Your step-by-step guide to the process of closing on a house...
Before Closing: Getting Pre-approved, Making an Offer, and Having That Offer Be Accepted
First, in order to close on a home (or even make an offer), you need to make sure that you're approved for the loan amount -- usually in the form of a pre-approval. Most sellers don't entertain an offer without a written letter from the bank saying that the buyer actually has the ability to purchase the property. A pre-approval can go a long way toward getting an accepted offer, especially in competitive markets.
Then, after you've been approved, you'll need to shop around and make an offer on a home.
Once that offer is accepted, you're one step closer to becoming a homeowner. From there, all that's left is closing.
Overview: How the Home Closing Process Works
The closing process may look a bit different from situation to situation (and state to state, since some states require a real estate attorney to be present at closing), but by and large every closing will have the same elements:
- Optional home inspection
- Loan origination
- Appraisal and Underwriting
- Loan approval
- Homeowner and title insurance
- Closing disclosures
Most of these are going on in the background without much input from you, the buyer. If you just had an offer accepted and you're unsure about what to do next, don't worry too much: the lender will let you know what they need next.
One step that requires your involvement, however, is the home inspection:
Optional Home Inspection
While a home inspection is by no means a guarantee that the property is free from defects, a good home inspection can save you tens of thousands of dollars in potential repairs. According to Mortgage Reports, home inspections can save buyers up to $14,000.
Why? Because home inspections give the buyer leverage when it comes to negotiations. Even though you've already agreed upon a purchase price, if there's serious foundational damage, drainage problems, wood rot, infestation, or another serious issue -- that maybe the sellers didn't even know about -- then that can affect the marketability and value of the property.
This puts the sellers in a sticky situation. If the sellers decide to deny the buyer any money for repairs, they might run into the exact same issues with the next buyer. After the property has been on the market for a while, many buyers start to assume that there's something wrong with it. If they try to sell it "as-is" right now, they might end up paying for the same repairs further down the line after the property has been on the market for months.
So, the sellers usually concede some money for repairs -- or they hire someone to complete the repairs before closing. No one wants to move into a house that's unsafe.
A home inspection can help you uncover some of the more obvious issues with a property before you move in. It's a good idea to hire a reputable home inspector.
While you likely received a pre-approval letter from the bank saying that you qualify for a mortgage, other documents are required from the lender before the loan is finalized. During this stage, they might ask for:
- Pay stubs
- Tax returns
- Bank statements
- Student loan details
You'll also receive a loan estimate from the lender detailing your closing costs (which are subject to change). The lender may also provide you with a rate lock for a certain period of time. With interest rates changing all the time, this is important to ensure that your payments stay the same before all of the other steps in the home closing process are finished.
Home Appraisal and Underwriting
While you may have made an offer on a home for $300,000, the home itself might not be worth that much money. In order to ensure that the loan is safe, the bank hires a professional, third-party real estate appraiser to analyze the market value of the property by comparing it to other similar properties in the area.
A property appraisal serves to validate the market value of the home. The lender will evaluate if the amount being borrowed stands in correct proportion to this appraised value. In cases where the loan amount surpasses a justifiable percentage of the appraisal price, the borrower may need to provide extra capital to cover the discrepancy. Otherwise, the lender may no longer be able to finalize the loan terms. Careful assessment of the appraisal results prevents unanticipated financial shortfalls as part of the overall home acquisition process.
Since no two properties are exactly the same, appraisers make adjustments to comparable properties for different features, depending on whether they're inferior or superior. For example, if one of the comparable properties has an inground pool while the subject doesn't, the appraiser may analyze the market and find that an inground pool has a contributory value of $30,000. They will then subtract this amount from the comparable property to arrive at a value that's closer to the subject's.
Since you don't need to provide access to the property to the appraiser, however, it's not very likely that they'll need to contact you. You'll receive a copy of the appraisal report from the lender when it's finished. Besides that, you don't need to do anything.
The lender's underwriter will then review all of the important factors that go into your loan, including your credit score, income, appraisal, and more. This is for a final review before they officially approve you.
You're approved! At this stage, if you're approved for the loan and have already settled negotiations on potential repairs and the final purchase price, it's unlikely for issues to arise that would stop the sale entirely. While you aren't 100% closed, this means that the lender has fully approved you for the mortgage.
Homeowner and Title Insurance
The lender will require you to provide proof of homeowner's insurance and title insurance.
It sounds weird, since you don't officially own the property yet, but the lender wants you to purchase home insurance on the property before its ownership has officially transferred. No matter how unlikely it seems, it's always possible that a tree falls on your property the day after the loan closes. If you don't have insurance and the home is in shambles, the lender will lose all of their money. You can reach out to various insurance providers for quotes, and you'll usually get a discount if you bundle your home insurance with your auto insurance, so your best bet might be to opt for your auto insurance provider.
