Step-by-Step Closing Guide

The Settlement Process

Step by Step Guide to Closing After the Contract is Signed

After you have a fully ratified sales contract, it is time to find a settlement company to handle your settlement and to insure that you will own your home free and clear from any liens or claims. 

1. You will meet a number of service providers such as settlement companies, lenders, insurance agents, inspectors, surveyors and appraisers to name a few.  They may use terms which are new to you.  For your education, in English and Spanish, a Glossary of Terms has been provided under the tab “Buyer/Seller Tools” on the left hand side of the home page of our website.  Please use the glossary for any terms you do not understand.  If the glossary does not answer your questions, please call us.
   
2. After the seller accepts (ratifies) the contract you submitted on the house you are purchasing, you usually will be required to put down a deposit check to show you are a serious purchaser and you want to purchase the house.  Sometimes the deposit is non-refundable and sometimes it is refundable if certain conditions to settlement do not occur in accordance with the contract.  The deposit is usually held by either the buyer’s real estate agent or the settlement company.  If there is no real estate agent is representing you or the seller it is wise to have the deposit held by a neutral party.  A settlement agent is often an attorney, but is always a licensed agent in the state in which the house is located.  Settlement agents are also sometimes referred to as closing agents, escrow officers or escrow agents.  Settlement companies are often referred to as title companies or escrow companies.  If the settlement agent is to hold the deposit, the settlement agent will deposit the check for the deposit into a special escrow account under the care of the settlement company for the purpose of conducting settlements.
   
3. Upon receipt of the ratified contract, the settlement company will order the title work on the house.  The title work or abstract will examine the ownership history of the house, including any loans secured by the house, and will also examine certain court or judgment records relating to the owners of the house.  Each house has a series of documents recorded at the local courthouse that reflect prior owners, lenders and other parties who have or had an interest in the house you’re buying. These documents are examined to identify all outstanding interests in the house, summarized and then sent to the settlement agent for review in the form of a title abstract.
   
4. After receipt of the title abstract, the settlement company begins reviewing the abstract to determine if the house is owned by the seller and if there are any encumbrances (liens) against title which might impact your ownership of the house.  Mortgage issues are addressed to determine if any loans secured by the house are outstanding in the records and/or with the lender.  If prior mortgages have to be paid to provide you with free and clear ownership of the house, or if a loan secured by the house is being assumed, the settlement agent will determine the amount of such loans and the procedure necessary to payoff or assume such loans.  In addition, if you are obtaining a loan to help finance the purchase of the house, the settlement agent will work with your lender to verify dollar figures and other important details of the transaction and to provide insurance to the lender insuring the lender that you will own the house free and clear of unacceptable encumbrances.
   
5. In most cases a survey of the property where the house is located will be required to show that the house is located within the property boundaries and that no part of the house, any fence or any other structure encroaches onto the property of the neighbors.  Lenders will also require an inspection for termites to ensure that the house is structurally sound.  It is a good idea to consider hiring a professional inspector to conduct a home inspection.  The inspector should be able to find defects in the house or repairs that need to be made to avoid surprises after you move into your house.  If possible, you want to have the contract to purchase the house contingent upon the receipt of a good inspection report which either requires the seller to fix problems uncovered at the house or allows you to terminate the contract and receive a return of the deposit in the event the seller does not repair any problems.  You should also obtain homeowner’s insurance for the house to protect against damage or destruction by disaster.  If you getting a loan to help pay for the house, lenders will require homeowner’s insurance as a condition to making the loan.
   
6. After the lender has provided the instructions for settlement and listing of the lender’s fees and charges relating to your loan and you and the seller are ready to proceed to settlement, the settlement agent will prepare a settlement statement.  This document will show all of the costs that will be paid at settlement.  Any funds paid to or from the settlement agent or to or from the seller, you or the lender must be on the settlement statement.  You should check with your settlement agent to confirm the amount you need to bring to the settlement at least one day prior to settlement since you should bring a certified check or other bank check acceptable to the settlement company to settlement for any amounts you need to bring to settlement to buy the house.  Personal checks are usually not accepted by settlement agents.
   
