any other specific questions you may have that were not covered in the content above.
Papers You Will be Signing at Settlement
Whether you are settling on a loan to purchase a home or refinancing, you will find that at settlement, there are many documents to sign. We hope that the following synopsis of the documents most commonly used by lenders will assist in taking some of the anxiety and confusion out of the settlement process.
- Note – This is the most important lender document. This is your legal I.O.U. that is, your agreement to pay back the money. The Note is almost always set forth on a standard note form, however, it is important to read through it with your settlement officer or attorney to ensure that the terms are correct. Look for: the interest rate, term of the loan (15 or 30 years, etc.), loan amount, and if it is adjustable, look for the margin, the change dates, and the ceiling or caps.
- Deed of trust – This is the instrument that is recorded in the courthouse to show that your property is encumbered by a mortgage. A standard form is used for this and it is very lengthy. The document itself merely summarizes how mortgages work under state law. It is not necessary to read through this document at settlement, in fact, it is almost impossible to do so. If you wish to read it beforehand, ask your attorney to put a copy in the mail to you before settlement. At settlement, you will be asked to sign the last page, and possibly initial all the pages.
- Name affidavit – Most lenders require that the borrower sign an affidavit, stating that if the borrower has used any other name or initials, the borrower is really the same person. For example, if James Smith sometimes also signs his name as J.L. Smith or goes by James Luther Smith, he will be asked to sign that James Smith is the same person as James Luther Smith and J.L. Smith.
- Right of rescission – This is a notice, which is signed only at a refinance settlement. For refinancing your personal residence, federal law gives the borrower a 3-day right to recession. Lenders routinely require that the borrowers sign to acknowledge that they have received two copies of the right of rescission notice, and then to sign after the rescission period is over, stating that the 3 days have elapsed and that they have not rescinded. Some lenders break this down into 2 notices.
- Truth in lending – This disclosure document is intended to be presented to borrowers at loan application to comply with the lender’s obligation under the Federal Truth in Lending Law. The law was intended to allow a prospective borrower to shop and compare the true cost of the loan by disclosing the annual percentage rate and key terms of the loan itself. The annual percentage rate is often higher than the actual interest rate since points and other lender charges have to be included in the total computation. Since Lenders must comply with this law, a final Truth in Lending is signed at settlement. This may be different from the one which you may have received earlier on if you locked in at a rate, or on terms different from what was originally discussed at the loan application. This document also indicates whether the loan is assumable or not ( usually only FHA and VA loans are assumable in today’s market).
- First payment letters – This sets forth your monthly payment is broken down into principal and interest, plus escrows. It usually informs the borrower as to when the first payment is due, the loan number, and the address where the payments are to be sent. Sometimes the lender also provides a temporary payment coupon, to be used in case the payment coupon book does not reach the borrower prior to the first payment due date.
- Escrow analysis – This statement confirms the amount of real estate taxes, insurance, and mortgage insurance, if applicable, that are to be paid by the lender on a yearly basis.
- Compliance agreement – Sometimes borrowers are required to sign several different forms of this same document at settlement. The borrower is acknowledging that in the event that the lender is audited by the federal agency, or if there are clerical or typographical errors contained in the documents, the borrower agrees to work with the lender so as to make any necessary changes or cooperate with the federal agencies.
- Flood hazard insurance – This statement indicates that in the event that the area in which the house is located becomes a flood hazard area (very unlikely in most areas), the borrower authorizes the lender to obtain flood hazard insurance and to pay the lender for the annual premium.
- Assignment disclosure – Lenders are required to disclose the approximate number of loans that are sold to other lenders during the past three years. The disclosure also summarizes consumer rights and complaint procedures under federal law. If your loan has been sold prior to settlement, this is also disclosed, and the name and address of your new lender is provided.
Other miscellaneous documents
- Occupancy Statement: That the borrower will reside in the property as their primary residence.
- As-is Statement: The borrower has inspected the property and accepts it as is, in its present condition.
- Loan Application Form: The original loan application has been typed up for the lender’s permanent loan file, and borrowers are asked to sign and initial.
- Owners Affidavit: That the borrowers own the subject property, and do not have any other mortgages, liens, or judgments other than those which they have previously disclosed.
- No Material Changes: The borrowers have not had any material change in their financial status, marital status, or employment since their loan application was taken.
- W-2 Forms: To verify the borrowers’ correct Social Security Numbers.
- Power of Attorney to Correct Clerical Errors: Borrowers are asked to give the settlement attorney a limited power of attorney to correct clerical errors after settlement.
