The process of closing on a home is often confusing to home buyers and sellers and differs from state to state. We’re in Washington, so I’ll talk you through the process here, but if you are in another state, the process may or may not be the same.
Preliminary closing items
Your title insurance and escrow companies will work on a variety of tasks in the weeks leading up to closing. The title insurer will research the title history of the property and verify any liens that need to be cleared to transfer ownership. They will also make sure that the property qualifies to be issued a title policy, and if you have a common name, they may ask for identify verification documentation to prove you are not the same “John Smith” who has a judgment against him. Your escrow company, which may or may not be the same as the title company, will track down payoff statements for each mortgage or lien against the property. They may need you to provide authorization to obtain such statements on your behalf. As a buyer, you need to stay on top of documentation requests from your lender and prepare your down payment funds.
Loan documents sent to escrow
“Your loan documents are in escrow” are the magic words that all buyers want to hear. Nothing can be done or signed until those arrive, and in 95% of cases, this is the step that the entire process is waiting for. In order to generate loan documents, your lender needs to approve your file in underwriting. This means that the underwriter has reviewed your income, debt, credit and the appraisal of the home and determined that it fits within their lending guidelines.
In a perfect world, these arrive 2-3 days prior to closing. It gets pretty dicey to close on the same day as documents arriving, though it can be done if documents arrive early in the morning. Once documents are in escrow, the escrow agent needs a few hours to prepare the file. Basically they review all of the lender closing instructions and then prepare a HUD-1 Settlement Statement that reflects the purchase price, closing costs and all fees that are outlined in the purchase & sale agreement, the listing agreement (if you are the seller) and the lender instructions.
Sellers can generally sign their closing documents without having to wait for the buyer’s loan documents to arrive. During the signing appointment, you will sign a number of documents. The important ones are the deed transferring ownership, an excise tax affidavit showing the tax you are paying on the sale and a HUD-1 Settlement Statement outlining the sale price, any charges or credits to you and the net sale proceeds that you will receive. You will also tell them how you want to receive your proceeds, whether via check or wire transfer. Most seller signings happen 1-3 days prior to closing.
Once escrow has received loan documents, they will schedule a signing appointment for the buyer. This is always a source of angst for buyers who want to plan their closing appointments ahead of time. The escrow companies can’t do a darn thing with you until they receive loan documents and the exact arrival of those documents is hard to predict. They won’t set appointments to sign without documents in hand, so make sure that your schedule is flexible in the days immediately prior to closing. Buyers typically sign their documents 1-2 days prior to closing.
During the signing, you will sign a small forest worth of documents, most of which are generated by your lender. In a nutshell, you sign documents that say how much you owe them, how you will pay them back and what happens if you don’t pay. It usually takes 50+ pages to get this across! In addition, you will sign a copy of the HUD-1 Settlement Statement showing what you are being charged, what you have already paid, and what remaining funds you need to provide to the escrow company. You will need to provide certified funds for the remainder of your down payment and closing costs, which means either a certified check or wire transfer. If you are providing funds on the day of closing, you will be required to send funds by wire. Note that most banks have a 12:00 or 1:00PM wire deadline, so you need to take care of such transfers in the morning.
Once you have signed your documents, the loan documents are sent back to your lender for review. Some lenders require documents with original signatures to be couriered to them. Other lenders require 24-48 hours to review. The most flexible lenders are the ones who will fund your loan on the same day by reviewing a scanned copy of your documents. These lenders are known as “table funders,” and you won’t know how great this is until you get in a last minute bind with a lender that has lengthy review procedures.
Once the lender is satisfied with your loan documents and the settlement statement figures, they will wire your loan proceeds to the escrow company. Typically this happens on the closing day, though sometimes it can happen a day or two beforehand. Once again, these funds are tied to the wire deadlines. If these funds are not wired by 2PM, they won’t arrive until the next day. (All wire transfers are tied to east coast time where they are processed by the Federal Reserve.)
Unless you have problems with delayed loan documents, in Washington the buyer and seller don’t really do anything on the closing day other that sit around and wait for the transaction to close so that they can exchange keys. However, there are a number of behind the scenes tasks that must happen before the sale is complete.
Real estate transactions must be recorded at the county recorder’s office for a sale to become official. The title company will send the deed, your deed of trust (mortgage) and the excise tax documents to the recorder’s office. The title company has a courier that shuttles these documents to the courthouse throughout the day. Your documents will likely be queued up in this process waiting for the escrow company to “release the file to record.”
There is a final lender review of the file on the closing date. They verify the final settlement statement, wire their funds and ensure that all conditions required have been cleared. Once the funding department is satisfied with the file, they tell the escrow agent to “release the file to record.”
Once the file is released, the documents are taken to the counter at the recorder’s office and submitted for recording. The moment the document is scanned, a recording number is generated and provided back to the title company. The recording number of the deed is evidence that the transaction is officially closed. The recording numbers then get passed along to your real estate agent, who gets to make the exciting call that your home has finally closed.
Once your deed and mortgage are recorded, you own the home and escrow is able to disburse funds to all parties in the transaction. The previous lender is paid off, the real estate commissions are paid and the seller is sent their proceeds from the sale. You also get to receive the keys from the seller, depending on the possession time you negotiated in your contract. The default contract language grants you possession at 9PM on the closing date, but if the seller is moved out, the exchange of keys often happens earlier.
If you are a seller, you will generally receive your sale proceeds on the day after closing, so don’t go writing any big checks just yet. Technically the funds can be disbursed to you at any point after recording numbers are received, but from a practical standpoint, you have likely missed the wire transfer deadline for that day. Most sales officially close late in the afternoon.
Be flexible to avoid closing delays
The last few days of a real estate closing are when most things go wrong. If you are involved with a real estate transaction, make sure that you are available to sign documents at a moment’s notice and try to be reachable during this critical phase of the transaction. If you are prepared to be flexible, you can head off any last minute delays.