You’re getting closer to buying your house. You’ve found your dream home and submitted an offer, which the seller accepted. You’ve been through the inspection process and have started working with a mortgage professional to help you with your financing options.
Closing is the final step in the real estate process—the day that you become the legal owner of your new home. The first step in closing is signing a purchase agreement or offer accepted by the seller. Your next steps are doing your due diligence. That includes getting an inspection and appraisal done on the property, ensuring you can get financing (and apply for it), ensuring the title is clear, meeting all contingencies outlined in the purchase agreement (such as obtaining insurance), and much more.
Once everything has been approved, you will work through the closing disclosure. This document outlines how much money will be required to pay off any existing liens on the property, what amount needs to be placed into escrow accounts (for taxes or insurance), and how much needs to go toward the down payment.
Here are things you must do before closing on a property:
Review the Closing Disclosure
Your lender must deliver the closing disclosure three days before closing. It contains all the essential details about your loan, including the actual interest rate and costs you’ll be paying at closing.
- Review it carefully to make sure there are no unexpected fees or charges. If anything looks amiss, contact your real estate agent or lender immediately to clarify why those charges are there and whether they can be removed. You can also request to change an incorrect interest rate or adjust a portion of your loan proceeds (for example, credit for a prepaid property tax).
- Make sure everything matches the loan estimate you received when you first applied for a mortgage. For example, if you negotiated with the seller to cover certain costs, such as homeowners association fees (HOA fees), at closing, ensure these discounts are listed on both documents so that they aren’t double-charged by mistake.
- The final loan amount should always match the agreed-upon purchase price of your home from your real estate contract; otherwise, either the buyer or seller will have to contribute additional funds before closing. If you’re confused about any aspect of the closing disclosure document, talk to your real estate agent or lender so that everyone is on the same page when it comes time for all parties involved in buying and selling properties to sign contracts on closing day.
Document Income and Assets
While this may not be the most exciting item on your list, documenting your income and assets is essential to making sure you get a loan. Your bank or lender will want to see evidence of a steady income, as well as any savings accounts and investments that could serve as emergency funds.
To document your income for the past two years, start gathering tax returns from that period. Next, find pay stubs from these years or write a letter from your employer explaining how long you’ve been working there, your salary, and whether it’s likely to change in the future. You will also need to document any additional sources of income.
If you have investments or savings in an IRA account, take note of the balance on each account and request official statements that show this information. The more documentation you can provide upfront, the more prepared you’ll be when it comes time to apply for a mortgage.
Consider an Escrow Account
An escrow account is a separate bank account, usually held by a third party, that holds deposits to pay taxes and insurance on your property. Your lender will keep whatever payments you make in this account and then pay them out to the appropriate parties in installments. It can provide peace of mind for buyers who don’t want to worry about forgetting to pay their taxes or insurance on time.
For example, suppose you’re buying a $200,000 home with 20% down and have set up an escrow account. In that case, your lender will take money from this pool every month (in addition to your mortgage payment) until they’ve accrued 1/12th of the amount needed for yearly property taxes (based on the current tax rate). Many lenders require borrowers to deposit two months’ worth of estimated taxes and insurance into the pool before closing. So, depending on how much your tax bill is for a year, that could be anywhere from several hundred to several thousand dollars.
Loan verification is how lenders verify your income, assets, and other information you have given them to determine your ability to take on a mortgage loan. If anything has changed in your finances since you were prequalified for a loan, it could result in your application being denied.
- A lender will review your credit report and your credit score, which is used to help determine what interest rate you will receive.
- Your lender will review your income and employment history to confirm that you have sufficient income to pay back the loan.
- Your lender will verify that the assets listed in the application are genuine and belong to you; this may include bank account balances, investments, or retirement accounts.
Homeowners insurance (or home insurance) is a home-security policy that covers your property in the event of theft, fire, or other damages. Additionally, the policy will protect you from liability in the case of someone being injured on your property.
Other required insurances include flood and hazard insurance. These policies cover you in the event of specific natural disasters. Flood damage is typically not covered by homeowners’ insurance, while damage related to earthquakes or landslides may or may not be covered by a standard plan.
If your down payment on a home is less than 20 percent of its value, you’ll be required to pay for private mortgage insurance (PMI) until you reach that 20 percent mark. The cost for this can vary greatly, from 0.25% to 2% of the loan amount per year, and it’s something that many first-time buyers forget about when budgeting for their new homes.
Now that you have a better idea of what to do before closing a real estate property, you can simplify the process. A thorough inspection should help highlight any issues with the property, while a title search can help ensure that the seller has clear ownership of the property. Understanding your closing costs will help you create an appropriate budget, and shopping around for different loans can ensure that you receive the best terms possible. Finally, finding out if there are any easements or liens on the property will help protect your rights as an owner.