Getting to the closing is what you’ve been working toward throughout this whole book. This is when all the documents and contracts are signed, the purchase is complete, and the title passes from the seller to you. In other words, after the closing, you own the home!

There are two types of closings—an escrow closing and an attorney closing. You will be attending one or the other. Think of an escrow closing as a third party who holds the money until the deal is complete. The money stays in an escrow account, and you and the seller work out the details of the purchase. Once all the details have been agreed upon and all the contingencies have been met, all documents signed and title passed to you, all of the money will be released from escrow and paid to the seller. Depending on where you live, the funds may change hands either by wire transfer or check to the seller’s account (and, if there’s a mortgage being paid off, to his lender). However, in most cases, a wire transfer is used because there is no delay waiting for a check to clear. If a check is used, it must arrive early enough to clear before closing. Other states use an attorney for closing. The attorney examines the title records to ensure that clear title, one with no liens or other clouds on it, passes to the buyer. He may be involved in drawing some closing documents as well, depending on local custom. In New York, for example, closings are frequently held at the offices of either the buyer’s or seller’s attorney. Typically, both the seller’s agent and the buyer’s agent are also present.

In the case of escrow closing states—California, Arizona, and Oregon to name a few—the closing happens through the escrow company’s office, but the parties don’t usually get together. Instead, each party comes in to sign their documents a few days prior to closing. Then funds are wired into the escrow’s account and transferred to the seller. Finally, the deed goes to the recorder for recordation.

This chapter provides information on both escrow and attorney closings, including what to bring to a closing and what you can expect once you get there.

In an escrow closing, all of your payments toward the purchase price and any funds from your mortgage are deposited into the escrow that was created for your purchase. In the case of the mortgage funds, they are deposited into escrow just a day or two before closing, and your existing deposits remain there until closing. Once all the paperwork has been completed, the funds are paid to the seller. The escrow holder will not transfer any funds to the seller until all conditions of your purchase are met, all relevant documents are signed, and you’re at the closing.

Similarly, the escrow holder will not refund any monies to you that you deposited until the seller agrees in writing that the purchase has been canceled for any number of reasons that we’ve already discussed. Though the escrow is usually opened in your behalf, once it is opened, the escrow company has fiduciary responsibilities to both you and the seller.

An escrow account is opened as soon as the seller accepts your offer and your deposit has to be put into the account. In most cases, the buyer’s agent chooses the escrow company, opens the escrow account, and deposits the check. The only exception is in the purchase of REO property; the selling bank often chooses the escrow holder because it usually uses the same company for all of its sales and therefore gets a cheaper fee. Usually a buyer pays this escrow fee, but with REOs the selling bank pays for it as part of choosing the company to do the escrow.

Your agent will provide the escrow company with all of the relevant information about the transaction—the address of the property you are purchasing; the purchase price; your name, address, e-mail, and other contact information; and the same information for the seller, your agent, and your seller’s agent. The company appoints an escrow officer, also called a title officer, to handle your account, and assigns an escrow account number for identification purposes.

If the funds have not arrived to the escrow company by wire transfer, you will need to provide a cashier’s or certified check. These checks clear more quickly and easily than personal checks. Your earnest money check might have been submitted by a personal check, but that was early in the home-buying process, so there was plenty of time for it to clear. Now, you’ll need a check that clears faster.

The funds may not all arrive at once at the time of closing. For example, the original earnest money deposit has been held in escrow since you went into contract. In the contract, you may have a clause that requires you to increase the amount of your deposit once you have released all of your contingencies. You’ll receive a receipt from the escrow officer for every deposit you make, including the remainder of your down payment, and a copy will be sent to the seller’s agent.

The escrow account officer also receives a copy of the purchase contract and any counteroffers or addenda that you and the seller have signed and dated. This is so the officer knows the total amount that will be deposited into escrow and when it can be expected. The contract will also tell her which contingencies have been agreed to, when they must be released, and any other requirements. The escrow officer has a duty to notify both parties if any deposit dates are missed. She will also check with your agent if she has not received notification that all contingencies have been released by their scheduled release dates.

One of the first things the escrow officer will do after the account has been opened and the first check deposited is to order a preliminary title report for the property you are buying. The report is considered preliminary because it gives you and the seller an opportunity to see what turns up. If anything appears erroneous, the seller can tell the escrow firm, who will investigate the claim and, if necessary, arrange for a corrected title report to be created before the closing. In some states, this may be ordered by the listing agent when she first lists a home. It saves time and work for everyone once they receive an offer.

This report covers all the known legal information on the property as of its date of publication. For example, it covers the legal boundaries of the property; any recorded liens, mortgage or other types; judgments or easements; and real estate taxes owed. It also notes any exclusions from coverage under a proposed title insurance policy. Exclusions, as the name suggests, are items that the policy specifically does not cover.

