Explaining the Loan Process Part 5: The Closing Process

Congratulations! You’ve found the home you love, been approved for the loan you need and have now entered the final phase of loan processing.

In real estate, "closing" refers to the final step in the home-buying process. This stage, also known as "settlement" or "account settlement," marks the completion of your escrow account, which has been holding funds throughout the transaction. During closing, you’ll need to carefully review, approve and sign numerous legal documents that officially transfer ownership of the property to you.

Preparing for Closing

As you approach the closing on your home, your lender and real estate agent will guide you through the process. Here are some of the steps completed prior to closing.

Mutual Acceptance of the Offer

After negotiation, the buyer and seller agree on the final property price. The price is formally documented in the purchase agreement, a legally binding contract that outlines the terms of the transaction.

Opening Escrow and Earnest Money

After an offer is accepted, the listing broker or the seller’s agent will initiate the escrow account opening process. A real estate escrow account, also called a pre-closing escrow account, is held by third-party entities separate from the buyer and the seller; it’s designed to protect the interests of both. These accounts hold all funds, instructions and paperwork necessary for the impending real estate sale, including:

• Down payment funds
• The deed to the home
• Earnest money, also known as a good faith deposit that demonstrated the buyer’s commitment earlier in the transaction

Home Inspection and Appraisal

The home inspection and home appraisal are often confused as synonymous, but they’re two separate events conducted before finalizing the purchase. They each have a distinct purpose and are typically scheduled during the escrow period.

Home Inspection

The home inspection helps identify any potential property issues. It can uncover hidden problems, such as structural flaws, basement leaks, hazardous electrical conditions and environmental risks like lead paint or mold. Many mortgage companies mandate a home inspection before approving a loan. The inspection report, shared with both buyer and seller, can lead to further negotiations, particularly if repairs or updates are necessary.

Home Appraisal

An appraisal is a crucial step in the home-buying process, even after negotiating the price and completing an inspection. It protects both the buyer and lender's investment by independently assessing the property's value. The appraiser — a neutral third party — uses comparable property sales and key features of the house to determine its market value. This process ensures that the buyer is not overpaying and the lender is not issuing a loan exceeding the property's worth.

Loan Approval and Documentation

Before you can close, you will need to have secured financing. Your application should have gone through underwriting, and your lender should have issued you a formal loan approval with final loan terms and conditions.

Title Search and Title Insurance

A title company helps ensure that all real estate transaction components are legal and problem-free. At closing, the title company will verify that the property title is clear and all necessary paperwork is completed correctly. It will also issue title insurance policies to safeguard the buyer's investment and the lender's interest in the property.

Finalizing Details

When closing on a home, finalizing the details contributes to a smooth and successful property transfer.

Take a Final Walk-Through

To confirm that all repairs mentioned in your contract have been completed, schedule a final walk-through of the home you’re buying 24 hours before closing.

Review Closing Disclosure and Other Documents

You’ll be asked to review and sign many documents at closing. Let’s look at the various documents the closing agent will ask you to review and sign, and examine the purpose of each one.

Closing Disclosure

Required by federal law, the Closing Disclosure (CD) is typically the first document you will review with your closing agent. This form will disclose all costs related to the home purchase, including loan fees, real estate taxes and other miscellaneous expenses. There are many separate costs when buying a home, and this document helps you understand and prepare for them. It contains information regarding the details of your loan, including the amount financed, the annual interest percentage rate, the finance charge and the payment schedule. This document will also consider any modifications that may have been made to your interest rate or points during the loan process.

Be sure to compare your Closing Disclosure (CD) to your initial Loan Estimate (LE), as the CD will include final closing costs and any modifications that may have been made to your interest rate or points during the loan process. Some changes from your initial LE are typical, but make sure to ask for an explanation if you notice a big shift. Because this document contains a lot of information that is essential for homeowners to review, it’s required by law that it be sent to you three business days before closing.

Promissory Note

This document is legal evidence of your mortgage and pledge to repay the loan and a copy is kept as a public record, often with your county clerk’s office. The promissory note details the loan amount, interest rate, payment schedule and term length. It also lists the penalties the lender can impose if you fail to make routine mortgage payments.

