10-Step Guide To Closing on a House

Advice That Can Help You Avoid Hassles and Delays

When you're buying a home or refinancing a mortgage, you must go through the closing process. Closing day is exciting, but it can also be nerve-wracking if you don't know what to expect.

Fortunately, this complete guide to the home closing process will help ensure you're prepared to get to closing day and finalize the purchase of your dream home.

What Does Closing on a House Mean?

Closing on a house is the final step in the process of purchasing a home. Closing is also the last step in refinancing a mortgage loan.

When you're buying a house, closing comes after getting prequalified for a home loan, making an offer, getting it accepted, and completing all preconditions necessary before the sale. At closing, the deal is finalized, buyers and sellers sign all paperwork, and ownership and money will officially change hands.

Closing is also necessary when refinancing, but in this case, the process finalizes the borrowing transaction. Your new lender disburses funds, and your old lender is paid off on closing day.

1. Open an Escrow Account and Start the Title Process

The first step in getting to closing happens long before closing day. It begins when a buyer makes an offer on a home and the seller accepts it.

When this happens, you'll choose a title company that will handle the closing. You'll reach out to them to get the process underway, and they’ll open an escrow account. The deposit the buyer makes will be deposited into that account.

2. Schedule Home Inspections

In most cases, an offer to buy a house is made contingent on a successful home inspection. Many buyers also include a pest inspection contingency. This means that the buyer only has to follow through on the purchase if the home and pest inspection don't reveal any major problems.

If the inspections do show issues, the buyer and seller can negotiate on how to resolve them. This could include the seller agreeing to make repairs or reduce the price of the home to allow the buyer to pay for repairs.

Satisfying the inspection condition is usually necessary, and always a good idea, before you can move toward the next step of closing on a house.

3. Consider Hiring a Real Estate Attorney

In some states, real estate attorneys handle closings. In others, title companies do. Even if your state does not require a real estate attorney, you may want to hire one. An attorney can help you understand your rights, draft a purchase agreement that protects your interests, and research the purchase agreement to make sure that it is fair and reasonable.

If your state requires you to have a lawyer to close on a house, you’ll want to find and hire one as soon as possible to avoid delays. Research closing on a house in your area to find out if a lawyer is required.

4. Complete the Appraisal and Provide Documents for Underwriting

Buyers may also make an offer contingent on a home appraisal. Whether they put this into the purchase agreement or not, mortgage lenders usually insist upon an appraisal before they'll provide a loan.

An appraisal is a third-party assessment of the market value of a home, created by considering comparable property sales in the area and evaluating the condition of the home. Appraisals are very important to ensure the home is worth what a buyer is paying and worth enough to be sufficient collateral for the loan.

Lenders will review the appraisal before finalizing loan approval. This is part of the underwriting process. Lenders also review details about the buyer's finances during this time to make sure the buyer is well-qualified to pay the loan. Typically, underwriters will ask for financial documentation, including pay stubs and tax returns, when deciding whether to make a loan.

The more timely you are as a buyer in responding to underwriting requests, the faster you can get final loan approval and get to closing. It’s a good idea to get your financial paperwork in order when you first begin looking for a home.

5. Review Your Closing Disclosure and Compare Costs

Federal law requires that you receive a copy of the Closing Disclosure at least three business days prior to closing. The Closing Disclosure provides information about the actual costs of the loan, including interest rate, loan terms, fees, closing costs, and projected monthly payments. You’ll need to acknowledge receipt of the Closing Disclosure in a timely manner.

When you receive it, read your Closing Disclosure carefully. Compare the final terms to the terms in the loan estimate you received when you first applied for the mortgage. Make sure you understand the information you find in the documents and feel free to ask your loan advisor questions if you think anything in the Closing Disclosure is unclear.

6. Avoid Major Financial Changes Before Closing

When you are getting ready to close on a home, lenders usually review your financial information again right before closing day. They want to ensure nothing has changed in your financial life that affects your ability to pay the new home loan they're about to give you.

