What is it?
The closing is the culmination of your home-buying journey — it’s when the parties come together to legally transfer ownership of the property to you, in exchange for your payment of the purchase price to Seller.
The closing is an actual, physical event — it’s an in-person meeting — that typically takes place at the office of your (the Buyer’s) attorney. Those in attendance for all or part of the closing are: you, your attorney, your real estate agent, the title company, the Seller’s attorney, and the Seller’s real estate agent. (Most sellers do not attend the closing.) Your lender also participates in the closing, albeit remotely, via email and telephone. With limited exceptions, closings must happen during business hours.
Why is it important?
The closing is the final step in the home-buying process and is when you become the new owner of the property.
At the closing, all funds necessary to complete the purchase of the property are gathered together from you and the lender and then distributed to the appropriate parties: the Seller receives the purchase price; the attorneys receive their legal fees; the real estate agents receive their commissions; the title company receives their fees and the title insurance premiums; the county receives recording fees; and so on.
How does it work?
There are actually two parts to the closing:
- The Loan Closing
- The Title Closing
The Loan Closing happens first and is attended by you, your attorney, your real estate agent, and the settlement agent for the transaction. (The settlement agent is the third party that facilitates the transfer of funds and property ownership between the parties for the closing. Most often, the title company will act as the settlement agent, but occasionally the Buyer’s attorney will take on that role.)
During the Loan Closing, you’ll sign the Closing Disclosure and all of the documents in the loan package that was prepared for you by the lender, including the Promissory Note and the Mortgage. The lender will then officially release the loan funds to the settlement agent so that those funds can be used to pay for the property during the subsequent Title Closing. The Loan Closing takes, on average, anywhere from 30-60 minutes.
The Title Closing begins as soon as the Loan Closing is complete and is when ownership of property is legally transferred from the Seller to you. Generally, the Seller’s attorney arrives at the closing to take a seat at the table on the Seller’s behalf and deliver the legal documents required for the transfer of title to you (including the Deed), as well as the keys to the home. In return, the Seller’s attorney collects a check from the settlement agent for the Seller’s sale proceeds, to take back to the Seller. Compared to the Loan Closing, the Title Closing tends to be quick, lasting only 10-15 minutes on average.
The typical flow of a closing from a Buyer’s perspective is described below
STEP 1: Arrive at the Closing
Your closing will be scheduled for a specific date, time and place. Unless you’re buying new construction, the closing takes place at the office of your (the Buyer’s) attorney or, sometimes, your real estate agent’s brokerage office.
You should plan to arrive a few minutes early to the closing, as oftentimes the attorneys for the parties and the settlement agent will have multiple closings scheduled for the same day, so it’s important that you don’t go over your allotted time slot.
Your attorney will let you know ahead of time exactly what you need to bring to the closing, but generally those items will be:
- Two forms of identification for each buyer: One must be a government-issued photo ID such as a driver’s license or passport, while the other doesn’t have to include a photo, such as a student ID, voter registration card, banking card, etc. Most commonly, though, buyers bring their license and passport;
- A bank check in the amount of your Cash-to-Close, made payable to the settlement agent (unless you’ve wired your Cash-to-Close to the settlement agent ahead of time);
- Your personal checkbook in case of any last minute, minor adjustments to the Closing Disclosure or between the parties.
When you arrive at the closing, you’ll settle into your seats at the closing table and give your IDs and bank check to the settlement agent. (Your IDs will be photocopied and then returned to you.)
STEP 2: Review and Sign the Closing Disclosure
Typically, the settlement agent or your attorney will kick off the closing by walking you through the Closing Disclosure in detail so you can understand all of your transaction costs. You’ll then sign the Closing Disclosure.
Confused about what, exactly, your closing costs will be?
CHECK THIS OUT: What Are My Closing Costs as a Buyer?
[THE LOAN CLOSING:]
STEP 3: Review and Sign the Loan Package
The settlement agent and your attorney will take you through the loan package received from the lender and have you sign the many documents therein. The two most important documents in the loan package are the Promissory Note and the Mortgage.
