“Closing” or settlement or “escrow” is listed as one of the top ten problem areas that occurs in a real estate transaction.  It is probably the least understood, and most feared, aspect in a property purchase. Misunderstandings about closing costs can result in hundreds or even thousands of dollars of needless expenses, and put seemingly solid deals at risk. This final step to your purchasing a home or property can go smoothly if you take a few precautions beforehand. Knowing what questions to ask and reviewing all documents well in advance of the closing day will prepare you for a hassle-free and smooth closing.

Can you learn how to save money at closing?

Can you learn how to control your closing?

Yes, you can.

Here are the answers to common closing and escrow questions to help make your home buying process go smoothly and perhaps to save you money in the process.

1. What is closing or escrow and what is involved in opening escrow?
2. What should a purchase agreement include?
3. How long does a title search take?
4. What are the most common ways to hold title?
5. How should I go about shopping for a loan?
6. Can I still get a loan with bad credit?
7. How much will the closing costs be and what are they?
8. What happens on the day of closing and can I move in on that day?
9. When do I receive a copy of the deed to the property?
10. I have a complaint against my escrow company. Who regulates escrow companies in California?

1. What is closing or escrow and what is involved in opening escrow?

Closing (also referred to as “settlement” or “escrow” in many parts of the country) is the process whereby an impartial third party, such as an attorney, an escrow company or a title company, is entrusted with the job of seeing that the transfer of ownership from the Seller to the Buyer takes place according to the terms of the written contract agreed upon by all parties involved. The closing agent keeps or holds any funds or documents safely until all the details have been settled and disburses them to the proper parties at the proper time. At the actual time of the closing, whereby all the parties come together to sign their appropriate documents, the seller will be asked to provide clear title to the property and the buyer will be asked to provide the funds needed to close the sale. If there is a mortgage or loan involved, the closing of the mortgage also takes place at this time.

Opening escrow or starting the closing process, simply involves visiting the office of any firm that handles closings, then handing over the deposit money and giving instructions for the transaction. Anyone who is involved in the transaction may “open escrow.” Generally, the real estate agent takes the initiative and opens the escrow. In for-sale-by-owner transactions, in which no agent is involved, either the buyer or the seller or both together may open escrow.

What law governs the payment of escrow funds to the proper party?

The underlying agreement between parties governs the payment of escrow funds to the proper party. The essential elements of an escrow are the irrevocable deposit of money or documents with a third person, and a valid and enforceable contract that calls for the delivery of that money or those documents on the occurrence of some condition (for example, the exchange of deed for money).

Who sets the closing date?

Either buyer or seller may set the closing date, both parties must agree to the date, and generally the buyer puts his request for a 30, 60 or 90 day escrow in the original purchase agreement. The seller may request a shorter or longer escrow, depending on his circumstances, and as long as the buyer agreed, that date will be set. Generally, a “financing contingency” is put into the offer to purchase in which the buyer is given a specified amount of time to obtain a mortgage. Once the buyer has a firm commitment from a lender, the actual closing date can usually be set. Be sure, if your are the buyer, to set the closing date prior to the expiration of your lender’s loan commitment or lock in date for your interest rate.

What happens if I need to extend the closing date?

If any party needs to extend the closing date of the escrow, all parties must sign and agree to an Addendum or Extension to the original purchase agreement contract. Be careful that the extension does not interfere with the lender’s obligation for a closing date.

Related Information

• When is escrow opened?
• How Prepare for Closing
• Why the right closing date can make a difference

2. What should a purchase agreement include?

A purchase agreement must state clearly the terms of the sale and what must occur before the property can change hands. The agreement should state what will happen if the agreement is canceled, what personal property is to be included in the sale (be specific!), the date for the closing of escrow and what will happen if it is delayed, prorations and the date to be used for computing them, default provisions or what will happen if one party doesn’t live up to the agreement, who pays for property inspections and any deficiencies that they may uncover, financing arrangements and the occupancy date.

Related Information

• Personal vs. Real Property: Can I Take The Chandelier?

3. How long does a title search take?

A title company examiner searches the records of the county recorder, county assessor, and other government taxing agencies to locate any documents which might affect the title to a given property. Depending on the number of documents the examiner must review, a title search will take anywhere from one hour to two weeks to complete. Read this search carefully and look for any hidden problems.

Please explain the value of title insurance.

Title insurance guarantees that the seller has legal and “marketable” title to the property which he is selling. A title search is performed by the title company or attorney handling the closing. This search will reveal, among other things, any liens or claims against the property and ascertain that the seller had good and clear title to the property. Title insurance will be issued for both the buyer and for the lender, if there is one. The lender’s policy will protect the lender for any defects in the title up to the amount of their loan. The buyer’s or owner’s policy will protect the new buyer against any flaws in the title. The policy will be good as long as you own the property. It covers events or circumstances that happened in the past, before you took title to the property.

