When Tameka Jones and Demetrie Hylick were rushing to the meeting to close on their two-bedroom townhouse, the Baltimore couple was both excited and fearful. Engaged to be married in July 2007, the two were elated to buy their first home, but they were pressed for time because their apartment lease was expiring.
Several months earlier, Hylick, 24, who works as an assistant manager for a Sears in Baltimore, and Jones, 23, an account coordinator in Columbia, Maryland, decided to buy a home together when they realized mortgage payments could be about the same as their current rent. Encouraged by their real estate agent and friends, they applied for and discovered that they qualified for the first-time buyer program offered by the Association of Community Organizations for Reform Now, which advocates for better housing, schools, healthcare, and neighborhood safety (www.acorn.org). In November 2005, they completed ACORN’s one-on-one homebuying counseling sessions. By mid-January, they found their dream home.
With financing secured from Bank of America, they bid $116,000 on the townhouse they liked, and their offer was accepted. The closing was set for February 2006, but because their first-time home buyer program gave them access to nontraditional financing, setting up the financial paperwork took a bit longer than expected. The program allowed for 100% financing. Hylick and Jones would be responsible for $6,500 in closing costs, which they paid up front.
The closing was originally scheduled for mid-February, but the delay in completing their paperwork pushed the meeting back to Feb. 27 — one day before the Jones’ lease expired. Now they were praying nothing else would go wrong. “We lived in an apartment and had to be out at the end of February,” Jones recalls, “so we also had to schedule our closing around that same time or we were going to be homeless.”
At their closing, another problem arose, but the solution worked out in their favor. “With the ACORN program, we qualified for a loan with no PMI [private mortgage insurance] but the paperwork came to the closing with PMI calculated into the cost of the loan, which raised the closing costs an additional $1,800,” says Hylick. “We had already paid that out up front, so they had to write a check back to us to cover what we had overpaid.”
While the couple’s real estate agent caught the error and alerted Jones and Hylick just prior to the signing of the mortgage agreement, it could have gone unnoticed, costing thousands of dollars.
Jones and Hylick faced the challenges that a multitude of home buyers face at the closing (also called the settlement), the meeting in which the sale of property is finalized. Terms are agreed upon and documents are signed that legally transfer the property’s title from the seller to the buyer. Because there is a flood of paperwork to go through and financial figures often change during the meeting, many home buyers see the closing as a baffling and frustrating process. In the final part of our series on homeownership, we review steps home buyers can take to make the closing process as smooth as possible. To prepare for closing, buyers should pay attention to the following:
Know all the players and the process. At the settlement, the buyer, the seller, brokers for both parties, and the title company representative (or an attorney) meet to review the details of a property sales agreement before final signatures. All provisions of the agreement will be explained one last time.
First, any unresolved matters with the property are cleared up. Any problems with the property’s title not corrected during the walk-through will have been resolved. Also, title insurance will have been obtained. Next, the attorney or title representative will explain the Deed of Trust, the mortgage note, lender instruction forms, and the transaction settlement sheet to the buyer. The buyer signs all these documents and the balance of the downpayment is paid to the seller with a certified check.
The closing costs and settlement fees are also explained. They include loan origination fees, recording fees, county taxes, attorneys’ fees, and appraisal fees. The buyer may have to pay some of these fees at the closing. Closing costs are approximately 4% to 7% of the total loan. Any reimbursed fees for taxes or insurance that may have been paid in advance are returned to the proper parties as well. The seller and the brokers are supplied a copy of the settlement sheets for their records. The house keys are then passed to the owner.
Obtain closing documents in advance. It is recommended that the buyer gain access to the loan documents to review before the closing. That’s what Aisha Thomas did. The 27-year-old single mother qualified for a Michigan State Housing Development Agency (MSHDA) first-time home buyer program that provided a below-market interest rate mortgage since her income was below $69,000 and her credit score was above 670. Thomas secured her financing at LaSalle Bank, and found she also qualified for the bank’s $2,000 first-time home buyer grant and a $4,000 welcome home grant. She also contributed $3,000 from her own funds.
After all her grants were applied to her purchase, Thomas thought she needed $109,000 for the newly constructed two-bedroom home in Pontiac, Michigan, that she had her sights set on. However, two days before closing, she found that due to a discrepancy, the home would cost $110,000.
