At last, most likely several weeks after your offer to buy a home was accepted by the seller, you are preparing for the closing day. This involves you paying for the property, the lender (assuming you have one) funding your loan for a portion of that payment, and the seller transferring title — all of which are further described in the article, “Home Buyers: What Happens at the Closing.” But the most time-consuming part of the closing involves your reviewing and/or signing the various documents required to bring this about.
This article will describe those documents and provide tips on what you should look for -- or watch out for -- in your review.
Real Estate Transfer Documents
Most of the documents related to transfer of ownership of the property must be signed by the seller and delivered to you, the buyer. It’s important to review these for accuracy and completeness. With many state and local variations, the main purchase documents in your home purchase are likely to include:
- The deed. This document transfers the property from the seller to the buyer. State law dictates its form and language, but you can choose the form of ownership in which you take title: individually, in trust, in joint tenancy or in other tenancies. The deed is given to the county recorder of deeds to record, and made public. Recording your deed puts you in the property’s chain of title so that anyone looking at the county records can see that you took your title from the prior rightful owner, and therefore, own the property.
- The bill of sale. This transfers all of the personal property that is being sold along with the house, such as furnaces, air conditioners, appliances, light fixtures, window treatments, security systems, antenna, or cable or dish TV equipment, from the seller to the buyer. The document will typically list the property to be transferred, or refer to the contract that lists the personal property.
- The affidavit of title or seller’s affidavit. Although the actual name of this document varies by state, it is a sworn, notarized statement by the seller confirming ownership of the property and describing any known title defects such as leases, liens, or work on the property that could potentially create liens, boundary line disputes, or outstanding contracts for the sale of the property.
- Transfer tax declarations. Many states, counties, and municipal governments charge real property transfer taxes and require the buyer and seller to sign declarations disclosing the purchase price and calculating the tax.
- Buyer/seller settlement statement. This document shows all of the monetary transfers between the seller and buyer, including the purchase price, down payment amount, payment of brokers’ commissions, attorney fees, escrowee fees, surveyor’s fees, title insurance fees, county recorders fees for the recording of the deed and mortgage, transfer tax payments, credits for tax payments, and agreed repair credits. This information is used by the escrowee to prepare the HUD-1. Both the buyer and seller will sign this document.
- HUD-1. The HUD-1 is the universal settlement statement that shows all of the money transfers by and among all of the parties to the closing. It is required to be used for all closings involving a federally insured lender by the Real Estate Settlement Procedures Act (“RESPA”). (See 12 U.S.C. §§ 2601–2617.)
Home Loan Documents
The loan documents are prepared by your lender or a servicing agent for your lender. How many documents you have to sign and what’s in them will depend on the lender and the type of loan you chose. The typical loan documents are:
- The note. This provides evidence of your debt to the lender, a description of the loan terms, and a means for the lender to transfer or collect the debt. It will state the amount of the debt, the initial interest rate, the terms of any interest rate changes, and the time and place that you must repay what you owe. The note has value in and of itself, just like a check or money order. If your lender sells your loan (as is common), it will physically give the note to the loan purchaser.
- The mortgage. The mortgage is your agreement to put up the property as collateral for the loan. It is recorded, along with the deed, in the county recorder’s office, and becomes a lien against the property — meaning that the lender owns an interest in your property up to the amount outstanding on the loan at any given time. In literal terms, the lender can foreclose upon and sell the property if you fail to repay the loan or otherwise comply with its terms.
- Loan application. You completed a loan application form when you first applied for the loan. The lender will type a new form with the information that you gave in the original application for the closing, and ask you to review it for accuracy and sign it. If your financial position has changed since your original application -- for example, you have lost your job or taken on another credit card or debt -- you must inform the lender before signing.
- Truth-In-Lending Disclosure (“TILA”).Required by the Truth-In-Lending Act, (15 U.S.C.A. § 1601 et seq.) and "Regulation Z” (12 CFR Part 226), this is a standardized explanation of the financial terms of your loan. Key information disclosed within includes:
- The annual percentage rate (“APR”). The APR is always higher than the interest rate because it is calculated by combining the amount of interest to be paid over the life of the loan with the prepaid finance charges computed as an annual rate.
- Finance charges. These are the sum total of any and all charges for the loan, including all interest to be paid over the life of the loan, mortgage insurance premiums, and prepaid finance charges.
- Amount financed. This is intended to disclose the economic benefit of the loan. It is calculated as the principal amount of the loan minus most of the charges being paid out of loan proceeds such as points and certain closing fees, as shown in your Good Faith Estimate of Closing Costs (described in greater detail below).
- Total payments. This is the amount of money that you will pay at the end of the loan term if you make every payment on time for the entire life of the loan.
Various other disclosures and agreements may be included in the loan package. In the compliance agreement, you agree to cooperate if the lender needs to fix any mistakes in the loan documents. IRS forms W-9 and 4506 allow your lender to report your mortgage interest and obtain copies of your tax returns. Servicing disclosures tell you if the lender is going to use a servicer to collect your payments, or whether the lender intends to sell your loan to another lender or an investor, and where to send your payments. Tax and insurance escrow forms allow the lender to charge and hold fund to pay real property taxes and insurance premiums on your behalf.
The lender may also ask you to sign affidavits certifying that you are going to occupy the home as your primary residence, and confirming your legal name and any other name you may use on accounts and legal documents.
Real Estate Title Documents
Just when you think you are finished reviewing and signing documents, the title company and escrowee will give you their documents.
The main title document is the title insurance commitment (the “Commitment”) showing the party in title (who owns the house), hopefully the seller. It will also show all of the liens or other clouds on title. If you have one, your attorney will review the Commitment to make sure that title is in the condition promised in the contract and otherwise acceptable under local law and custom. If you are relying on an escrow company, it will review the Commitment to make sure title complies with the conditions stated in the escrow instructions created to satisfy the lender’s requirements. If title is not acceptable, the seller may have to pay off additional liens, or obtain additional signatures. Unexpected title issues could halt or delay your closing.
CAUTION: Some title issues can be very complex. If your seller does not have an attorney, or if local custom dictates, you may have to do more to ensure title will be good in time for the closing. If neither party has an attorney, you may wish to contact the title company well prior to the closing to obtain the Commitment, and review it with a title underwriter.
The title company will ask you to sign its customary closing documents. This will include an ALTA statement, which is a one-page affidavit very similar to the seller’s affidavit of title; a judgment affidavit, where you list your recent judgments, divorces, or bankruptcies; a compliance agreement, in which you agree to cooperate with the title company to correct any closing mistakes; and a disbursement agreement, allowing the title company, as escrowee, to disburse the loan proceeds. There may be additional disclosures informing you that an attorney is involved in the transaction, or that the lender has an affiliated businesses arrangement with the title company, or that the loan title insurance policy will not cover your interest as the buyer.