Related Information

• What its the difference between a title theory vs. a lien theory?
• What is an attorney’s opinion of title?
• Who determines title insurance rates?
• Exceptions to coverage
• Coverage and types of title insurance
• Clouds on title
• What title insurance will do for you?

4. What are the most common ways to hold title?

• Joint Tenancy: The main distinguishing characteristic of joint tenancy is the right of survivorship. If one of the joint tenants dies, his interest passes automatically to the surviving party or parties instead of being tied up in lengthy probate proceedings. When two or more people own a property as joint tenants, they own an undivided equal interest in the property.
• Tenancy-in-Common: This is so standard a form of ownership for unrelated buyers that it is generally presumed to be the way they hold title if nothing else appears to the contrary. The shares are presumed to be equal unless stated otherwise on the deed, and each of the tenants has equal rights of possession. There is no right of survivorship; each tenant-in-common should note in his will the person or persons to whom his share will pass.
• Community Property: This type of ownership is available to married couples in nine states – Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Both husband and wife have an equal right to possess the property during their marriage, and in some states, upon the death of either spouse, the survivor automatically receives half of the community property and the other half passes to the lawful heirs.
• Sole and Separate Property: Holding title this way means that no one else has any interest in it. If you are married and wish to take title this way, you should record a quitclaim deed from your spouse to yourself so that no community interest could be claimed at a later date (in community property states).

May I change the way I hold title after escrow closes?

Yes, at any time. You may effect the change yourself, through a written agreement, or have your escrow officer help you do it.

Related Information

• Community Property States
• Ending A Co-Ownership With A Quitclaim Deed
• Unmarried Joint Tenants?

5. How should I go about shopping for a loan?

Consider banks, savings and loan offices and loan brokers: Find out what types of loans are available and ask about interest rates and loan fees. Find out how quickly the lender can make an appraisal of the property. Prepare a form that makes a side-by-side comparison of the terms being offered to you by the various lenders, and think carefully about which loan would be the best for your circumstances.

What information will I need to give the lender when I make an application for a loan?

When you visit your lender, you will be asked to fill out a Uniform Residential Loan Application form. This is a four page document that asks you about your employment, your assets, your liabilities, and your income. It is important to be as truthful and complete as possible on this loan application form. All the information will be verified. Your employer will be called and your bank accounts will be checked. Upon receipt of your completed application, the lender will give you a copy of a government publication called “Settlement Costs: A HUD Guide”. This small pamphlet will explain the closing process and describe the various closings costs which you may incur with your loan. The lender is allowed three business days after receiving your loan application to provide you with this brochure.

What are the other documents that my lender is required to give me when I apply for a loan?

The lender is required to provide you with a “Truth In Lending ” statement which will tell you the APR, or Annual Percentage rate of the loan for which you are applying. The APR will be the percentage rate quoted to you by the lender, PLUS other closings costs, such as any points and other finance charges over the term of the loan. This form must also be given to you within three business days of your loan application. You will also receive a disclosure about Adjustable Rate Mortgages, a Good Faith Estimate of itemized closing costs, various authorization forms giving the lender permission to research your credit, contact your employer, request rental or part mortgage history, and verify all your bank deposits.

Once I have completed my loan application, what else should I take in with me to speed up the loan process?

Together with your loan application, you should take in your last two years tax returns, the last 2 or 3 month’s bank statements, current W-2 forms, any trust agreement or securities account information, and letters of explanation of any credit problems you may have had. The more information you provide the lender at the time of your application, the faster your loan will get processed.

Related Information

• Escrow Impound Accounts

6. Can I still get a loan with bad credit?

You may qualify for a loan despite past credit problems. In most cases, you can qualify for a loan with late payment histories on your credit report. You can even qualify for a loan with a bankruptcy or foreclosure on your credit history.

What rights do I have to delete incorrect information on my credit report?

Under the Federal Fair Credit Reporting Act (FCRA) you have the right to be told if information in your file has been used against you. You have the right to dispute inaccurate information and request that it be corrected or deleted. Incorrect information must be corrected within 30 days of your request.

How do I contact the various credit bureaus to report incorrect information?

The three main credit reporting agencies are Experian, P.O. Box 2106, Dallas, TX 75002-9506, (888) 397-9506, Equifax, P.O. Box 740241, Atlanta, GA 30374, (800) 685-1111, and Transunion, P.O. Box 1000,Chester, PA 19022, (800) 916-8800. Please refer to page 74 of your copy of The Complete Guide to Your Real Estate Closing for a detailed explanation on how to contest incorrect information found in your credit report.