7. At settlement you should have two forms of picture identification, including a driver’s license or a passport.  Settlement will be conducted by a licensed settlement agent and will usually have the seller and you at the settlement table.  Often the real estate agents and your lender will also attend settlement.  During the settlement, you (and whoever else is buying the property with you) will
   sign a number of documents, each of which will be explained to you by the settlement agent. If you are buying the house with at least one other person you should discuss the type of ownership (tenancy) which best suits your needs.  A deed conveying the ownership of the house to you by the seller will set forth the names of buyer and the tenancy.  Tenants in Common are two or more people who own the house together; however, if one dies, the decedent’s ownership interest is passed to the decedent’s heirs, not the other house owners.  Joint Tenants are two or more people who own the house where upon the death of one of the owners, the decedent’s ownership interest passes to the other Joint Tenants, not necessarily to the heirs.  Tenants by the Entirety are Joint Tenants who are married.  After your settlement is complete, the house is yours.
   
8. The settlement agent should review all of the documents to make sure everything is signed.  The settlement agent will have the appropriate documents recorded in the land records of the applicable jurisdiction in which the house is located, and will disburse the funds collected for various fees and expenses to the appropriate parties.  The settlement agent is responsible for satisfying all the title conditions, paying the seller and the previous lender, obtaining money from the buyer
   and new lender, obtaining recording fees and taxes for the government and filing the paperwork at the local courthouse or county recorder’s office.  If you have purchased a policy of title insurance insuring that you own the property (an owner’s title policy) the settlement company will prepare and deliver to you an original of the owner’s title policy.  If you are buying a house, it is very wise to get an owner’s title policy to insure that you own the property and that your ownership is not subject to any claims or liens.  Without purchasing an owner’s title policy, you will have no protection against any claims from third parties relating to your ownership of the house.
   
9. Now all that is left is to move into your new home.
   

1. THE PLAYERS
   
   
   1. Borrower and/or Buyer
      
      
      1. The Borrower is the beginning, middle and end to this whole process.
         
         
      2. Without the Borrower, there would be no need for the rest of the players.
         
         
      3. The Borrower is, by law, permitted to select his or her own Title Company also known as a Settlement Company or Escrow Company.
         
         
   2. Title Company a/k/a Settlement Company
      
      
      1. The Borrower is by law permitted to utilize a Title Company of their choosing.
         
         
      2. An attorney who is recognized by the state as a Licensed Title Producer (Agent) may perform real estate settlements. 
         
         
      3. Other individuals may take an examination and become a Licensed Title Producer (Agent) and perform real estate settlements.
         
         
      4. The Title Company does not have any influence or impact on interest rates, points, or loan conditions.
         
         
   3. Mortgage Broker
      
      
      1. The Mortgage Broker is also selected by the Borrower.
         
         
      2. The Mortgage Broker may recommend a Title Company, however, they cannot require a Borrower to use any particular company as a condition of the loan.
         
      3. The Broker cannot tell the Borrower that the use of a Title Company is tied to getting better rates, fewer points or lower loan fees.
         
         
   4. Lender
      
      
      1. The Mortgage Broker submits an application to one or more lenders on the Borrower’s behalf.  A Borrower can also seek a loan directly from a Lender.
         
         
      2. The Lender approves the loan and sets the loan conditions.
         
         
      3. The Lender may also recommend a Title Company; however, the Lender cannot make it a condition of the loan, affect rates and/or points.
         
         
2. THE PROCESS
   
   
   1. Mortgage Broker-Lender
      
      
      1. The Borrower selects a Mortgage Broker and/or Lender.
         
         
      2. The Mortgage Broker and/or Lender obtains information from the Borrower and fills out the loan application also known as the Form 1003.  The 1003 can be found on the Freddie Mac and/or Fannie Mae website and contains:
         1. Borrower’s Name(s);
         2. Subject property address;
         3. Social Security Numbers of the Borrower(s);
         4. Income and employment information;
         5. Credit history (usually from the Borrower’s credit report);
         6. Recommends/schedules appraisal of the subject property; and
         7. Payoff information per credit report.
            