The Deed of Trust

The Deed of Trust is a security instrument and may be referred to as a mortgage, depending on the state your property is located in. When you sign the Deed of Trust, you pledge your home as security for a loan. This means if you fail to make your mortgage payments, the lender has the right to foreclose on your property. Some Western states, including California, use a deed of trust in lieu of a mortgage.

Certificate of Occupancy

This document certifies that a newly constructed home is in compliance with local building codes and laws. If you built or purchased a brand new home, you may need this document to legally move into your new residence. This document is usually issued by a local government agency, such as your city’s building department.

Notice of Right to Cancel

Under federal law, your lender is required to supply you with a Notice of Right to Cancel. The Notice of Right to Cancel provides each borrower under the transaction a three-business day window to cancel the new mortgage loan. If the borrower is purchasing a home with a mortgage loan, once the closing documents are signed, the borrower does not have the right to cancel.

Ask questions if you need clarification on any part of the process or paperwork. It's important to review these documents carefully to ensure they are accurate. For example, make sure you’re not being billed for your home appraisal if you paid for it already. Talk to your closing agent if you find errors in the above documents. You want any inconsistencies or discrepancies corrected before settlement.

Addressing Contingencies

A contingency clause in real estate is part of a purchase agreement that outlines specific conditions that must be met for the contract to be valid and binding. A contingency could be that a buyer has to secure financing or that if the appraisal comes in lower than the purchase price, a buyer could back out or renegotiate. At closing, the realtor will review that all contingencies have been met.

The Closing Meeting

The closing meeting is the home stretch. Let’s look at who and what’s involved.

Purpose and Participants

During closing, the property title passes from the seller to the buyer. A closing agent — usually an attorney or official from a title or mortgage company, and not to be confused with your real estate agent — oversees this process, which typically takes place at a title company, escrow office or your home. The mortgage closing process varies from state to state.

Your closing agent will explain the specifics of your settlement process and who needs to be there. This agent acts as a mediator between the selling and the buying parties and ensures that all documents are signed and recorded. Finally, they will oversee that all funds, including closing fees and escrow payments, are paid and properly disbursed.

Closing Costs and Payments

At closing, you’ll be responsible for paying your agreed-upon closing costs. Closing costs are the additional expenses incurred by both buyers and sellers to finalize a real estate transaction, distinct from the property's purchase price. These costs may include:

• Appraisal fees
• Title insurance
• Inspection fees
• Attorney fees
• Discount points

The buyer generally pays closing costs; however, in some cases, sellers will negotiate and contribute a percentage of the costs. Additionally, in certain states, it may be customary that the seller covers specific fees, such as owner's title insurance or transfer taxes.

Distribution of Funds

At this point, the closing agent distributes the transaction proceeds to the various parties involved. This includes:

• Payment of the purchase price to the seller
• Payment of closing costs to various providers
• The distribution of any remaining funds to the seller or buyer
• Fees to the realtor (usually from the seller)
• Escrow fees paid to the escrow company by both the buyer and seller

Signing of Deed and Transfer of Ownership

The deed, a legal document that conveys ownership of the property, is reviewed and signed by both the buyer and seller at the closing. Once signed, the deed is recorded with the county clerk's office, officially transferring ownership of the property to the buyer. In short, you’re now the new homeowner!

Post-Closing Activities

Closing might mark the official transfer of the keys, but it's not the final chapter in your homeownership journey. The following activities wrap up loose ends so you can move into your new home with peace of mind.

Recording the Deed

Recording the deed is the official registration of your property ownership and mortgage information with the county where the property is located. This process establishes legal documentation of your ownership and secures the lender's interest in the property in the event of foreclosure proceedings.

Take Possession of the Property

Your possession date, or the day you can move into your new home, is determined during contract negotiations. It can be the same day as closing, once the deed is recorded or a later date, depending on your agreement with the seller.

Complete Post-Closing Follow-Up Tasks

A post-closing follow-up ensures a smooth transition and covers any remaining details. Some tasks to add to your to-do list include:

• Reviewing all closing documents for accuracy and filing them securely
• Ensuring property tax information is updated with your name and address
• Starting to repair any issues revealed during the home inspection
• Changing the locks and security codes

Common Situations and Solutions

While a seamless closing is ideal, unforeseen situations can surface even at the final stage. Here's how to navigate through some common issues that may arise during closing.

Situation: Title issues, such as unresolved liens or survey and boundary disputes

Solution: Your closing agent will be able to help you rectify title issues. If errors are found, they can also refile public documents if necessary.