Title insurance is a bit different, but most lenders will require it too. A title refers to the legal ownership and rights associated with a property. Title insurance is a type of insurance that protects property owners and lenders from financial loss due to defects in the title of a property. For example, if the seller opened up a line of equity on the property and thought it would be fully paid off by the amount that they'll receive after closing, this could cause an issue with the title that title insurance will take care of.
Finally, the lender will arrange a final closing day. On closing day, you’ll sign the documents and the ownership of the property officially transfers to your name. Three days prior to the final closing day, you'll receive the closing disclosures. You'll perform a final walk-through at some point before closing (which can be important in case the sellers damaged anything during the move).
After that, you'll meet with an agent from the title company to review the final disclosures, sign any paperwork, and hand them the check for closing costs.
As your closing day approaches, it is understandable to feel excited about finalizing your home purchase. However, do not let the enthusiasm overshadow the need to prepare for the various closing costs you will owe. Typical fees to anticipate may include:
- Origination fees
- Appraisal fees
- Title insurance
- Recording charges
- Transfer taxes
- Prepayment of property taxes
- Prepayment of homeowner's insurance premiums
- Legal fees
Your lender will provide you with the precise total owed for these closing costs prior to the closing date. Having these funds readily available on closing day will prevent any last minute delays as you finalize the property acquisition.
If you're confused about any of these steps, keep in mind that requirements can change from situation to situation. Your realtor has been through this process many times, so make sure to ask them exactly what you'll need at each step.
FAQs for Process of Closing on a House
How Long Does Closing on a House Take?
From when you sign the mortgage application to when you receive the keys, according to ICE Mortgage Technology (formerly Ellie Mae) it takes about 44-50 days to close on a home.
How Much are Closing Costs?
Information on closing costs is notoriously murky. With the National Association of Realtors under fire for $1.8 billion for violating antitrust violations and inflating concessions, the rules around closing costs could change very soon, probably in mid to late 2024.
Typically, the buyer pays the brunt of closing costs, at about 3-6% of the loan amount. For a $300,000 mortgage, that equates to roughly $9,000 to $18,000.
However, the seller currently pays all realtor commissions, which are usually around 3% for the buyer's agent and 3% for the seller's agent.
How Are Closing Costs Calculated?
Closing costs are calculated by exactly what's required to generate your mortgage and make sure that it's adequately protected. This might include but isn't limited to:
- Loan origination fees (around 1% of the loan amount)
- Appraisal ($450-$650)
- Flood zone analysis ($50)
- Tax monitoring ($150)
- Lender's title insurance ($500-1,000)
- Title search ($500)
- Homeowner's insurance, pre-paid 12 months in advance ($1,350-$2,250)
- Prepaid interest (~$700-1,200)
- Property tax, pre-paid 6 months in advance ($2,000)
What Happens at Closing?
On closing day, you'll spend an hour or two initialing the final disclosures. You'll receive a copy of the final disclosures about three days before this meeting with the title agent and give them the check for closing costs.
Are Closing Costs Rolled Into the Loan?
Closing costs can be rolled into a loan. Buyers tend to get sticker shock when they see that, for a $300,000 mortgage, they'll have to pay $12,000 in closing costs alone -- before any of that has been applied to equity. Rolling closing costs into a loan is easy, but the downside is that you'll have to pay mortgage interest on the closing costs.
Are Closing Costs Tax-Deductible?
One major benefit of homeownership are the tax benefits. However, the only closing costs that are tax deductible are mortgage interest, paying down points, and property taxes.
What's the Difference Between Closing Costs and Cash to Close (Cash Due at Closing)?
Cash to close refers to the total amount of money that you'll need to pay at closing. This includes the down payment and excludes any closing costs you paid along the way.
For some closing costs, you'll pay them as they occur. For example, you'll pay the home inspector upfront for the inspection. When the appraiser is contracted to inspect the property, you'll pay them as well.
Additionally, since you had to deposit some earnest money before closing, that amount will be rolled into your cash to close.
What Closing Costs Can I Deduct from My Taxes?
You can deduct mortgage interest, point buydowns, and property taxes.
Do Closing Costs Include the Down Payment?
No, closing costs don't include the down payment.
Is the Down Payment Included in the Loan Amount?
Your down payment isn't included in the loan amount. The loan amount is only for how much money that the lender is giving you. If you're buying a house for $200,000 and put 20% down, you'll only need a $160,00 mortgage. The down payment is $40,000 and the loan amount is $160,000. The down payment is different from the loan amount.