Closing on your first home can feel overwhelming, especially if you've never been through the process before. There are so many steps to follow, documents to figure out, and new terms used you may not have heard before. Buying your first home is an incredibly large and emotional transaction. Most people only buy a home a few times in their life, so you want to get it right.
One of the pieces of home buying that can feel confusing is the closing process. By the time you reach this point, you’ve been through many open houses, gotten pre-approved for your loan, made an offer and had it accepted by the seller. You are likely reviewing the purchase agreement with your attorney, going over any results from the home inspection.
With all the above hanging in the balance, the closing process is just this one last hoop to jump through before the keys are in your hand.
Closing isn’t something to glaze over, though – it’s an important part of the process that you’ll want to be ready for and pay attention during. If you go in prepared, you’ll feel a lot less confused and a lot more empowered and excited!
How to Prepare for Closing on a Home
The most important part of the closing process is the documentation. Be prepared to see a big pile of documents when you get there. By working with STEM Lending, you can E-sign most of the documents, but not all lenders work this way. Regardless of the lender you choose, we will guide you through the process of signing all the documents that need your signature.
To prepare for this portion of the process, familiarize yourself with the documents that you’ll be working with, including:
The Loan Estimate
You shouldn't be seeing this document for the first time at closing. A Loan Estimate (“LE”) is a three-page form that you receive after applying for a mortgage. See an example loan estimate here. The LE tells you the estimated interest rate, monthly payment, and total closing costs for the loan. The Loan Estimate also gives estimated costs of property taxes and insurance. The lender must provide you with a Loan Estimate within 3 business days of receiving your application.
The Contract
The purchase contract document will have all the terms on it you need to sign off on to complete the purchase of the home. This contract, once signed, is a binding, bilateral agreement between two parties for the purchase, exchange or “conveyance” of real estate.
What is actually in your exact real estate purchase contract may vary, but it should include:
- The agreed upon purchase price
- The agreed upon amount of the deposit
- The total closing costs
- Description & Identification of the specific real estate property
- Description & Identification of the two parties agreeing to the transaction
- Any conditions or contingencies attached to the sale of the property
- The closing date
- Signatures from both parties
- Terms of possession
- Results of a professional inspection
- Results of the appraisal (likely required by your mortgage lender)
A Word on Contingencies
As the real estate market heats up and competition gets fierce in cities like San Francisco, Seattle, New York and others, we wanted to share advice on contingencies.
One of the most common contingencies are “financing contingencies.” This contingency states that the seller understands the contract is canceled if a prospective buyer earnestly attempts to get a mortgage to buy the property, but is turned down. We are seeing an increase in buyers waiving financing contingencies in order to show the seller their serious intent to buy the home.
Another common contingency (and one I went through personally) is the inspection contingency. If an inspector finds defects in the home you are looking to purchase, and you (the buyer) no longer wish to proceed or negotiate an agreement on how to repair the defects, the two parties can cancel the contract.
Proof of Title Search and Insurance for Closing
Before you close on your new home, make sure the title company you are working with has performed a title search. The title company should make sure there are not any outstanding liens or other marks against the property.
What is a ‘lien' you ask?
A lien is a legal claim against the property that must be satisfied before the property is sold. The lien provides notice that the bank has a secured interest in the property and guarantees the bank that the property cannot be sold or transferred without either the loan being repaid or assumed.
There could also be unpaid property taxes, or other loans that need to be repaid for you to successfully close on the home, so many sure everything is in good order with the home's title, before signing any documents.
States the flood zone status of the property (so you’ll know if you need flood insurance). Most lenders will take care of the flood certification.
Proof of Homeowners Insurance and Mortgage Insurance
You need to be insured before you can go through the closing process and prove that you’ve bought the policy. Most lenders require proof of 12-months homeowner's insurance, and some will want this pre-paid and deposited in an escrow account before you go to closing.
Home Appraisal
A document appraising the home’s value. Appraisals are handled by third-party vendors and hired by your mortgage lender to ensure the property you seek to purchase has a value that matches the loan amount you are attempting to borrow from the bank.
The Closing Disclosure is a five-page form that provides final details about the mortgage loan you have selected. It includes the loan terms, your projected monthly payments, and how much you will pay in fees and other costs to get your mortgage closing costs.
The lender is required to give you the Closing Disclosure at least three business days before you close on the mortgage loan.
During this time, compare your final terms and costs to those estimated in the Loan Estimate we mentioned earlier. Also, during those three days also gives you time to ask your lender or broker any questions before you go to the closing table.
In Summary
Overwhelmed? Don’t be.
Yes, we just went over a lot of stuff. However, you don’t need to feel overwhelmed! You’ll have a lot of guidance at this point in the process from your realtor and mortgage agent. Everyone involved wants closing to go smoothly, so it’ll be clear what you need to present at the closing time.
Closing involves sitting at a table (often with the sellers and their real estate agent present) and going through document after document. You’ll be walked through each document, told what it means, and told where to sign.
These days, it’s more common to go through some of the closing process (or all of it) electronically, so if that is something that appeals to you, call us at 833-600-0490 or email us at [email protected] and we'll help you get there!