Situation: Mortgage approval or financing issues that may cause delays

Solution: Talk to your lender and determine if the issue can be resolved before closing. You should also:

• Communicate with the seller about the problem and explore options such as extending the closing date.
• Consider alternative financing options, such as a bridge loan.
• Be prepared for the possibility of the sale falling through if issues can’t be resolved.

Situation: Home inspection uncovers problems that may require negotiation or repairs

Solution: Negotiate with the seller. See if they can fix the issue or reduce the house price to cover the repair costs.

Situation: Mistakes or discrepancies in the closing documents

Solution: Read your closing documents carefully prior to closing. Any errors, including simple name misspellings, should be corrected. Be sure to compare your Closing Disclosure (CD) to your initial Loan Estimate (LE), as the CD will include final closing costs and any modifications that may have been made to your interest rate or points during the loan process. If you spot a mistake on any document, no matter how small, contact your loan officer immediately. And don’t be afraid to ask questions or request clarification.

Situation: Final walk-through problems

Solution: The buyer’s and seller’s agents should work together to resolve the concern. This may require negotiating costs to cover the issue.

Situation: Lower-than-expected home appraisal

Solution: Your real estate agent should provide support if your desired home is appraised lower than the purchase price. They may request another review at the appraisal and look for oversights or errors. If there are none, the buyer and seller will need to renegotiate the purchase price, or the buyer will need to bridge the gap between the offered loan amount and the purchase price.

Tips for a Smooth Closing

Closing may involve paperwork and details, but the reward of homeownership will be worth it in the end. You can facilitate the process by staying organized and prepared. Here are some tips to keep in mind as you embark on this next step in your journey.

Communicate and Cooperate

Open communication between all parties involved ensures everyone is on the same page. This includes the buyer, seller, real estate agents, lenders and title company. Timely communication about requirements and potential challenges can help streamline the process.

You can do your part by being prepared and proactive:

• Upon loan approval, secure the exact date and time for the closing
• 24 hours before closing, schedule a final walk-through of the home to confirm completion of all repairs outlined in your contract
• Confirm who will receive your closing costs and request a certified or cashier's check from your bank beforehand. Personal checks, especially for large sums, are often not accepted at closing.
• Gather all required closing documents, such as your:
  • Contract
  • Proof of title search and insurance
  • Flood certification
  • Homeowners and mortgage insurance confirmations
  • Home appraisal and inspection reports
• Don't forget to bring a valid government-issued ID, such as your driver's license to closing

Understand Closing Costs

Ensure you understand — and budget for — closing costs and what you’ll be responsible for at closing. If you’ll be paying your down payment or any closing costs at your settlement, make sure that you have a check or other acceptable form of payment ready. It’s essential to check with your settlement agent to verify what types of payments are acceptable since, in some instances, a cashier’s check or wire from your financial institution may be required.

Be Prepared for the Unexpected

From title issues to miscommunications to document errors, many unforeseen circumstances can occur at closing. Being prepared is key. Flexibility, transparency, clear communication and contingency plans can help navigate these situations as all parties work together to find solutions.

Seek Professional Guidance

Buying a home is a complex process with many moving parts. Guidance from the following professionals can provide invaluable support, protect your interests and help you make informed decisions:

• Real estate agent
• Mortgage lender
• Real estate attorney

In addition, you may want to consult with a financial planner, tax advisor and insurance agent, depending on your particular needs and circumstances.

Be An Informed Homebuyer

Closing can feel like a whirlwind. You’re finalizing agreements, signing documents and exchanging forms. Many small charges add up to one of the largest payments you will probably ever make. It’s a significant transaction that will change your life, so take the time to request and read all the documents before closing. Being informed and prepared will ensure that you protect yourself and are able to enjoy the closing process.

To start the home-buying process, contact a Pennymac Loan Expert today to get the information you need. Still researching? Check out the next post in our series on Explaining the Loan Process: Part 6 – Transfer of Loan Servicing.

Jump to...

• Part 1 - Explaining the Home Loan Process
• Part 2 - 1003 Uniform Residential Loan Application Explained
• Part 3 - Understanding Loan Processors and Mortgage Processing
• Part 4 - Mortgage Underwriting
• Part 5 - The Closing Process
• Part 6 - Loan Service Transfer

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