Related Information

• E Loans
• Why is my FICO score so important?

7. How much will the closing costs be and what are they?

Generally, your closing costs will come out to between 4 and 5 percent of your purchase price. The closing costs will include title searches and title insurance, government taxes, notary fees, loan fees, escrow fees, recording fees, reconveyance fees, prorations and sales commissions.

How will I know how much my closing or settlement fees will be before the actual closing date?

When you applied for your loan, if you have one, you would have been given the Loan Estimate form no later than three business days after your loan application was received. This statement will have provided you with an “estimate” of what you closing costs will be.

Three business days before the actual closing, you will then be given the Closing Disclosure statement. This is the final accounting of the settlement fees you will incur at closing. It will list various fees, depending on your individual transaction, such as: the sales commission, the loan origination fee, the loan points, the appraisal fee, the credit report fee, the assumption fee, any prepaid interest, the mortgage insurance premium, the first year’s homeowner’s insurance premium, the mortgage insurance escrow account, if any, the recording fee, the transfer tax, the property survey fee, the termite report fee, any homeowner’s association fees, and any other fees specific to your particular purchase. If you do not have a loan, the closing agent will give you a settlement or closing statement to review prior to closing.

Must I check all the closing fees on the Closing Disclosure form or will the closing agent already have done that for me?

Carefully review all the fees listed on the Closing Disclosure statement before closing takes place. Check the math. Check that all the fees are what you had agreed to pay. Question any fees that you do not understand or think that may have been added without your permission. Lenders often add Courier Fees, Processing Fees, and other fees that they may not have disclosed to you at the time of your loan application.

Since my settlement or closing fees are a substantial amount of money, can I deduct them on my income tax return?

The items given to you on your Closing Disclosure statement fall into three categories relative to your income taxes: tax-deductible in the current year, capitalized (added to the price paid for the property and thereby becoming part of your base for capital gains tax purposes when you sell) or neither (personal expense). The tax-deductible items are interest, points, loan-orgination fees, any prepayment penalty, and property taxes. Those items which are capitalized are the termite clearance costs, title insurance premiums, attorney’s fees, appraisal fees, recording fees, notary fees, escrow fees, transfer taxes, and the ALTA inspection fee. The personal expense items are the first insurance premium, private mortgage insurance, and any money put into an impound account.

Reminder: In most instances, property taxes paid on your home are a deductible item on your personal income tax return. Please refer to your copy of The Complete Guide to Your Real Estate Closing for further clarification.

Related Information

• Should I Compare Escrow Fees On-Line?

8. What happens on the day of closing and can I move in on that day?

The actual day of your closing will be the day in which the buyer deposits any remaining money due into escrow and signs his escrow and loan documents and it is the day in which the seller will sign the deed and closing statements and receive a check for the money due to him. In some parts of the country, the buyer and seller go into the closing agent’s office separately. In other parts of the country, the buyer and seller go in together. Either way, closing is the day in which the deed is exchanged for the sales proceeds money. “Recording” will take place on that day, which means that the deed and any mortgage documents are taken to the county court house and recorded in the official records. These documents are them made of “public record” for anyone to see. The actual day that you can move in will be determined by local practice and the terms of your purchase agreement. It may be the day of closing, or it may be a day or two after the closing.

Why must I bring identification with me to the closing?

You will be required to sign certain documents which must be acknowledged before a Notary Public before the closing can be finalized. A notary can only accept an official identification, such as a driver’s license, passport, or other form of authoritative ID.

I have heard that closing can take hours. How long does the closing usually take?

The actual closing can take anywhere from one hour to several hours, depending on the situation. If both buyer and seller are in full agreement of all the terms of the sale, and the buyer and seller both understand all the documents they will be signing, the closing should go quite quickly. The closing agent will present the buyer with any loan documents to sign, notarize all the required signatures, and give the seller the deed and any closing documents for him to sign. If an explanation of each document is required, then the closing will take longer. This is the most important last step of your property purchase, so do not be rushed at the closing. Ask questions about any documents which you sign that you may be unsure of their content. All the documents you sign at the closing will become legally enforceable contracts and documents and bind you to certain obligations.

Is there anything I should do before I go to the closing?