The report highlights items that a title insurance company would likely refuse coverage on and indicates potential claims or liens against the title (we cover the title insurance in more detail later in this chapter). If you or your agent notices a particularly serious issue, you can question it and, if it is found to be correct, decide whether you still want to buy the home.

Once the escrow account is open, start your due diligence—inspections, financing, investigation of homeowners’ association documents, and so on. When a release of a contingency is due, you will sign the document and your agent will provide a copy to the seller and to the escrow officer so the file stays up-to-date.

In some states, an attorney closing is also called a settlement of the property. However, it means the same thing. The attorney comes into the closing after all the inspections and other contingencies have been satisfied. In some cases, the attorney draws up all but the loan documents to be recorded, and may have drawn the purchase contract. In other cases, the purchase contract may be drawn by your agent and then sent to the seller and her agent. The attorney steps in once a contract has been established.

For example, in Illinois, an attorney reviews the contract after the parties have agreed to it. The attorney is permitted to make any alterations he feels necessary to protect his clients, but he cannot change the agreed-upon price. Also, any changes an attorney makes have to be agreed to by the parties.

Everybody knows how expensive attorneys are. However, in attorney closings, they do not get paid unless the property sale actually is completed, much in the same way that the Realtors don’t receive their commissions until the sale is completed. Fees vary with the attorney.

The lawyer either investigates the title or contracts the process out to a title company. He may do the lien search to determine what, if any, liens have been filed against the property. The attorney also draws the HUD-1 statement, which is a document that shows all receipts and disbursements connected to the transaction, and must be approved by both parties. Some states have the Realtors draw up the purchase contract and then turn it over to the attorneys for review before it is signed. This review is limited to a certain number of days. For example, in New Jersey, there is a three-day limit for review. The attorney will contact the bank to find out the exact amount of remaining down payment money the buyer needs to deliver at closing to complete the purchase. The attorney then draws up the Real Estate Settlement Procedures Act (RESPA) disclosure documents.

The RESPA documents are designed to help buyers avoid unnecessary expenses related to closing. They explain the policies of the escrow firm and detail any connections between the escrow company and other companies involved in the process whose fees you pay at closing. The idea is to have an informed buyer who can know if the fees he is being charged are legitimate and reasonable.

If you are mortgaging your purchase, the bank will send the various mortgage documents to the escrow company or attorney for your review and signing. Usually this is one of the last parts of the process because if any part of your purchase does not work out or fails to be completed, there is no reason to go to a closing.

Among the mortgage documents you will sign are the following:

Likely others will also be involved, depending on where you live, your lender, and the type of transaction, but these cover the most common documents you’ll sign.

The loan agreement is the agreement between you and the lender. It says that the lender is loaning you a specific amount of money to purchase your house. The agreement includes the rate of interest, the term, the frequency and amount of your loan payments, the loan maturity date, and the terms and conditions governing the loan, such as late fees, conditions of default, and any prepayment penalties.

Lawyers refer to the promissory note as “the proof of the debt.” Like the loan agreement, the promissory note shows the amount of the loan, the interest rate, and the final maturity date of the loan.

The mortgage or deed of trust gives the lender a security interest in your home as collateral for the loan. This document recognizes the right of the lender to foreclose if you do not make your payments. When recorded in your local recorder’s office, this document becomes a lien on the property. Many buyers jokingly say they own their home in partnership with the bank. Strictly speaking, that is incorrect. Even if you have a loan covering all but the tiniest of down payments on your home, you own the entire home. But your ownership is subject to the bank’s security interest in the property represented by the mortgage you have agreed to on that property.

The truth-in-lending document is a federally required document that protects you, the buyer, by disclosing all the key terms of your loan. This includes the principal amount of the loan, rate of interest, and annual percentage rate (APR).

Buyers were once unaware of the true costs of their borrowing—the fees, interest rates, and points—until they got to the closing. Required by the federal Truth in Lending law, this statement is meant to keep you fully informed about the details and costs of your loan. The information is broken down and detailed in easy-to-understand language.

The statement outlines your real rate of interest—the APR and how much the loan will cost over its lifetime. This can be a particularly sobering moment when you first see the total. The reaction usually goes something like, “Oh my! I’m paying all that money just to borrow money to buy a house?” The answer is, yes, but if you didn’t borrow it, you likely wouldn’t be able to buy the house.

