What to Do Before Closing on a House
You've made an offer to buy a house. The seller has accepted your offer. You've given your mortgage lender a copy of the purchase agreement. And the closing date has been set, 30 days from now. What next? What should you do before closing on a house, aside from waiting? And what should you avoid doing during this timeframe?
We will discuss the things you should be doing before closing in a moment. But first, I want to start with some background information for readers who aren't familiar with this topic.
What is Closing, Anyway?
A real estate closing is the final step in the purchase process. It's also referred to as settlement, particularly in the eastern part of the United States. This is when the money exchanges hands, so to speak. It's also when you sign all remaining paperwork related to the sale. The buyers present a cashier's check to cover whatever closing costs they owe. The sellers get a check for their proceeds, if applicable. Ownership will be transferred from the seller to the buyer. Here's a more detailed explanation of what happens on closing day.
What to Do Before the Big Day
Many first-time buyers assume that they are "home free," once the seller accepts their offer. But nothing could be further from the truth. There are plenty of things that can go wrong before closing day. Trust me. I've experience a few of them myself. I don't say this to frighten you. On the contrary, I want you to understand these potential closing problems so you can take proactive steps to avoid them.
What to do before closing:
- You can still be denied for a mortgage loan, even after you've been pre-approved by the lender. The pre-approval is not a commitment or guarantee. You've been conditionally qualified for loan. But you need to stay qualified all the way up to the closing. The less your financial situation changes, the better.
- If you withdraw or transfer funds for any reason before closing, your lender will probably ask for a written explanation. They will also want to see a record of the transaction, such as your bank statements.
- You will need to bring a cashier's check with you on closing day. In most cases, the check will be made out to the title or escrow company who is managing the process. The check should cover the exact amount of your closing costs.
- A few days before your closing date, you should receive a HUD-1 Settlement Statement. This document will have a finalized list of fees you're responsible for paying. The cashier's check (mentioned above) should be made out for this amount.
- Your actual closing costs might be different from the initial estimate the lender gave you, when you first applied for the loan. That's the purpose of the HUD-1 statement. It gives you a more accurate picture of your final costs.
- Make sure you have a homeowners insurance policy in place. Your lender will require this. They might even require you to pay the first year's premium in advance, by setting up an escrow account. The lender may contact your insurance agent before closing day, to verify the policy and coverage amount.
- If you make any large deposits into your account, tell your lender about it. It will only help your cause, as far as mortgage approval goes. Provide any documents you have relating to the deposit.
What to avoid before closing day:
- Don't spend a lot of money. Implement a self-imposed "spending freeze," as much as possible. You obviously have to buy groceries, gas for your car, and other necessities. But don't spend anything beyond that. Keep things as stable as possible until after you close on the home.
- It's best to avoid any major purchases during this period. Your lender might have certain cash-reserve requirements for the loan. So a major reduction in assets could hurt your chances of getting the final approval.
- Don't open any new credit lines, such as credit cards. The same goes for buying a car, applying for a store credit card, etc. These things will change your debt ratio, which could cause problems with your final approval. Mortgage lenders hate surprises.
- Don't switch jobs before closing, unless it's completely unavoidable. A new job usually brings a change in income, as well. If your income goes down, it will alter your debt-to-income ratio in a bad way. A change in employment will also require a lot of paperwork changes. Some lenders will verify your employment again, just before closing day. And remember, they hate surprises.
Most of these do's and don't can be summed up with a single phrase -- status quo. You should maintain the status quo as much as possible, between the pre-approval and the final approval. Change is the enemy. Try to keep your financial situation the same during this time.
The only good change before closing would be an increase in assets. It certainly doesn't hurt to have more money than necessary on closing day. But aside from that, try to keep things the same. Maintain the status quo.
Frequently Asked Questions
We receive a lot of questions from our readers, on all aspects of the home-buying process. Here are five of the most frequently asked questions that relate to the closing process.
1. Can I switch mortgage lenders before closing on the home?
Yes, you can seek other financing before you close. But it might push the closing date back. Sometimes you don't have much of a choice in the matter.
This happened to me when I was buying the home I'm in now. We started out using Bank of America. We met all of their conditions for approval, and we were on track to close. About ten days before the scheduled closing date, their underwriter said we had insufficient cash reserves.
We had specifically asked them about cash reserves when we applied for the loan, and the loan officer said there weren't any reserve requirements. So you can imagine our surprise when they said we needed six month's worth of mortgage payments to satisfy their (newly announced) cash-reserve requirements. You can't pull that kind of money out of thin air.
So we switched to another lender about a week before our original closing date. We had no choice, really. The other lender did not have any requirements for cash reserves -- only the down payment and closing costs. In fact, he told us he got a lot of business from "BofA turn-downs" for this very reason. Long story short, we got a better deal with fewer restrictions, and the loan went through. The closing was only delayed by a week or so.
So yes, you can switch lenders before closing. But I only recommend doing this if you have a good reason. (Hint: being turned down by the original lender is a good reason!)
2. Can my mortgage be denied before closing?
Yes, it can. I just shared my own personal story with you, of a loan going south after the pre-approval. It's entirely possible to be denied by a lender before your scheduled closing. It happens all the time, actually. That's what people mean when they say a house "fell out of escrow."
Getting pre-approved for a mortgage is a helpful step in the process. But it's not a commitment or a guarantee. It's the lender's way of saying: "Everything checks out right now, so we are going to conditionally approve you for this amount. But we still have some digging left to do. If the underwriter feels the loan is too risky for some reason, we may have to turn you down."
The underwriting stage is when you really have to hold your breath -- especially these days, with the stricter lending requirements we are seeing. It's the underwriter's job to determine whether or not the loan meets the lender's guidelines for risk. If he sees something that makes him uncomfortable (like too much debt), he can put the brakes on.
Here's a list of problems that can occur before closing.
3. Do lenders check your credit again, before closing a loan?
Some do, and other don't. I can guarantee they'll check your credit score at least once, shortly after you apply for the loan. Some lenders will do a second check closer the closing date.
Earlier in this article, I talked about the importance of maintaining the status quo with your financial situation. This applies to your credit score as well. You shouldn't do anything that could negatively affect your credit score before the closing. Don't open up any new lines of credit. Don't use your credit card for any big purchases. Make sure you pay all of your bills on time.
4. Can I move in before the closing date?
This would be up to the seller (the current homeowner of the builder). Legally, you don't become the new homeowner until after the closing. That's normally when people move in. There's a good reason for this. What if something went wrong at closing? It's rare to encounter major problems on the actual day you close. But it can happen. In that scenario, you would have to move right back out again.
If you feel there's virtually no chance of the deal falling through -- and you have permission from the seller -- then you might be able to move in beforehand.
5. What if the value of my new home drops before closing?
Obviously, it would be unfortunate for you as the homeowner. It's tough to see your property value drop, especially when you haven't even moved in yet. But from a lending standpoint it might not be a bid deal. If your mortgage lender has already appraised the home (and the appraisal amount was equal to or greater than the purchase price), then the loan should still go through. On the other hand, a low appraisal could cause problems for you.
This article explains what to do before a real estate closing -- and what not to do. If you would like to learn more about the home-buying process, use the search tool provided at the top of this page. It gives you access to a research library containing more than 500 articles.But when