Prior to your actual closing day, there are several things you should have done to prepare for the closing: You should have reviewed the letter of commitment from your lender and read and understood all the terms of the loan they are proposing to give you. You need to be sure that all inspections have been done on the property, and that you have inspected to see that any work (such as termite repair, roof repair, plumbing repair or the like) has been done. You should have read the title search report and reviewed the survey, or plot plan of the property. The survey will confirm the property’s boundaries are exactly as described in your purchase agreement. You should have obtained a homeowner’s insurance policy and provided this information to the closing agent. You should have performed a final walk-through inspection to examine the property within the last 24 hours before closing. You will want to make certain that everything is in the condition that it was in when you made your offer to purchase. You should have your certified or cashier’s check payable to the closing agent to cover the closing costs and the balance of funds due. If you are well prepared for your closing, everything should go smoothly and quickly.

Do all closings occur at a formal closing meeting?

Depending on your area of the country, the closing may be a formal meeting at an attorney’s office, escrow or title company, with all parties attending or it may be an informal signing of papers at an escrow or title company. In some areas, escrow agents process all the paperwork and arrange for all the documents to be signed, often by the buyer and the seller separately. The escrow agent then disburses the required funds to the seller.

Will I receive more documents to take home with me from the closing?

After the closing has taken place, you will be given copies of various documents. Some of these documents will be the HUD-1 Settlement Statement, which the buyer and seller will be asked to sign, the Truth In Lending Statement, the Promissory Note to the lender, binding you to pay a certain amount according to the terms of the loan, including the dates on which your loan payments are due and the location where they must be sent, a copy of the mortgage or deed of trust, which is the document which secures the note and gives the lender the legal right to make a claim against the property in case you were to default on the terms of the note.

I still do not understand why I have to sign a mortgage or deed of trust on the property if I have already signed a promissory note?

The promissory note is your promise to pay the lender a certain amount of money over a specific period of time, but the mortgage or deed of trust gives the lender an actual “ownership interest” in the property. Until the loan has been paid in full, the lender will retain this ownership interest in the property for his protection. The mortgage document restates the basic information found in the note and spells out your responsibilities to pay principal and interest, taxes, insurance on time, and to maintain insurance on the property and to properly maintain the property and not allow it to fall in disrepair. Please refer to your copy of The Complete Guide to Your Real Estate Closing for further explanation.

Are there any tax tips and after closing advice that you can give me.

Remember that several of your closing costs may be taken as deductions on your tax return. These include any prepaid mortgage interest, property taxes, points, and other fees. Remember that under the new federal tax rule, a single taxpayer is allowed up to $250,000 ($500,000 for married couples) of gain if the property has been owned for at least two of the last five years and had been the owner’s primary residence. Please refer to page 191 of All About Escrow and Real Estate Closings for additional questions which might be of concern to the buyer and seller after the close of escrow.

Related Information

• Final Walk Thru
• How do I prepare for closing?
• When can we move in?
• Closing escrow when you are out of town
• Why the right closing date can make a difference

9. When do I receive a copy of the deed to the property?

The deed will be mailed to the buyer from the recorder’s office after it has been documented (recorded) in the county official records.

Related Information

• Must I record my deed?

10. I have a complaint against my escrow company. Who regulates escrow companies in California?

An escrow company in California is subject to the provisions of the Financial Code and the California Code of Regulations under the Business, Transportation and Housing Agency in the Department of Corporations. Address your complaint to the Department of Corporations at 3700 Wilshire Blvd. #600, Los Angeles, CA 90010 or telephone them at (213) 736-2751.

How do I start an escrow company in California?

Any person who desires to engage in business as an escrow agent in California must be a corporation organized for that purpose. In addition, there are several criteria which must be met:

1. you must have a $50,000 tangible net worth and $25,000 in liquid assets,
2. you must obtain a surety bond of at least $25,000
3. the manager of the company must have at least 5 years experience of responsible escrow experience,
4. you must be a member of Escrow Agents Fidelity corporation and pay them an initial member ship fee of $3,000,
5. all officers, directors, stockholders, managers, and employees will be required to file fingerprints with the initial application, and
6. you must pay a filing fee of $625 and an investigation fee of $100.

Real estate brokers, banks, savings and loan institutions, attorneys and title insurance companies are exempt from licensure.

Persons licensed by the Department of Corporations as an escrow agent are subject to the provisions of the Escrow Law (Division 6 of the California Financial Code (FC) and the Escrow Regulations (Title 10, Chapter 3, Subchapter 9 of the California Code of Regulations (CCR). Copies of the California Financial Code may be purchased from Barclays Law Publishers, 400 Oyster Point Blvd., South San Francisco, CA 94080.

How can I find out who regulates escrow in my state?

The Complete Guide to Your Real Estate Closing includes a state-by-state guide to escrow procedures. Order a copy online.