Unfortunately, changes to your finances might compromise your loan eligibility and delay your home purchase or refinance. To make sure you don't jeopardize your ability to close on your house on schedule, you should:

• Avoid changing jobs: Lenders want to see consistent income and usually want a two-year employment history before considering your income when determining how much you can borrow. If you change jobs, your new salary may not count.
• Don’t open new loans or credit cards: Lenders base loan approval on your credit score and debt-to-income ratio. If you open new cards or take out new loans, this could lower your credit score and result in you having more debt than you are allowed. Don't take that risk. Avoid any kind of borrowing before closing.
• Check before paying off debts: Paying off debts could affect your cash reserves, which could affect loan qualification. In some cases, your lender also requires you to pay off debts at closing. If that's the case, if you make a payment before and don't pay the correct amount or the payment doesn't clear, this could delay closing.
• Don’t move your money around: Lenders want to know where the down payment and closing cost funds are coming from. If you move money around, you may need to provide documentation sourcing and tracking the funds. This can also delay closing.

If you can avoid these changes, you can make sure the closing process doesn't take longer than necessary.

7. Negotiate Closing Costs, Confirm Closing Date, and Organize Your Documents

You'll have certain closing costs to pay, such as title insurance costs, appraisal fees, fees to the agency or attorney handling the closing, and transfer taxes.

Some of these fees are not negotiable, while others, such as attorney fees, can often be negotiated. If you want to save on closing costs, shop around for the services that you’re able to choose and make sure you're getting the best price.

You'll also need to know when closing day is, so you can make sure you have money ready to wire and a moving truck to help you relocate.

Depending on your current situation, there may also be some other tasks to take care of before moving day. For example, if you are renting a home or apartment, you’ll have to give the landlord notice. You might also need to hire movers or contractors. Make sure you have a confirmed closing date before you lock down dates for these other things.

8. Get Homeowners' Insurance

Lenders require you to have homeowners' insurance to close on a house.

This makes sense because the home is collateral for the loan, and lenders need to protect the collateral. You can shop around for insurance coverage before closing and let your lender know which company your planned policy is with.

You'll typically need to provide a declaration page or a copy of the policy to show the lender you have the coverage required. Start looking for an insurer early to avoid delays.

9. Complete a Final Walk-Through

On closing day, you'll get to complete a final walk-through of the home. This means you get to visit the house again before signing the papers and paying the seller.

A final walk-through is important to make sure nothing has been changed in the home and that any conditions are met.

For example, if the seller put a large hole in the wall or took a flat screen TV that the contract said they had to leave. Or if the seller agreed to deliver the home empty and left behind large items they were discarding, this could be an issue. In such cases, you can delay closing until they follow through on the promises in the contract.

10. Bring the Right People and Items to Closing Day

Finally, on closing day, you'll need to show up prepared and ready. Here's what you need to do:

• Bring your spouse and/or a witness: If your spouse is a co-borrower, you will both need to sign the papers. In some states, the papers must be signed in front of a witness. The title company could provide a witness, or you may have to provide a witness if you are doing a remote closing, and a notary comes to you to sign the papers.
• Bring valid identification: You will need a state-issued ID to prove who you are when you are completing the closing.
• Bring certified funds for closing costs: Money must be paid to the seller at closing. You can't just write a check that could bounce, though. There are specific accepted ways of paying the costs due at closing. This could be a cashier's check or a wire transfer.
• Bring a voided check if you’re doing a cash-out refinance: If you are doing a cash-out refinance loan, you get to walk away with a lump sum of cash from your mortgage lender. A voided check allows you to provide bank information for where the funds should be deposited.

Closing on Your New Home FAQs

If you still need to know more about closing on a house, here are the answers to some frequently asked questions.

How Much Are Closing Costs on a House?

Closing costs on a house vary. Usually, you can expect to pay 2% to 6% of the purchase price in closing costs.

How Long Does It Take to Close on a House?

Many factors determine how long it takes to buy a house or how long it takes to get to closing.

These factors include the buyer and seller's schedules, when the buyer submitted a mortgage application, how long the underwriting process is, and how long it takes to satisfy contingencies like those for an appraisal and/or inspection.

The process could take anywhere from a few weeks to a few months if issues arise.

What Happens on Closing Day?

On closing day, buyers and sellers sign paperwork to finalize a real estate sale. The process is handled by a title company or a real estate attorney. Money also changes hands in the form of a wire transfer or cashier's check. At the end of closing, the seller has been paid, and the buyer has a new home and a new loan.

Final Thoughts: Are You Ready for Closing Day?

Closing day is the most exciting part of the real estate purchase process, but the path to get there requires first finding the right home loan. If you are ready to begin your homeownership journey, reach out to Freedom Mortgage to talk with a loan advisor who can help you explore loan options and secure the financing that will hopefully allow you to buy your dream home.