Closing on a house is the most rewarding part of the home buying experience. And hopefully, you will walk into your closing day with all your questions answered, negotiations settled and your mortgage preapproved. On this day, you should also be ready to become the legal owner of a home.
But before popping any champagne bottles, you need to know what happens on closing day when buying a home. We are here to help prepare you for what is involved in the closing process, what to expect on closing day, and what you need to bring on the big day.
What is Escrow?
Escrow refers to a third-party service that is part of every home purchase. When a buyer and seller initially arrive at a purchase agreement, they select a neutral third party to act as the escrow agent. The escrow agent collects a deposit from the buyer that is equal to a small percentage of the sale price. This deposit is known as “earnest money”. In exchange, the seller takes the property listing off the market. Until the final exchange is completed, both the seller’s property and the buyer’s deposit are said to be in escrow.
Escrow accounts are a part of the mortgage process homebuyers typically cannot avoid. With mortgages, home buyers typically pay a little extra into an escrow account every month, along with their home loan payments.
While a mortgage holder (most typically a bank) collects the principal and interest payments each month, they also can collect homeowner’s insurance payments and property taxes. They will then pay those bills when they come due. They do this because when you borrow money from a lender to finance your home purchase, the property becomes the collateral for your loan. Your lender needs to know that the property is adequately insured so that it can be repaired or replaced if damaged. Likewise, they want to prevent a tax lien being placed on the property if you neglect to pay taxes.
What Is the Close of Escrow?
When you buy a home, the last step in the process is called the closing. Your title company will work with you to determine the closing date and time—or the date when you finalize all the details of the transaction and you become a legal owner of the home.
Closings typically happen 4-6 weeks after you sign the sales and purchase contract, though it could take longer. This allows enough time for home inspections, home appraisals, funding, and title searches to clear.
Close of escrow starts with the buyer making their earnest money deposit, which is a deposit made to the seller in good faith. It gives the buyer extra time to come up with funding. The money is placed into an escrow (or trust) where it is held jointly.
Escrow has another meaning as well: the process of purchasing property that utilizes an independent third party (escrow company) to hold all of the funds from the buyer. The escrow company then transfers it to the listing agent who then sends it to the seller.
There is one escrow officer who handles the transactions for purchasing a house and they are quite literally a middleman between buyer and seller. They work to make the buying and selling process run smoothly.
The home buying and selling process takes quite a bit longer than other purchases. There are various stipulations, inspections, and other miscellaneous details before the close of escrow. The escrow period should last from 30 to 50 days.
Who Attends the Closing?
In some areas of the country, the buyer and seller sit down together at closing. In other areas, you may not even see the seller, as you will have separate appointments. And today, many closings are happening remotely, with notaries being dispatched to hotels, offices or a location of choice by the buyer.
The closing agent is usually a title officer or an attorney. It will be a neutral third party to ensure everything is completed correctly. The buyer and the seller will agree on the closing/settlement agent at the time the offer is accepted by both parties.
All parties do not have to be present, but the following parties often are:
- All homebuyers
- Home sellers
- Attorney(s), if using
- A lender’s representative
- The seller’s representative
- Real estate agents from both sides
- Title agent/notary public
What Happens on Closing Day
On closing day, you will have two primary responsibilities: signing legal documents and paying closing costs and escrow items. The documents that you will sign pertain to the agreement between you and your lender regarding the terms and conditions of your mortgage and also the agreement between you and the seller, who is transferring ownership of the property. It is important to read all of these documents carefully so that you know exactly what you’re agreeing to.
Additionally on closing day you will be required to pay all closing costs and escrow items. There are a number of fees associated with obtaining a mortgage and transferring property ownership. These fees include property taxes, utilities bills and HOA fees. The funds are usually provided via a certified check or cashier’s check made out to the escrow company or a wire transfer of funds to the banking institution. Personal checks are often not allowed.
What You Need to Bring
Most of what you’ll need on closing day will be provided to you, but there are a few items you’ll need to bring, too, including:
- All your paperwork: You will need to bring proof of homeowners insurance, a copy of your contract with the seller, your home inspection reports, anything the bank required to approve your loan, and a government-issue photo ID.
- Valid Photo ID – The title company running your mortgage loan closing will verify your identity by checking and making copies of a photo ID that you bring to closing day. You can use a signed U.S. driver’s license, U.S. ID card, or U.S. or foreign passport to serve as your photo ID. Just make sure that everyone – including your spouse or partner – listed on the mortgage loan also provides an approved signed photo ID. The title company is required to verify the identity of every person whose name is on the mortgage.
- Cash to close – Certified funds for the down payment and closing costs (usually, a certified check or a cashier’s check)
- Proof of homeowner’s insurance – Before your lender approves you for a mortgage loan, they’ll require you to take out a homeowners insurance policy. You can use the policy’s declarations page as proof of insurance.
- Closing Disclosure – The Closing Disclosure is a key form when taking out a loan. It lists the final terms and costs of your mortgage loan. Your lender is required to provide it to you at least 3 business days before your loan closing.
How Much Should You Save for Closing Costs?
Closing costs typically make up to 3-6% of the home’s cost. Closing costs are separate from, and in addition to, your down payment. Closing costs cover the appraisal, title insurance, application fees and more.
- Average Closing Costs for Sellers
Though not technically a closing cost, it is typically the responsibility of the seller to compensate the Realtors representing each side of the deal. That said, most Realtors and real estate agents will charge somewhere in the neighborhood of six percent of the sale price of the house for their services. That means a seller could expect to pay upwards of $30,000 for a Realtor’s help on a home, depending on the final sale price. However, it is worth noting that the agents representing both parties will split the six percent commission. To be clear, sellers will usually have a cost somewhere in the neighborhood of six percent of the sales price.
- Average Closing Costs for Buyer
While the buyer’s list above may seem longer than the seller’s, many of these come at a minimal fee. The buyer’s closing costs are generally between 2 to 5% of the sale price. Be sure to go through each line-item with a mortgage professional to paint a clearer picture of the entire situation.
A buyer should receive a loan estimate form early on in the sale process. This document spells out all the approximate costs the buyer will face when making the purchase, so there are not any surprises at closing. Some buyers use the information on the loan estimate form to shop for different lenders, interest rates and costs.
A Final Word
Your home purchase is one of the biggest investments you will make. Over the past century of buying and selling real estate in the United States, many processes have been put into place to protect the home-buying process, as well as your homeownership rights. The escrow account is an essential tool that offers protection to everyone in the process.
Whether you are the buyer, seller, lender, or borrower, you want the assurance that no funds or property will change hands until ALL of the instructions in the transaction have been followed. Your escrow company is what safeguards your funds and documents while those funds and documents are in their possession.