Related Article: How Closings are Handled since COVID-19

Also see the Title Insurance Glossary

Adjustable Rate Loan or Adjustable Rate Mortgage (ARM)

A loan with an interest rate that changes during the term of the loan. The payments generally increase or decrease with the interest rate. Rate is based on one of several “index” options.

Amortize

Payoff off a debt in installments which includes both principal and interest.

Amount Financed

A required Truth in Lending Act disclosure for consumer loans. It is calculated by starting with the full amount borrowed (principal) and subtracting out the dollar amount of prepaid finance charges (finance charges the borrower is paying in advance).

Application Fee

A fee charged by the lender or broker for the loan application.

Appraisal

A report that estimates the value of real estate.

Appraiser

A person typically hired by a lender to provide an appraisal.

Annual percentage rate (APR)

A required Truth in Lending Act disclosure for consumer loans. It is a calculation of the cost of credit as a yearly rate and shown as a percentage. It is often higher than the interest rate because it incorporates prepaid finance charges that are not interest.

Arbitration

A privately conducted trial to resolve a dispute. Arbitration can be binding (in which case there is no appeal), or non-binding, in which an appeal may be possible.

Aztec Recognition Agreement

An agreement a bank draws up to give its lien first priority over the co-op’s lien in case the shareholder defaults. Also, the co-op corporation promises to notify the lender if the owner fails to pay maintenance or other fees to the co-op.

Back End Ratio

A ratio used in Fannie Mae mortgages which indicates a borrower’s ability to make mortgage payments. Total monthly debt, including expenses such as mortgage payments (made up of PITI), credit-card payments, child support and other loan payments are divided by gross monthly income. Lenders use this ratio in conjunction with the front-end ratio to approve mortgages.

Balloon payment

A scheduled payment due at the end of a loan term that is substantially greater than the regular monthly payments. This may be a very large payment. It is designed to occur when the regular payments do not pay off all interest and principal owing (not fully amortizing) on the loan over the term of the loan.

Borrower

A person who receives funds in the form of a loan with the obligation to repay the loan in full.

Broker Agreement (Mortgage Broker Agreement)

A contract between a borrower and a mortgage broker. It describes what the broker will do for the borrower, and the terms of the agreement, including compensation.

Broker Compensation or Fee

The amount of money the broker will receive for finding a loan for a borrower. This may be an amount paid by the borrower, an amount paid by the lender or a combination of the two.

Cash-out Refinancing Loan

A loan that refinances a prior mortgage and that provides additional cash to the borrower. funds.

Closing Costs

A general term to describe the fees that a borrower will pay at closing. Sometimes called “settlement fees.”

Conforming Loans

Loans which conform to Fannie Mae guidelines.

Co-op

A unit in a large building operating as a cooperative corporation.  Individual units are leased exclusively to purchasers. Buyers are issued shares in the corporation rather than receiving a deed to the property.  Special restrictions limit the terms of purchase and use of the unit.

Courier Fee

This is a fee that may be charged to send documents or payments by courier, messenger or overnight mail service to various parties involved in the loan transaction.

Credit Report

This is a report which is generated by a credit reporting agency (such as Trans Union, Experion or Equifax). It is supposed to show accurately the history of your on-time and late payments on mortgages, credit cards, rent, utilities, and other debts. It may also show how much you owe on your various debts and whether you have taken the maximum amount of credit available to you through credit card borrowing. Your credit reports are used, with other information, to generate a credit score that is supposed to reflect how good a credit risk you are.

Credit Score

This is a number that is supposed to show the lender how likely you are to repay a loan–whether you are a good or poor credit risk. This score can be a very big factor in determining whether you will get a loan, from whom, and what interest rate and fees you will be charged for your loan. The score is generated by a mathematical formula that considers your credit reports and other factors. It may also be referred to as FICO score (Fair Isaac Company) or Beacon score or some other name-these are companies that create credit scores. (See Chapter 6 in The Complete Guide to Your Real Estate Closing.)

Deed of Trust

In some states loans are secured by means of a document called a deed of trust, instead of a mortgage document.

Document Preparation Fee

An amount of money that you may be charged for the preparation of mortgage loan documents. This charge will be shown on the HUD-1 Settlement Statement.

Equity

This is the dollar amount of your home that you really own. You can calculate your equity by taking the market value of your home and subtracting out the debt that is secured by your home. For example, if your house is worth $150,000 and you owe $65,000 on a first mortgage and $15,000 on a home equity line of credit. You would take $150,000 – $80,000 (65,000 + 15,000) to arrive at $70,000 in equity.

Fees

This is money you pay or is charged to you up front to get a mortgage loan. You may pay fees in cash or finance them (or a portion of them) as part of the loan. If you finance fees, your loan balance will be higher and your equity will be lower. The fees appear on the Good Faith Estimate and HUD-1 Settlement Statement. Many of these fees are negotiable or can be reduced if you shop around.