            
      3. Broker will also need a form signed by Borrower (the Borrower’s Authorization) to obtain information for loan payoffs.
         
         
      4. Submits Application to the Lender’s Underwriting Department for approval.
         
         
      5. Orders Title Report.
         
         
      6. Upon approval they notify the Title Company that they are ready to schedule the closing also known as the settlement.
         
         
   2. Title Company
      
      
      1. Orders Abstract also known as a Title Search
         1. The title search is performed by a third party who physically travels to the court house in the county seat where the subject property is located;
         2. The title search will include any and all liens on the property as recorded in the Land Records of said County;
         3. The title search will also include a judgment search on the Borrowers to make sure that the property does not have lien attach due to some unpaid debt or other lien due to litigation; and
         4. The title search usually takes 5 business days to complete, review and return to the Title Company;
            
      2. Upon receipt of the Abstract by the Title Company it is examined and reviewed by an Attorney and/or a Licensed Title Producer (Agent).
         
         
         1. If there are liens attached to the property, it is determined (on the 1003 provided by the mortgage broker) if said lien will be paid off in the process of the current loan;
         2. It is not uncommon to find a lien that is unknown to the Borrower;
            1. Sometimes, former loans are paid off; however, the paperwork has not been properly completed to release the lien from the property;
            2. The Title Company will obtain lien information, track down the last Title Company involved and obtain the releases prior to the new loan being put in place as many Lenders make it a condition of the new loan that they be in “First Lien Position”; and
            3. If necessary, the Title Company will obtain a Subordination Agreement from a current lien holder, if the lien is not being paid off and thus the current lien holder agrees to be placed in “Second Lien Position”.
         3. Once the Abstract review is complete and title issues are resolved the Title Company will issue and send to the Mortgage Broker:
            1. Title Binder also known as the Title Commitment.  This document states that the Title Company promises to insure the title of the subject property.  This is of primary importance to any Lender.  Unless they receive “title insurance” a Lender will normally   refuse to provide the loan; and
            2. Insured Closing Letter from the Title Company’s Underwriter; and
            3. Wiring Instructions for funds to be sent to the Title Company’s escrow account.
               
               
      3. The Title Company will also obtain:
         1. Real Estate tax information.
            1. Most Lenders require proof of tax payment since this can become a lien against the property and endanger the Lender’s first lien position and
            2. Most Lenders require an escrow of several months of real estate tax payments.  This results in one-twelfth of your insurance and taxes being added to your monthly payment (i.e. PITI or principal,interest, taxes and insurance).
         2. Obtain payoff information from current Lenders, including:
            1. Principal balance;
            2. Per diem charges for each day of interest;
            3. Fees; and
            4. Payoff Balance.
         3. In the case of a sale:
            1. Order a survey of the property to be sure that the correct parcel is being purchased and that the actually land is the size claimed.  For example, that there is actually a full acre of land rather than ¾ acre of land;
            2. Obtain final water bill from the property; and
            3. If applicable, obtain Home Owner’s Association payoff information
         4. Pre-Closing.
            1. In addition to information above, the Title Company will also be sure to prepare HUD-1 settlement sheet;
            2. The HUD-1 contains a detail of all of the costs and fees that are incurred by the Borrower in connection with receiving a loan; and
            3. Once the Lender provides an o.k., the Closing will be scheduled with the Borrower
         5. Closing.
            1. The Closing is the meeting between the Borrower and a representative of the Settlement Company wherein all of the paperwork related to the loan is completed;
            2. In a sale, the paperwork is complete upon execution;
            3. In a refinance, the Borrower has 3 business days in which to cancel the loan; and
            4. Upon receving funds the loan is disbursed.  This means that the prior lender is paid off, the fees for taxes, recondation fees, etc. are sent out.
         6. Post-Closing
            1. Upon disbursement, make sure that all proceeds are sent to the proper place;
            2. Be sure to have all deeds and deeds of trust recorded
            3. Send loan package back to Lender;
            4. Provide title insurance policy to Lender; and
            5. Obtain Certificate of Satisfaction from prior Lender to be filed at courthouse so that everyone knows that they have been paid.