Documentation You Need for Closing
Important documents you will need to close on your home loan.
There are both state and local laws that will dictate the documents you need for closing
as well as how you will close on your home loan. Although these laws vary, the
mortgage loan settlement has many very standard legal documents and what are often
called “exhibits” required to close on your home loan. Let’s look at these documents,
beginning with your Closing Disclosure.
The Closing Disclosure or CD is a five–page document that summarizes your mortgage
loan terms. It provides estimated monthly payments and closing costs. The reason it is
still estimated on the Closing Disclosure is because the settlement agent will be
gathering your final costs for items like your taxes and insurance, and they may vary.
When you get to your final closing documents you will have your actual monthly
payments. The Closing Disclosure outlines all the payments and credits and specifies
who is responsible for paying what. You will receive the Closing Disclosure a minimum
of three business days prior to your actual closing date. You must acknowledge
receiving the Closing Disclosure at least three business days before you can actually
sign your closing documents. This is a federal law and there are no exceptions, so you
want to be sure to work with your lender on the timing of your Closing Disclosure. The
three days are designed to allow you to compare your original disclosure, called the
Loan Estimate with your Closing Disclosure and compare the costs. Let’s go on to the
next documents which are the Title Documents.
Title insurance ensures that the seller is the legal owner of the property and that there
are no claims, liens, or pending judgments against the property that would prevent you
from taking ownership. The title is issued before closing, but you are required to pay for
it at the closing table.
Every lender requires title insurance. The company issuing the title insurance policy will
have researched the legal records on the property to ensure that you are receiving what
is called a “clear title” or ownership to the property upon transfer. Title companies may
offer both a lender’s policy and an owner’s policy. A lender’s policy is required, so you
have no choice on that, but the owner’s policy is not required, however it is a good idea
to have an owner’s policy to protect yourself in case there may be some type of fraud,
lien or faulty title discovered after closing.
You will also be required to have homeowners’ insurance, so let’s take a look at what
that looks like.
Your lender will require you to have homeowners’ insurance on the property for at least
the amount of the replacement cost of the property. You should make sure that your
policy covers the value of the property as well as the contents in the event that they are
destroyed by a catastrophic event. Homeowners insurance policies must be paid for
and be active at the time of closing and often require the borrower to pay one full year,
plus two additional months up front at closing. These funds are often placed into what
is called “escrow” that will hold the funds and pay them out to the insurance company
annually when they are due.
The mortgage note is also called the promissory note and is legal evidence of your
indebtedness and formal promise to repay the debt on the home plus interest within an
agreed upon length of time. The mortgage note sets out the amount and terms of the
home loan and also recites the penalties and steps the lender can take if you fail to
make your payments on time.
Mortgage/Deed of Trust
The mortgage deed of trust is the security instrument which gives the lender a claim
against your house if you fail to live up to the terms set out in the mortgage note. The
deed of trust recites the legal rights and obligations of both you and the lender and
gives the lender the right to take the property by foreclosure if you default on the loan.
The deed of trust will be recorded and will provide public notice of the lender’s claim
which is called the lien on the property.
The closing instructions serve to engage the closing company or closing attorney with
the parties of the real estate transaction. The closing company or closing attorney
agrees to provide settlement services in connection with a transaction for the sale and
purchase of a property. The parties who engage are the buyers and sellers. The
documentation authorizes the closing company or closing attorney to obtain information
necessary for the closing. The closing company in turn, agrees to prepare, deliver, and
record all documents necessary to close the transaction.
Any additional documentation that will be needed for your closing will be set out in the
commitment letter from your mortgage lender and will depend upon the terms of the
sale, peculiarities of the property type and local ordinances. Examples may include
documents like certificate of occupancy, termite inspection, flood insurance, water rights
transfer, radon test, etc.
Regardless of if the documents are lender or state specific, they should not be taken
lightly. Take your time to review them and ask questions.
It’s also important to remember that you have a deadline for your closing, which is
usually dictated by your sales contract, so make sure that you get your documents
together and reviewed on time.
Once you have reviewed your documentation and signed your paperwork, you are on
your way to becoming a homeowner!