FICO

Credit scores calculated by Fair Isaac Company are often referred to as FICO Normally an average of credit scores taken by 3 national credit bureaus.

Finance Charge

The finance charge is a disclosure that appears on the Truth in Lending Act Disclosure Statement. It is intended to show the cost of your loan as a dollar amount. It includes (1) interest that will be charged over the life of the loan and (2) some up front fees (prepaid finance charges). Prepaid finance charges include such items as mortgage broker fees; lender fees; points; and some closing agent fees. Any closing fees that are unreasonably high should also be included. You may also be required to pay other fees that will not be included in the finance charge.

Finance Companies

These are companies that make loans which are generally at higher rates than are available from banks or credit unions.

Fixed Rate Loan

A loan where the interest rate does not change during the term of the loan.

Flood Certification Fee

A fee charged to determine if the property lies in a flood zone and whether flood insurance is required.

Foreclosure

The legal procedure by which a lender holding a mortgage on your house forces a sale of your house to obtain repayment of your loan. Foreclosure proceedings are typically started by a lender when you do not pay your loan on time. It might also be started if you fail to pay property taxes or insurance or keep other promises.

Foreign National

Term used to describe a person who is not a citizen of the country in which they may be visiting or residing. Used for U.S. taxation purposes to mean someone who is not a U.S. citizen.

Front End Ratio

A ratio used in Fannie Mae mortgages which indicates a borrower’s ability to make mortgage payments.  It is calculated as an individual’s monthly housing expenses divided by monthly gross income and is expressed as a percentage.  Lenders use the front-end ratio in conjunction with the back-end ratio to approve mortgages.

Fully Amortizing

This describes a loan where the balance owed at the scheduled end of the loan is zero if all regular monthly payments are made as scheduled.

Good Faith Estimate

This document lists the estimated fees you will have to pay to get the loan. It also identifies who is expected to provide services and receive fees in connection with your loan, such as credit bureaus, appraisers, and closing agents.

Government Recording Fees and Taxes

Fees and taxes required to be paid to the local government where your mortgage documents are filed.

Home Equity Loan

A loan made to a current homeowner that is secured by the equity in the home.

Homeowner’s/Hazard Insurance

Homeowner’s or Hazard Insurance is insurance required to protect the mortgage lender against possible damage to your home. It can also protect the borrower. A borrower must obtain this insurance and bring proof of its existence to the loan closing.

HUD

The U.S. Department of Housing and Urban Development

HUD Special Information Booklet

This is a booklet published by HUD that describes important terms and provides information about the home buying and mortgage loan process.

HUD-1

Also called a “Settlement Statement” of all costs and fees in your closing.

Indorsement

1. the act of signing one’s name on the back of a check or a note, with or without further qualification.
2. the signature described above.

Installment note

a note which provides that payments of a certain sum or amount be paid in more than one payment on the dates specified in the instrument.

Installment sale

also known as an agreement of sale or a land contract. This is a method of reporting capital gains by installments for successive tax years to minimize the impact of capital gains tax in the year of the sale.

Institutional lender

a lender which makes a substantial number of real estate loans, such as banks, savings and loan associations, and insurance companies.

Interest Rate:

Cost of borrowing money expressed as a percentage of the amount borrowed.

Introductory Rate

Some loans have a lower introductory interest rate, which is in effect for a limited time. At the end of the introductory period, the interest rate will increase. It is also known as a “teaser rate.”

Jumbo Loans:

Loans which exceed the Fannie Mae guidelines for loan size and amount. Jumbo loans may have different guidelines from a “conforming” loan.

Late Charge

A penalty you will have to pay if you do not make your loan payment on time. This usually is calculated as a percentage of the payment amount or a minimum dollar amount, such as 5% of the late payment, or $25.

Lender

A company or person that makes mortgage loans, such as a mortgage banker, credit union, bank, or savings and loan. Your lender’s name will appear on your promissory note.

Lender Paid Compensation to Broker

This is also called the Yield Spread Premium. Fee which the lender pays to the mortgage broker for obtaining the loan for his client.

Lien

A claim (legal interest) against a home. Common types of liens include a mortgage, tax lien or judgment lien.

Line of Credit

Also called an “open line of credit” secured on your home. Often there are no closing costs involved, or the lender offers to pay all closing costs. Use like a checking account, borrowing credit over time up to your credit limit.

Loan Approval/Commitment

A lender’s agreement to make a loan on particular terms, including interest rate, fees and charges.

Loan Term

Length of time until your loan is due and payable.

