Home Buyer's Handbook
Closing on Your Home
We’ve warned you to stay calm throughout this process. But now it’s panic time! The closing on your home is a deadline you don’t want to miss. If you do, your purchase agreement could be canceled. Or your move could be delayed. And, worse yet, you could be living at your in-laws for weeks until you find a place to buy or rent.
There is a lot to get done before you close. The property title has to be examined. Your contingencies must be met. And, most importantly, your loan must be approved. Once you get to the closing, your closing agent will ask you to sign the biggest stack of papers you’ve ever seen. But don’t worry. This section is a quick guide to closing that will help you every step of the way.
How to Avoid the Closing Blues
Minnesotans are especially likely to panic about closings because most of our homes close during the last week of the month. That’s because buyers want to avoid paying interest on a monthly loan payment. If they closed at the beginning or middle of the month they’d owe at least part of the interest for the month. Underwriters, appraisers, and title companies are frantically trying to meet a zillion (that’s a slight exaggeration) deadlines at once. So give them time. Set your closing date at least six weeks from the date you and your seller sign the purchase agreement. Much of the closing process is out of your hands. You have to wait to see if your loan is approved, if the appraisal is high enough and if the home passes inspection.
What to Do While You Wait
Here are a few things you can do to help ensure that the closing will go smoothly. First, keep in contact with your lender to see if the lender needs any more information. If you are approved for a loan you’ll either get a commitment letter or a phone call from your lender explaining the terms of the loan.
Second, schedule a closing agent (or closer). The real estate agent or lender may suggest a closer. You are free to choose your own, however. (Some closings have both a seller’s and a buyer’s closing agent.)
Third, get a copy of the Closing Disclosure from the Consumer Financial Protection Bureau. Ask your closer for a copy. You have the right to see these forms before the closing. These forms contain a list of all your closing costs. Compare it to the Loan Estimate of closing costs your loan officer gave you when you applied for the loan.
Which Costs May Vary from the Good Faith Estimate or Loan Estimate?
Your closing costs should not vary much from the estimate. Question any that do. You may not have to pay the difference. But understand that some minor differences will appear. That’s because certain fees are based on the amount of the loan and the value of the property you end up with. They can only be nailed down when your loan is approved. These include:
- Title insurance premiums,
- Loan origination fee,
- Homeowner’s insurance premiums,
- Mortgage insurance premiums,
- Property taxes, and
- Mortgage registration tax.
Federal law states that, upon request, you must be able to see the closing documents before your closing is scheduled, but closing companies frequently may not provide them to you in advance unless you ask.
What is Homesteading?
Homesteading your property results in a reduction in the amount of value subject to tax. In other words, Homestead Taxes are lower than Non-homestead Taxes. Generally, if you are a Minnesota resident, own the home, and occupy the home as your primary residence, then you are eligible to homestead the property. The amount of the tax exclusion depends on the assessed value of the home. You should check with your agent or the closer to verify the process of homesteading in the county in which the home is located.
What Insurance Do You Need to Buy?
Once your loan is approved, a lender will require you to buy insurance to protect the investment—your home. You’ll have to purchase a homeowner’s insurance policy to protect your investment in the house, its contents, and unattached buildings such as a garage or shed. You’ll also want to protect yourself in case of liability. Policies vary, so check restrictions and exclusions carefully to make sure you are fully covered. Ask for replacement coverage, so you will receive the actual cost to replace items rather than the cost you paid for them five or ten years ago. A basic homeowner’s policy includes:
- Liability Insurance
This protects you against liability that may occur if someone is injured on your property. Liability insurance pays a designated amount for injuries you or a family member may have caused or for accidents on your property.
- Property Protection
Your personal belongings—stereo, TV, cameras, clothing—should be insured against damage or loss, along with the structure of your house. Basic policies may not reimburse you for loss of items that are expensive to replace, such as antiques; jewelry; baseball card, coin, or stamp collections; and other valuables. If you have items like these, you may need to pay extra to include them in your policy. This is called an inclusion or rider.
- Living Expense Coverage
If your house is damaged by lightning or fire, or uninhabitable for another reason, this insurance will help cover your living expenses while repairs are being made.
You may also need the following:
- Mortgage Insurance
As you previously learned, many lenders and the FHA require you to pay for this insurance to cover them if you default on your loan.
- Title Insurance
The title insurance policy you will be required to pay for at closing protects the lender in case the legal title to the property isn’t clear. It doesn’t protect you; therefore, you may want to buy an owner’s title insurance policy, too. These policies may insure you against title problems from situations like these:
- The seller who covered up unpaid construction debts;
- A spouse who wasn’t living in the home when it was sold, but later decides to claim ownership; or
- A contested will that left your property to a relative of the previous owner.
Asking Can Save You $$$
Be sure to ask for a re-issue credit on your title insurance. Re-issue credit is a savings on the cost of the title insurance when the title company’s issuance is based on a previous policy. Because the company is “re-issuing” the insurance, it can offer a lower cost. This can save you a lot of money!
These and other circumstances can affect your ownership rights. It is also important to keep in mind that the cost of title insurance, and the coverage provided, can vary greatly. Therefore, compare title insurance quotes and ask the title company to guarantee the quote.
How Much Does Insurance Cost?
Check with several insurance agents about premiums. Premiums are based on the property value and the contents of the property, type of construction, location, and even how close the nearest fire hydrant is. Homeowner’s insurance usually can be paid monthly, quarterly, or yearly. You’ll pay more, however, if you don’t pay one lump sum up front.
How Can You Avoid Overpaying for Insurance?
Shop around and compare insurance costs. The same policies can vary widely in price from company to company.
After you compare different companies’ prices, keep these hints in mind:
- Don’t take out a policy with a deductible under $500. Low deductibles raise your rates.
- Don’t buy earthquake insurance or other coverage unless you need it. One lender sold life insurance to borrowers who had no idea they were buying it, and the Attorney General made them reimburse the borrowers.
- Subtract the value of the land from the value of the home and buy property insurance just for the value of the home itself. A lender requires you to carry insurance on your home but not your land. After all, the house could burn down, but the land will survive.
What is Escrow?
Your lender may require you to escrow monthly payments for homeowner’s insurance, mortgage insurance, and property taxes. That means the cost of these items will be rolled into your monthly payments. The lender will hold these sums in a separate escrow account and will pay the insurance premiums and taxes out of the escrow account as they become due. You may not have the option of paying these items separately yourself. But check with your lender to determine if you can or can’t. Sometimes you even have to pay a fee to your lender for not escrowing!
A lender may ask you to keep up to an extra two months’ worth of payments in your escrow account at all times for future payments, if your mortgage contract allows this. Some mortgage contracts don’t, only allowing the lender to keep enough money in the escrow account to pay the insurance and taxes when due. Federal law limits the amount of any escrow “cushion” allowed by the mortgage contract to no more than two months’ worth of escrow bills.
State law gives homeowners the right to stop putting money in escrow after their conventional loan is seven years old or older. Your lender must notify you about this right.
Are you ready to close on your home? Bring your calculator to the closing and make sure there are no mathematical errors. Use this checklist to make sure you have all your “docs” in a row.
Closing Checklist (PDF)