The statement also details the principal amount of the loan, also known as the amount financed. Your payments will then be broken down. For example, if you have a 30-year loan, fully amortized, with monthly payments of principal and interest of $275, you will make 360 payments of $275, for a grand total of $99,000. However, if your loan requires you to make 30 years’ worth of payments at $1,800 every month, you will have paid $648,000. Chances are, more than half of that figure is interest alone. Your statement will also include a month-by-month schedule of your individual payments. This will show, payment by payment, the number of each payment: 1, 2, 3, and so on, through the final scheduled payment; the amount of each payment; and when each payment is due. For example, if your payments are due on the first of every month, you’ll see an actual date for the payment date for each of the enumerated payments on the schedule.

The closing statement, sometimes referred to as the HUD-1, looks like a page out of an accountant’s book. It shows every dollar that was paid in or out to both the buyer and seller. It includes all cash deposits into escrow, loan funds, and any closing expenses, such as insurance premiums, title insurance costs, loan fees, escrow fees, and Realtors’ commissions. There will be a closing statement for both you and the seller. Examine it closely to be sure there are no errors. Your agent can guide you.

Closing instructions are not actual instructions. Instead, they show the names, addresses, and contact information of the parties involved; the details of the purchase price; and its breakdown of loan and down payment, any encumbrances on the property, and your agreement to arrange for homeowner’s insurance on the property. It also shows the Realtor’s commissions and makes reference to any fees related to the escrow, any homeowners’ association obligations that may exist, and local city or county regulations that may apply.

The instructions also include the availability of funds. This refers to the date that your loan funds are actually available from their source, the lender, to be paid out to the seller by the escrow company. The date of availability is not always the same date that the funds are deposited into the escrow. Depending on the day of the week and time of day, the funds may not be available until the next day.

The deed is the document that actually transfers legal ownership from the seller to you. Typically, it will say something like, “John Q. Seller transfers all title at 123 Main Street in YourTown, USA, to you for value received from you.” It’s dated and signed by the seller. In many cases, the signature will be notarizedas well. Once it is recorded, the ownership transfer becomes a matter of public record.

After your loan documents have been signed and notarized, the lender funds the loan by transferring the loan amount to the escrow firm’s bank for ultimate disbursement to the seller. The only thing left before you own the home is the recordation of the sale. The escrow company sends the documents that the local laws require be recorded to the local recorder’s office for recordation. When recordation occurs, the escrow company is notified. They notify your agent and the seller’s agent, and pass the information on to you and the seller. At this point, you are considered “on record.” In other words, you own the home! Congratulations!

What to bring to the closing depends on whether it’s an escrow closing or an attorney closing. In the states where you actually attend the closing, you will need some form of government-issued identification, so make sure you bring your driver’s license or passport with you. Local law may vary from one state to another, so ask your agent if there are any other documents you need to have at the closing.

Remember, in an escrow closing, you are not present at the actual closing because your document signing takes place a few days prior to the actual close of escrow. In many cases, all of the funds are already in escrow by this time. Therefore, you don’t need to bring any money. However, in some locales, you actually bring a check to escrow covering such items as down payment and taxes on the day of closing. You will also have to write a check to pay for the closing costs, which includes your escrow fee, title insurance premium, first year’s homeowner’s insurance premium (if not already paid directly to the insurance company), flood insurance premium (if it applies), and notary and recording fees. These fees will be deposited into an escrow account and later disbursed to the intended recipients by the escrow company at closing.

You, and any other parties named on the documents, must bring photo identification. If it’s an escrow closing, in most states you bring it to the signing a few days prior to closing. If it’s an attorney closing, bring it to the attorney’s office where the closing will likely occur. You can bring a passport, driver’s license, or other government-issued ID. A Social Security card is not a valid identification, and it even states so on the card. The need for identification may seem a bit much, given the fact that your agent has been dealing with you for some time now, but in order for your signature to be notarized, the escrow firm’s notary must see some valid ID to prove to their legal satisfaction that you really are you.

What you bring to an attorney closing varies from state to state. You might need photo identification, and you may have to bring any funds that are part of the purchase price that you have not yet produced, as well as funds for your closing costs. These closings usually occur in your attorney’s office, and the attorney will oversee such things as funds disbursement and document signing.

Sometimes the seller won’t be in attendance at the closing due to family issues or because they are not physically able. In such cases, the one signing for the seller(s) will have a limited power of attorney that permits them to sign for the seller(s).

You should have your Realtor at the closing. She can answer any last-minute questions you may have. Also possibly attending a closing will be the notary, the seller, the seller’s attorney, and possibly the seller’s agent.

Paying the Realtor commissions happens at closing. That is because a Realtor gets no payment for his hard work at all unless and until the purchase closes and title transfers. He may have worked like the proverbial slave, but if the deal falls apart, even at the last minute, he gets nothing for his efforts.