Mediation

A process of dispute resolution in which an impartial third party, a mediator, intervenes in a dispute with the consent of the disputing parties and helps them negotiate an agreement. The role of the mediator is to assist the disputants define and clarify issues, help reduce obstacles to communication, explore possible solutions, and reach a mutually satisfactory agreement.

Mortgage

A mortgage is a promise in which you agree to put up your home as security for a loan. The mortgage is the instrument which secures the Promissory Note, in which you promise to repay the loan at a certain date. The mortgage document allows the lender to force a sale of your home (foreclosure) if, for example, you fail to make payments, to pay property taxes or insurance, or keep other promises. In some states the mortgage document is called a “deed of trust.” Refer to your copy of The Complete Guide to Your Real Estate Closing for full details of these two documents.

Mortgage Banker

A lender, other than a bank, credit union, or savings and loan, that specializes in making residential mortgage loans.

Mortgage Broker

A person or company that obtains a mortgage loan for the borrower from another lender. A mortgage broker will not always be representing the borrower and will not necessarily be looking after the borrower’s best interests.

Mortgage Insurance (PMI or MI)

Insurance that may be required when a loan is greater than 80% of the value of the home. This insurance protects the lender in the event a borrower fails to make his or her loan payments. The borrower ordinarily pays the cost of MI or PMI, in the form of monthly premiums added to the mortgage payments.

Notice of Right to Cancel

Under federal law, you may be permitted to cancel or “rescind” a mortgage loan within a specified time, generally three days, after you have signed loan documents in a refinance, second mortgage or other mortgage loans which do not involve the purchase of a home. . The lender is required to give the borrower notice in writing of this right to cancel or rescind and the deadline to cancel. (read full details in The Complete Guide to Your Real Estate Closing.)

Open-End Loan

A loan that permits the borrower to draw money from time to time up to a credit limit. A home equity line of credit (HELOC) is an open-end loan secured by a home.

Payment Schedule

This information on the Truth in Lending Disclosure Statement shows the amount of the first loan payment, the amount and number of the regularly scheduled payments (usually monthly), the amount of the final payment, and when all those payments are due. The actual payment due may be greater for a number of reasons, including taxes and insurance. If the loan has an “adjustable rate,” the actual payments will differ from the payment schedule.

Points

A fee charged by the lender as additional compensation for making the loan. One “point” is equal to 1% of the principal amount of the loan.

Prepayment Penalty

The charge which can be imposed if you pay off your loan before maturity. The Truth in Lending Disclosure Statement will show whether a loan has a prepayment penalty.

Prime Loan

A loan offered to borrowers with better credit history (sometimes called “A” loans). Prime loans generally are priced lower and cost the borrower less.

Private Mortgage Insurance

Private Mortgage Insurance (PMI or MI)- Insurance required to be paid for by the borrower to protect the lender in the event payments are not made on time; most often required when the loam amount exceeds 80% of the purchase price.

Processing Fee

A fee charged by lenders or brokers to prepare a complete loan application file. A processing fee may be charged to the borrower and shown on the Settlement Statement (HUD-1).

Promissory Note

A legal contract in which the borrower promises to pay back the loan. The “promissory note” sets forth the terms and conditions that apply to the loan repayment, such as interest rate, when payments are due, where payments are made, what happens if payments are not made, etc.

Purchase Money Loan/Mortgage

A loan for the purpose of purchasing a home.

Rate Lock (Lock in the Rate)

Refers to the agreement between the borrower and the lender or broker that as long as the loan is closed within a certain period of time (for example, 30 or 60 days), the interest rate on the loan will be set (locked) at an agreed- upon rate. A “rate lock” agreement must be in writing or it will be unenforceable.

Recording Fees

Fees charged by the local government to record loan documents (for example, the mortgage). These fees will be charged to the borrower and shown on the Settlement Statement (HUD-1).

Refinance

To repay one or more existing mortgage loans by getting a new mortgage loan.

Rescind (also Right of Rescission)

Literally means “to take back” or “cancel.” If a borrower rescinds a mortgage loan, it is as if the mortgage loan never existed. Some borrowers have by law a right to “rescind” certain mortgage loans. Note: A Borrower is entitled to a refund all fees paid in connection with the loan if the Borrower exercises his right of rescission.

Secondary Mortgage Loan

A mortgage loan that is in addition to a mortgage that already exists on the home.

Settlement

The time when loan and mortgage documents are formally signed and the loan transaction is completed. Sometimes called “Closing.”

Settlement Agent (may also be called closing agent or settlement attorney)

The person who organizes and is in charge of the loan closing. The settlement agent is the person who can explain any document the borrower must sign.

