What Happens On Closing Day?
The real estate closing can be a mysterious process for first-time home buyers. Most people know that it involves a lot of paperwork. But aside from that, it's all a big blank. The purpose of this article is to fill in those blanks. By the time you finish reading this guide, you'll know exactly what happens on closing day.
In a nutshell: During closing, ownership of a property is transferred from the seller to the buyer. All funds are distributed by the escrow company, and the new deed is registered in the buyer's name. The buyer also has to bring a check for all of the mortgage and title fees accumulated along the way.
What is a Real Estate Closing?
The real estate closing is also referred to as settlement. The two terms are interchangeable, though "closing" is the more common usage. This is the final step in a real estate purchase transaction. It's when property ownership is transferred from the seller to the buyer.
There will also be a final distribution of funds on closing day. The sellers will receive a check for whatever proceeds they earned from the sale. The real estate agents will receive a check for their commissions, if applicable. And you (as the home buyer) will have to provide a cashier's check to cover all of your closing costs. We will talk more about these costs later.
What Happens on the Big Day?
As mentioned earlier, there is a lot of paperwork that goes along with this process. The escrow company will have most of the documents ready to go -- they'll just need to be signed. As the home buyer, you will have a lot more paperwork to sign than the seller. You might sign your name anywhere from ten to thirty times during the closing process. You'll have to sign mortgage documents, legal disclosures, tax records and more.
Here are some specific things that happen on closing day:
- The buyer (or the buyer's lender) will provide a check for the amount owed toward the purchase price of the house.
- The seller will sign the deed over to the buyer. This act officially transfers ownership to the buyer. The seller will turn over the keys, as well.
- The title company (or in some cases a lawyer or notary) will register the new deed with the appropriate government office. This record will show the buyer as the new homeowner.
- The seller will receive any proceeds they earned from the sale, once their mortgage balance and closing costs have been paid off.
When all of the documents have been signed, and all funds have been properly distributed, the deed of ownership will be transferred from seller to buyer. This is when you become a homeowner. The seller will hand you the keys to your new house, and then you're all done. This is the gist of what happens during a real estate closing. Let's take a closer look at these events.
Events Leading Up to the Closing
This closing process will make a lot more sense to you if we put it into a broader context. The groundwork is laid when you first make an offer to buy a house. Here's what happens leading up to the big day:
The time and date for closing is usually set during the offer and negotiation stage. The buyer makes an offer to buy the house. As part of the offer, the buyer will propose a closing date. The seller can make a counteroffer to propose a different date, or they can accept the buyer's suggestion. Like everything else in the real estate world, it's negotiable. It usually doesn't take long for the buyer and seller to agree on a closing day (though the purchase price is another story).
The closing is usually scheduled several weeks after the offer is accepted. This allows time for the events that must take place after the contract has been signed. You need to allow time for the home inspection, the lender's appraisal, the underwriting process and more.
The period between the offer and the closing is commonly referred to as the escrow period. This is what people mean when they say their house is "in escrow." It means the sale is pending, but they haven't yet closed the deal. They are still waiting for the closing day. The typical escrow period is around 30 days, but it can be longer or shorter than this. The buyer and seller must agree on the closing date (and thus the length of the escrow period) when negotiating the contract.
When you agree on a date with the seller, it will still require the lender's input. So you can consider the proposed date to be tentative, until the lender gives you a green light. Remember, the mortgage company will be underwriting your loan during the escrow period. So they'll be the one to determine the actual date to close the deal. They will accommodate your desired window as much as possible, but they might need more time.
If you agree to a 30-day escrow period or longer, the lender should have plenty of time to process the loan. If you agree to a 15-day escrow or shorter, there's a higher chance the lender will delay the closing. You'll have to be flexible.
How Much Are the Costs?
During the mortgage process, you will rack up a wide variety of fees and charges. Whenever somebody performs a task related to the processing of your loan, they will charge a fee for it. They'll charge a fee when they originate the loan, when they check your credit score, when they do a title search, when they have the home appraised ... you get the idea. Collectively, these fees are referred to as your closing costs.
This is another one of the things that will happen on closing day. You will have to bring a cashier's check with you to cover all of your closing costs. You can multiply your loan amount by 3 percent to get a rough idea of what your costs will be. If you live in a high-cost area (like California or New York), you might have to multiply by 5 percent. Here's an article that explains how much you might have to pay.
You'll get an estimate of these costs shortly after applying for a mortgage loan. According to federal law, the lender must give you a written estimate within three days of receiving your application.
This document is known as the Good Faith Estimate (see image). It gives you a breakdown of the various costs you'll incur on closing day.
Related article: 3 ways to estimate your closing costs
Several days before the actual closing, you'll receive another document known as the HUD-1 Settlement Statement. This document will include the actual amount you need to bring with you.
Don't be surprised if your actual costs are higher than the initial estimate. It's quite common, in fact. So you should plan for this in advance. If the lender says your closing costs will be $7,000, try to have at least $8,000 before closing. It's better to be over-prepared than under-prepared.
Ask Your Lender About Cash Reserves
Most lenders today require borrowers to have some extra money in the bank, beyond what's required for the down payment and closing costs. These are known as cash reserves. Technically speaking, they are not a real estate closing cost, because you're not actually paying the money. You are just required to have it in the bank. It shows you have the ability to pay your first few mortgage payments.
Different lenders have different requirements for cash reserves. Some will require you to have the equivalent of one mortgage payment in the bank on closing day. Others may require up to six month's worth of payments. This can be a significant amount of money, so you want to know about it well in advance. How do you find out? Ask the lender. It might not show up in your closing costs worksheet, because it's technically not a "cost." But it's money that you need to have in the bank, so you obviously want to know about it.
Just ask the lender, "What kind of cash-reserve requirements do you have for this loan? How much money do I need to have in the bank, aside from my closing costs and down payment?"
This article explains what happens on closing day. If you would like to learn more about this topic, you can use the search tool located at the top of this page. You'll find hundreds of lessons on this website that pertain to the home-buying process.