Closing a Mortgage: 2010 – 2011 Edition

The final step of obtaining a mortgage can be both complicated and vexing. Known as settlement/closing, it involves the delivery of numerous documents, opening of escrow accounts, and delivery of funds. Given the handful of recent changes to the process as a result of the housing crisis, I would like to present a comprehensive guide to closing one’s mortgage.

The first step is to obtain a list of documents that the lender will require for closing. Without exception, you will be required to purchase a Title Insurance policy that protects the lender (from fraud, liens, etc.), and you also have the option of purchasing a policy that protects you, the future homeowner. Hazard Insurance, meanwhile, will protect the lender’s collateral, as well as making sure that if your home is destroyed, you will receive compensation to buy/build a new home. You may also be required to purchase a separate Flood Insurance policy, depending on the location of the property.

Next, you should arrange for a formal Home Inspection, in order certify Building Code Compliance and that it is Pest Free. The condition of the home should be thoroughly assessed to make sure that there are no latent liability issues involving the structure, plumbing, electrical system, etc. Depending on your lender’s documentation guidelines, you may need to furnish Water and Sewer Certification as well as a Survey of the Property Land.

In addition to these various documents, you should also bring a Certified Check to cover the closing costs as well as the balance of the down-payment (the portion of the property sale price that won’t be covered by your loan). You may also be required to bring a portion of the first monthly payment and to deposit no more than two months worth of real estate taxes and homeowners insurance premiums into an Escrow Account, which protects the lender from tax liens and insured losses and will be maintained for the duration of the mortgage. (You will be informed by your lender of the exact amount a couple days prior to settlement). At this point, your lender will perform a final credit check (in accordance with a recent Fannie and Freddie mandate) to make sure that your financial situation has not materially changed since you were initially approved for your mortgage.

At the actual settlement, the closing agent and/or your attorney will walk you through all of the documents that you need to sign. First is the HUD-1 form, which “is to be used as a statement of actual charges and adjustments to be given to the parties in connection with the settlement.” Basically, this form details all of the (financial) details of the transaction, including sale price, amount of financing, loan fees and charges. It also lists fees, taxes, and other funds that were conveyed to third parties.

Next, if there is a material difference between the initially estimated closing costs (per the Good Faith Estimate) and the actual closing costs, your lender will need to provide an explanation in the form of a Truth-in-Lending (TIL) statement. Given that lenders are now penalized if that discrepancy exceeds 10%, there is an incentive to keep closing costs close to the initial estimates. (Ironically, this requirement has resulted in higher closing costs for borrowers).

Finally, the Mortgage Note is signed and held by the borrower, and the Mortgage Deed of Trust is recorded and delivered to the lender. These documents outline the terms of the mortgage, in which the borrower officially undertakes the promise to repay the loan, and assumes the consequences (foreclosure, etc.) of default.

After you are sure that you fully understand your borrower obligations as well as your lender’s responsibilities, all that’s left to do is move into your new home and start making monthly payments!