Settlement Statement

A mortgage loan closing form required by HUD that is often called a HUD-1. It provides details of all charges and payments made in connection with your loan, and shows to whom they are distributed.

Sub prime Loans

These loans are priced higher than prime loans, often much higher. Loans to borrowers whose credit is less than perfect will almost always be subprime loans. There are also other circumstances that lead to subprime loans, including high outstanding debt, unproven income, etc. Even borrowers with good credit may receive subprime loans for a variety of reason, including fraud, discrimination, failure to shop around, etc.

Survey

A drawing or map showing the precise legal boundaries of a property and other physical features, prepared by a registered land surveyor

Term

The period of time during which loan payments are made. At the end of the loan term, the loan must be paid in full.

Transfer Tax or Charge

This is a government tax or charge that is usually based on a percentage of the property value or loan amount and imposed by state or local law. Many states do not require this charge for a refinance loan, but almost all require it for a home purchase. A transfer tax will be shown on the Settlement Statement (HUD-1).

Truth in Lending Act (TILA)

This is a federal law designed to protect borrowers and to give them enough information to comparison shop for loans. TILA requires certain disclosures about the loan and when they must be given to the borrower. TILA also provides additional protections and prohibitions.

Truth in Lending Disclosure Statement

This is a very important document that federal law requires for all consumer loans.] It provides key information to enable borrowers to shop around and compare loan terms from various lenders.

Underwriting Fee

This is a fee charged by the lender to evaluate whether the borrower qualifies for a mortgage loan. An underwriting fee may be charged to the borrower and shown on the Settlement Statement (HUD-1).

Up Front Costs

These are costs or fees which are charged to the borrower at or before closing of the mortgage loan, such as loan application fees, appraisal fees, points, broker fees, credit report fees, real estate taxes, etc. Up front costs can be paid in several ways: (1) they can be paid by the borrower in cash; or (2) they can be added to the loan amount and financed over the life of the mortgage.

Yield Spread Premium (YSP)

This is a payment made by a lender to a mortgage broker in connection with a borrower’s mortgage transaction. It is shown on the Settlement Statement (HUD-1), but often in a way that is difficult to understand. For example, a $1,000 yield spread premium may be shown as “YSP POC 1000.” Borrowers are often unaware that the YSP payment is being made. The payment of a YSP by a lender affects the interest rate charged to the borrower.

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Sandy Gadow is the author of “The Complete Guide to Your Real Estate Closing,” an essential tool in understanding the entire escrow and closing process. This highly regarded guidebook leads readers step-by-step through the transaction process from opening escrow, to obtaining financing, to holding title to closing the deal.  You will learn what to expect on closing day, how to protect your rights, and what title insurance is and why it’s important, the role of a settlement agent, and other helpful information to clear up your confusion, and save you money in the process. Use it as your one-stop resource for understanding each detail, answering each question, and preventing minor disputes from becoming major roadblocks.

In short, “The Complete Guide to Your Real Estate Closing” fills a niche no other book fills, giving you a better understanding of how real estate transactions work and of what your closing officer or agent should be doing for you.

“The Complete Guide to Your Real Estate Closing” is the latest, updated version of All About Escrow and Real Estate Closings which went through six printings and has more than 350,000 copies in circulation. This book has a proven track record for saving time and money for real estate purchasers. See what the reviewers have to say about The Complete Guide to Your Real Estate Closing.

“The Complete Guide to Your Real Estate Closing” covers an amazing amount of ground. For a detailed look at what’s inside, see Table of Contents. Some of the highlights are listed below.

Closings
Just what is “closing” or “escrow.” What is “title insurance,” “a preliminary title report,” a “title commitment” and a “survey.” Your questions will be answered in easy-to understand, simple language. Information which can help save you thousands of dollars. A closing checklist walks you through the closing process ahead of time. You’ll be confident and fully prepared.

Loan Tips
Determine which loan is best for you. Learn how to clean up your credit rating and how to avoid paying costly points and loan fees. Learn which fees are negotiable and which fees must be paid.

Holding Title
Learn how to best hold title under different circumstances. The manner in which you hold title can have significant tax consequences.

Statements & Forms
An in depth look at all closing statements and forms, and how they work. All the fine print explained explicitly. You’ll be in control of your closing!

Sample Worksheets
Sample worksheets included. Sample Forms such as Power of Attorney and Quitclaim Deed are included.

Instructional Purposes
This book can be used as an instructional manual for title companies and real estate schools. Email us for details and course outlines.

“The Nuts and Bolts of Escrow”, is a continuing education escrow course written by Sandy Gadow and offered for Realtors and real estate associates in conjunction with Pro U. Net. Click here to buy.