The Promissory Note (or “Note”) is the legal document that evidences your indebtedness to the lender and your formal promise to repay the mortgage loan according to the terms you’ve agreed to — i.e., every month, at a specified interest rate, and for a specified loan term.
The Mortgage, on the other hand, is the security instrument that you give to the lender to protect the lender’s interest in your property. When you sign the Mortgage, you are pledging the property to the lender as collateral for the mortgage loan, giving the lender the right to take the property by foreclosure if you fail to repay the loan according to the terms you’ve agreed to.
Additionally, the loan package will contain a number of affidavits, and declarations for you to sign. Affidavits and declarations are statements declaring something to be true, like the fact that the property will be your principal place of residence, or that all the repairs needed on the property were completed prior to closing.
QUICK TIP: Your first mortgage payment will be due on the 1st of the month following the month after the closing. This is because you pre-pay the interest for remainder of the month of the closing at the closing itself, and then thereafter you pay your mortgage in arrears (meaning, “after the fact”). So if you’re closing on January 20th, at the closing you will pre-pay your mortgage interest for January 20th thru the end of the month, and then on March 1st you will make your first mortgage payment of principal plus the interest that accrued during the month of February.
STEP 4: Obtain Funding Authorization from the Lender
After you’ve signed the loan package, some or all of the signed documents in the package may need to be electronically scanned to the lender for a quick quality control review by the lender, to confirm proper execution of the documents. Once the lender has confirmed proper execution, it will give the settlement agent authorization to disburse (or use) the loan funds for the “Title Closing” portion of the closing, which happens next. This authorization to utilize the loan funds to complete the purchase of the property is known as “Funding Authorization.” At this point, your loan is officially deemed “closed,” and you now have the money you need to complete your purchase of the property — i.e., to close title to the property.
[THE TITLE CLOSING:]
STEP 5: Accept Delivery of the Deed and Keys from the Seller
The Title Closing is the second part of the closing and is when the Seller’s attorney — and oftentimes the Seller’s real estate agent too — joins you at the closing table to effectuate the transfer of ownership of the property from the Seller to you. This is accomplished via the Seller’s delivery of the Deed to you (via the Seller’s attorney), along with various other legally required documents and the keys to the property. Note that these days, sellers only very rarely attend the closing themselves.
A Deed is a legal instrument by which title to property is transferred from one person or entity to another. In New Jersey, the standard form of Deed for residential transactions is a “Bargain and Sale Deed with Covenants Against Grantor’s Acts.” This type of Deed conveys to you whatever interest in the property the Seller has, and also contains additional promises (covenants) from the Seller that the Seller has not done anything to allow anyone to obtain any rights in the property. In addition, the Deed will name the Seller as the Grantor and you as the Grantee, will identify the property and sale price, and will be signed by the Seller. (Deeds are not signed by the Grantee/Buyer, since it is the Seller’s interest that is being transferred.)
The settlement agent and your attorney will go over the Deed and other sale documents with you at the closing table and will provide you with copies. Immediately after the closing, the settlement agent will send both the original Deed and the Mortgage to the county clerk’s office to be recorded in the public record. (Recording puts the world on notice that you’re the owner of the property and protects you from future claims against your title.) After recording, the original Deed will be sent back to the settlement agent or your attorney, who will in turn mail it to you, while the original Mortgage will be sent to the lender.
STEP 6: Disburse Funds to the Seller and All Other Payees in the Transaction
The final step of the closing is the disbursement of all the money that’s been collected from you and your lender for the transaction, to the proper parties. In other words, this is when you pay the Seller for the property and pay everyone else involved in the transaction, thereby fulfilling your contractual obligations and completing the deal.
The settlement agent handles the disbursement of all funds: the Seller receives the purchase price (minus the Seller’s closing costs, any credits given to you and any adjustments); the attorneys receive their legal fees; the real estate agents receive their commissions; the title company receives their search and settlement fees and the one-time premium payment for your and the lender’s title insurance policies; and so on.
