What is closing?
Closing is the last item on your home buyer checklist. In a real estate closing, ownership of the property is legally transferred to you. This is the day that you sign all the paperwork to make the deal official.
How long does it take to close on a home?
The time it takes to close on residential real estate varies but may take anywhere from four to six weeks.
If you're paying cash, the transaction might go faster. If you've been approved for a loan, mortgage lenders need to make sure several requirements are met before handing the money over to the seller.
What can delay closing?
Everyone wants the closing to happen. You want the home. The seller wants the money. The lender wants to close the mortgage loan. The title company and real estate agents want to get paid. That's a lot of motivation, but it doesn't mean delays won't happen during the closing process.
A few examples of possible delays include:
- Low appraisal: The lender will not approve a mortgage loan above a predetermined loan-to-value threshold. If your home appraisal comes in lower than expected, you may need to make a larger down payment or ask the seller to lower the purchase price to make the loan work.
- Title issues: The lender must confirm that the title is free of any legal matters. If any liens or judgments are discovered, your closing could be delayed.
- Inspection issues: If the home inspection reveals that the home has a significant problem like mold, you might want to back out or renegotiate.
- Financing issues: Your financing could fall through for any number of reasons. If you lose your job or your credit score changes or something else happens that makes you ineligible for the mortgage, your closing may understandably be delayed. Mortgage lenders for first-time home buyers will give you tips for how to avoid losing your financing.
- Unmet contingencies: The purchase contract will state that certain conditions must be met, such as the loan being secured or repairs being made by a certain date (contingencies can be for the benefit of the buyer or the seller). If any conditions aren't met, it could delay closing and even void the purchase agreement.
- Errors: If anyone involved in your transaction makes an error, it could delay your closing.
What happens during a mortgage loan closing?
Here are some of the things that need to happen to close a typical home purchase:
Some steps are out of your control and largely invisible to the buyer. For example, the lender will pay a title company to perform a title search. The title search tells the mortgage lender that no one else has a right to claim ownership of the property you are buying.
It's not all that common to back out of a mortgage loan before closing, but should you need to do so, our guide can help you navigate that process.
What do I need to bring to closing?
These days, you're likely to provide most documents digitally before your closing date. Your loan officer should supply you with a list of what you need to bring with you on closing day. It's a good idea to bring your phone, tablet, or computer so that you can access your email and the lender's loan portal, in case the lender is missing anything you previously submitted.
In addition, make sure to bring:
- Your government-issued photo identification
- A cashier's check for the amount due or a wire transfer receipt
- A copy of your purchase contract, your loan estimate, and your closing disclosure, to make sure everything that happens during closing is what you agreed to
What will I pay at closing?
Closing costs are just one of the many expenses of homeownership. Average closing costs are typically 2% to 5% of the loan amount, though not every home buyer will have to pay them out of pocket on closing day. You might have to pay some fees, such as the appraisal fee or the credit report fee, but whether you pay anything on your closing date depends on the specifics of your loan.
Here are some common scenarios:
- No-closing-cost loan: If the lender offers a no-closing-cost loan, that means the lender is paying those costs for you. You'll pay a higher interest rate as a result but no fees on closing day. And if you ever need to refinance, lenders may also offer a no-closing-cost refinance as well.
- Reduced closing costs: Sometimes, you can negotiate with the seller or the lender to pay all or a portion of the closing costs. A lender's credit or seller's credit means that entity has agreed to pay those costs (not roll them into your loan).
- Closing costs rolled in: Many lenders will give you the option to add your closing costs to your loan balance. This is not a credit. Rolling in the closing costs means you'll pay less (or nothing) out of pocket on closing day. But you're borrowing the money to cover those costs, and you'll pay interest on it for the life of your loan. Doing this might affect how much house you can afford. If you are borrowing the most that you can qualify for, adding closing costs could make you ineligible for the loan. Rolling in the closing costs could mean that you have to choose a home with a lower purchase price or find a way to make a bigger down payment.
- Pay closing costs out of pocket: In this scenario, you pay your closing costs on closing day.
Closing costs typically include:
Other line items can affect the amount of cash needed to close. For example, if your mortgage lender will pay your property taxes and homeowners insurance premiums, you will need to fund an escrow account for those expenses. At closing, these are called prepaids.
Prepaids and all other closing costs are noted on your loan estimate that lenders must give to you after you submit your loan application. Some of the actual costs may increase at closing, but by law, others can't.
What happens on closing day?
You will sign a mountain of documents at your closing. Take your time and look carefully at each page. These are legally binding documents. You have the right to read and understand each and every one of them, and to make sure they are error-free.
A notary public will be there to check your identification. They may take a photo of it and may require your fingerprint.
Once the purchase transaction is funded (by the loan proceeds and your down payment), a closing agent distributes the money due to all parties.
Most buyers get the keys to the home on closing day (unless you and the seller have agreed to something different in the purchase contract). Find out from the closing agent if there are any additional steps you need to take after closing in order to take possession of the home.
Once the closing process is completed, there's nothing left for you to do but enjoy your new home!