Traditionally, as the buyer, you pay nothing to your agent. His commission comes from the seller. The seller pays a total commission to his listing agent. The amount is open to negotiation between the seller and her agent, but the most common figure in the business seems to be 6 percent of the purchase price. That commission is then split between the seller’s listing agent and your agent.

While there is no strict requirement that it be split equally, that is the most common circumstance. Sometimes, however, the commission is split differently, with a larger sum going to the listing agent. Remember, it’s the seller’s decision how the commission is split. In some cases, the seller and her agent might feel that an extra incentive is needed to sell the home. Therefore, the seller may decide to split the commission in your agent’s favor.

Sometimes, on the seller’s instructions, there will be a bonus or some other form of incentive payment to the buyer’s agent when the sale closes. Usually this is an extra chunk of cash over and above the commission that your agent is entitled to receive. However, this bonus doesn’t have to be money. It can be a new luxury car—a Porsche, Lexus, or Mercedes—jewelry, a trip to some exotic vacation spot, or a week at a resort. Usually such incentives are offered when the market is severely slow or when the property has issues or faces an inordinate amount of competition in a slower than normal market. These bonuses are merely to encourage a little more aggressive work on the part of your agent as a buyer’s agent.

Sometimes the seller doesn’t pay the buyer’s agent’s commission. The most common situation is when the property you are buying is for sale by owner (FSBO). The seller has no agent handling his end of the transaction and thus has no one to pay. When you and your agent first consider a FSBO, one of the first questions your agent will ask the seller is whether the seller will pay the buyer’s agent a commission if that agent’s buyer buys the home.

If the seller says yes, your agent will still get paid by the seller at closing. But what if the seller says no? Your agent will tell you that you’re not obligated, but he wants to help you get a home and he needs to be paid for his efforts. He shouldn’t just walk away without any explanation.

The solution is what’s called a buyer-broker agreement. This is a contract between you and your agent that covers the situation when her commission is not being paid by the seller. It specifies that you will pay your agent’s commission and the amount of the commission, either in dollars or as a percentage of the purchase price. It will also have an expiration date, but it can be extended. Should you end up buying a home where the commission is paid by the seller, then you do not also have to pay your agent. She gets paid only once.

Some agents propose a buyer-broker agreement at the start of the relationship so there are no surprises later. Other agents wait until they face this situation before discussing it. Either way is fine, although it is better to get it out of the way early on.

The escrow company charges escrow fees for the work it performs in opening and managing your account. This is either a flat fee or a percentage of the purchase price, up to a maximum amount. The fees will be listed on your HUD-1, or closing, statement. The escrow fee is included in your closing costs.

You likely will find additional fees or expenses that you are responsible for. Many of these cover the premiums associated with specialized types of insurance, such as flood or earthquake insurance.

Insurance premiums are the fees an insurance company charges to insure your new home against various types of damage or disaster. The most common is homeowner’s insurance, which covers damage by fire, storms, wind, and, in some cases, landslides (although this depends on what caused the slide). The fees are paid annually, although some companies allow quarterly or monthly payments. The first year’s premium is usually paid at the closing.

If you took out a mortgage to buy your home, you will share the beneficiary’s position on the policy with the bank. The beneficiary here is the payee of the insurance policy in case an insured disaster actually takes place. This is to make the bank feel comfortable about the protection of its collateral for the mortgage it made to you.

Two other types of insurance may be placed on your home: flood or earthquake insurance. If they are, the premiums for each will also be paid for the first year at your closing.

You will be paying some property taxes at closing. A portion of the tax bill will also be paid from the seller’s sale receipts. You’ll be paying property tax in advance for the portion of the tax year you are currently in the middle of that coincides with your ownership of the property.

Other expenses must be paid at closing. They include, but are not limited to, the following:

So much paperwork is involved in buying a home, so when you finally are all settled into your new home, it’s time to get that paperwork organized and filed.

Protect yourself by filing your documents so you can reference them if you need them at any time after you close. Organize the documents into two parts: transaction documents and closing documents. Transaction documents are all of your documents—inspection reports, proof of repairs or remediation, seller disclosures, purchase contract, counteroffers, contingency releases, and so on. Also include structural reports, permits, applications, final inspections, installations, and related items.

Closing documents are all the documents you received and signed at closing. You can keep a file at home or store your documents electronically. Many Realtors now provide documentation files for their clients on a CD or a thumb drive. This gives you access to your documents on a small, easy-to-store device that provides some security. Most states require the title companies and real estate brokerages to maintain copies of all document files. So feel confident that your documents are accessible if you lose them or if they’re destroyed.

Once all the documents are signed, it’s almost time to get the keys and move in. Congratulations!