Now that you’ve received the Deed and keys and paid the Seller for the property and anyone else who provided you a service along the way, the closing is complete and you’re officially a new homeowner!
How do I prepare for it?
1. Line up your closing funds and how you’ll access them. As explained in Preparation for closing, the finalized Closing Disclosure will tell you exactly how much money you need to bring to the closing, either in the form of a bank check or an advance wire transfer to the settlement agent’s escrow account. (Whether you must choose one or the other method will oftentimes be determined by your settlement agent’s internal policies.) You’ll need to figure out the logistics of your closing funds ahead of time, so there’s no last minute issues that could delay the closing.
For example, if you’ll be paying via bank check, you should figure out ahead of time which branch location of your bank you’ll be getting the bank check from, including whether there’s a location near the property you’re purchasing or near your attorney’s office (where the closing will presumably take place), in case you need to get the bank check on the way to the closing. If, on the other hand, your plan is to wire your closing funds to the settlement agent in advance of the closing (ideally, the day before), you should call your bank ahead of time to find out what your bank’s wire transfer policies and procedures are, so you can ensure that your wire will arrive in time for the closing. Some banks have more stringent, restrictive rules when it comes to wires, like longer lead times or limited wire department hours.
2. Do my spouse and I both have to attend the closing? Generally, it’s a good idea for both you and your spouse to attend the closing. If only one of you is a borrower under the mortgage loan but both of you will be on the deed as owners, the non-borrowing spouse will still need to sign the Mortgage (but not the Promissory Note), along with the borrowing spouse. This is because, in the event that you default on your loan payments, the lender needs to be able to foreclose on the entire property, even if one of the owners isn’t a borrower under the loan. Having the non-borrowing spouse sign the Mortgage allows the lender to do so.
If one of you cannot attend the closing, you can ask your lender to permit the attending spouse to sign for the non-attending spouse via Power of Attorney. (The lender is typically fine with this.) Once you have your lender’s approval, a Power of Attorney will need to be prepared by your attorney and approved by the lender, and then the non-attending spouse will need to get the POA notarized so the attending spouse can bring the original POA to the closing.
3. Line up childcare if you have young children, so you don’t have to bring them to the closing. While bringing your toddler to the closing might sound like a convenient option, in practice it might make for more stress than it’s worth. Many attorneys’ offices are not particularly kid-friendly or child-proofed spaces, and tending to a restless toddler while you’re trying to understand your obligations under your mortgage isn’t easy. To get the most out of your closing experience, try to arrange for childcare at home during the closing, if possible.
Things to remember:
* If there are delays with your final loan approval, you may have a mad dash to the closing table. Although not ideal, sometimes the lender doesn’t get the loan package and Closing Disclosure finalized until the last minute, maybe even a mere few hours before the closing. In that case, some degree of flexibility as to the closing time may be required of you as the attorneys and settlement agents rejigger their day to accommodate such delays. Most buyers take the entire day off from work on the day of the closing, if possible. And you should be prepared to get your bank check on your way to the closing if that proves necessary.
* Your title insurance coverage begins as of the closing. The title company doesn’t prepare your title insurance policy until after the closing, and it can sometimes take months to get your policy if the title company is backed up. But even though you won’t walk away from the closing table with a copy of your final policy, rest assured that your title insurance coverage begins as soon as you become the owner.
What happens next?
Move into your new home! You’ve made it to the end of the closing journey and are ready to begin a new chapter as a homeowner. CONGRATS!
Within a few months of the closing, you’ll receive your owner’s title insurance policy and the original (now recorded) Deed. The speed with which you receive your title policy and recorded Deed in the mail after the closing largely depends on how busy the county clerk’s office and title company are around the time of your closing. During busy times of the year (such as spring and summer), there are long queues at both places and it can take up to a few months to get those documents in the mail.
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