Intro to Closing

Congratulations on signing a contract! You have completed what is by far the biggest step in either buying or selling a home. The rest is easy in comparison, but no less important. This will outline the basic steps involved in closing your deal, and will prepare you so you will know what to expect. As always, if you have any questions or concerns, please either Contact Us or contact the partner law firms that you have chosen for your closing.

The Lead-in to Closing

There are many fees associated with the closing. The buyer and seller are each responsible for their respective fees which are paid both beforehand and at the actual closing. Some are traditionally paid for by the seller, such as the title insurance premium, and some are usually paid for by the buyer, such as the costs of the appraisals and inspections required by the buyer’s lender. For some fees, who pays what is negotiable and may or may not have been part of the intent to purchase contract. The buyer and seller can go over this with their respective attorneys or with the title company prior to closing. To get an idea of who generally pays which fees, look at the Stewart Title’s Buyer and Seller Closing Costs. Note that since the sellers must pay for the title insurance, the choice of the title company is generally theirs. It is advisable that both the buyer and the seller have an attorney so each will be represented fairly should an issue which requires negotiation arise.

People looking for a house should already be pre-approved. If the buyer is not pre-approved for a mortgage, all necessary applications should be sent in as soon as possible to ensure that they are processed in time for the closing. Usually, the contract will specify a certain time frame for the buyer to apply for financing. Once the application process is completed, the buyer should receive a Good Faith Estimate (GFE) within three business days. The GFE itemizes the estimated closing costs that the buyer must pay. However, the buyers’ closing costs are not official until they receive the HUD-1 form, which itemizes actual, not estimated, closing costs. This should be received a day or two before the closing in order to give the buyers time to review it with their attorney to make sure everything is correct. Once the HUD-1 statement is determined to be accurate, the buyers must provide sufficient certified funds to cover all costs that are listed. (certified funds can be from a cashier’s check, certified check or wire transfer- no personal checks).

At this point, the lender will order an appraisal and inspection of the property. For more information on what this involves, read about our Partner Appraisal Services and Partner Inspection Companies for information on the nature of each of these processes. Although you will not be able to hire one of our partners for this stage (federal law states that lenders must be the ones to order appraisals and inspections), the pages provide good information on the nature of each of these processes. If either the appraisal or the inspection reveals problems that necessitate repairs, the payment of the repairs will need to be negotiated by the buyer and seller, hopefully with the assistance of their respective attorneys. A property survey of the boundaries may be ordered if the buyer would like, but this is optional. Whether or not it is a good idea would depend on how recently the property was last surveyed and whether or not this is an issue for the buyer (in any case, it would be the buyer’s responsibility to pay for it). Finally, the buyer must apply for and purchase hazard insurance, which protects the lender in the event that the property is lost or damaged due to fire, etc.

The Closing

In Colorado, the closing can be handled by either the title company acting as a settlement agent (closing company) or by an attorney, also acting as a settlement agent. The actual closing is fairly straightforward- the settlement agent will have prepared all the necessary paperwork in advance, and the closing process will take about an hour or so. The settlement agent will spend about an hour with both of you, explaining each document as you sign it. By the end of this hour, you will have either sold or bought a home!

Both the buyer and the seller must sign a “power of attorney” form which essentially grants the settlement agent the power to act as an agent or attorney for the person signing the power-of-attorney contract.

If an attorney is conducting the closing, the title company will have sent the attorney evidence of a clean title. If the title company is conducting the closing, then the title company representative will have evidence of a clean title as well.

There are two main transactions at the closing:

• The transfer of the title of ownership via a new deed. This deed is drafted by the settlement agent and, once signed, is recorded at the courthouse. The buyer pays recording fees.
• The disbursement of funds. The buyer and seller pay their closing costs as per prior agreement, which is either in the initial contract or the product of negotiations specifically for this purpose. Generally, fees such as utilities, annual property taxes and Homeowners’ Association dues (if applicable) are pro-rated and both buyer and seller pays their share based on the date of the closing. Upon completion of the closing, both pays their own attorneys for the services provided.

Escrows

Depending on who handles the closing, either the title company or the attorney will have set up an escrow account for the buyer. The buyer must deposit money in this account, the amount specified by the buyer’s lender, which will cover property taxes, insurance premiums and related payments for a given time period. One of the reasons this is done is that hazard insurance, which protects the lender, is only valid if the monthly payments are made on it. By reserving a some of the buyer’s money in an escrow account, the lender can ensure that the necessary payments are made for that given time period. If the buyer provided an earnest money check, this is where that money goes.

Similarly, a portion of the money that the seller makes on the sale will go into a special account to pay the seller’s portion of the closing costs. The seller may receive a check in the mail sometime later if there is any money left over, which is usually the case, as mortgage companies prefer to err in their favor.

General Advice

Since buying a FSBO home is very do-it-yourself in nature, it is up to both the buyer and the seller to make sure that everything leading up to closing and the closing itself goes smoothly. It is important that the buyer and seller communicate thoroughly with each other, and that their attorneys do the same. Everyone should work to be sure that all deadlines are met, such as those specified in the original contract. In the event a problem arises, remember that being accommodating with each other may have small costs, but immeasurable benefits in terms of helping to ensure that the sale goes through, as that is everyone’s main goal.

Links and Resources

The Mortgage Professor- How to Shop Settlement Costs. This won’t apply if the mortgage broker has already been chosen, but it is a good explanation of settlement costs.

Stewart Title’s Buyer and Seller Closing Costs sheet. A helpful chart of who pays for what in most cases.