As it turned out, in order to get the special interest rate, Thomas’s loan had several special requirements. The buyer was required to pay a $1,000 fee, which would be reimbursed if she stayed in the home for 15 years. Since she hadn’t paid that fee up front, the cost had to be added to the loan at closing. Also, the original paperwork did not require a prepayment penalty. But because she was receiving an MSHDA loan, a 1% prepayment fee was required if the mortgage was paid off in less than three years. “Since it was a mistake on their end, I just had to agree to the changes because there was an increase in the amount that I was financing,” says Thomas.
Reviewing such documents in advance can help you solve problems that could jeopardize the agreement. “I read the documents over several times and had a guy I dated who is an attorney look them over for me as well,” says Thomas. She says you should ask the mortgage lender representing you at the closing to obtain the documents for you in advance.
Understand the provisions of the programs you participate in. There are a variety of first-time home buyer programs, so it’s up to you to understand what you are entitled to or what you are responsible for providing if you participate. For Hylick and Jones, certain forms had to be filled out by their lender in order for them to get the 100% financing they sought. The couple
lost a week in the process because their banker “didn’t know what needed to be submitted to [ACORN], what things we needed to keep, and what things we needed to sign,” maintains Hylick. “Make sure whoever is doing your paperwork is familiar with the program [you’re in] so that they get all the proper forms and they know everything they are supposed to turn in.”Know how much money to bring to the meeting. This sounds like a very simple matter, but if you can’t meet the financial obligations in your loan agreement, the sale may not go through. “Find out in advance how much money you’ll need to bring with you, and who the checks should be made payable to,” says Dale Mattison, associate broker at Washington, D.C.-based Long and Foster Realtors. Fees for the title insurance company or inspections are common. “Typically, the realtor would help you do all of that kind of processing up front.”
Make sure all documents are fully executed. Missing or inaccurate information on important documents can delay your purchase. Hylick and Jones say it’s a good idea to
develop a checklist to keep track of forms that need to be completed so that everything is in place at the closing. “Whenever you do anything, like turn in forms, check it off the checklist and follow up to make sure papers were received,” says Hylick. “Everything that the bank sends you, send back ASAP. Then, don’t assume that they’ve received it and everything is going fine. You really have to go back and double-check with your loan agent or processor to make sure that they have everything so that your process runs smoothly and you stay on schedule.”
Mattison adds that it is the buyer’s responsibility to make sure that the title company has gotten all necessary signatures and all documents are recorded properly at the courthouse. “That house isn’t really yours until those documents are recorded at the courthouse,” he warns. “Normally, it’s done on the next business day, but it could take two to three business days.”
Don’t panic over errors. The calculation of closing costs typically generates most of the mystery and misery. “Buyers need to pay attention to the good faith estimate a broker brings them, noting the points, closing costs, and how much money they’re really borrowing,” says Mike Hannigan, executive vice president of the Precedent Companies, a real estate firm in Indianapolis.
Take time to understand before signing. You should never sign anything that you don’t understand, so don’t feel pressured if problems arise at the closing. “I asked a lot of questions of my mortgage person,” says Thomas. “I read everything. If there was a term I wasn’t familiar with, I asked for an explanation.”
As Thomas says, “Take your time, really read the documents. If you have questions, don’t be afraid to speak up because you are going to be responsible for whatever you sign. There’s no turning back once those papers are signed.”
PREPARING FOR YOUR CLOSING
Here is what you can do before your closing to make sure that the process goes smoothly:
Schedule the closing during business hours.
If you schedule the closing after business hours, and your bank or any agency has to make adjustments to your paperwork, the office might be closed.
Use a lawyer before the closing.
The critical time to have your lawyer involved with your purchase is well before the closing. Your attorney should review the purchase agreement, resolve any complications with the title, and make certain any other issues you deem important are covered to your satisfaction. “Bringing an attorney to settlement is probably a waste unless you are expecting a problem,” says Mattison. “By the time you get to settlement, you have signed a sales contract as a buyer, the seller has signed, and you both have created an agreement that spells out the terms. At that point, [the terms] shouldn’t change and don’t need to change anywhere between the time that document is signed and the time settlement occurs.”
Resolve issues with the property before signing the agreement.
The most common obstacle to a successful closing is when the buyer goes through the final walk-through and the property is not in the condition that they agreed to. For example, if a stove doesn’t work, that issue needs to be ironed out or negotiated at settlement between the two parties to produce an acceptable resolution. Instead of asking the seller to fix problems, experts say, you might negotiate a cheaper price before closing, and fix minor problems yourself.