Do you understand the process of real estate closing?
Even though buying a home is most-likely the single biggest investment in our lives, you’d be amazed at how many of us go to the “closing table” ill prepared. Dozens of documents are shoved before us and we dutifully sign them. But do you really know what you are signing?
Let’s discuss the “Closing” to figure it all out.
First, the word “closing” simply means the deal (or transaction) will be “closed” or consummated or completed.
In a real estate closing there are three main categories: Settlement, Payment and Ownership Transfer.
Settlement is the process by which taxes, HOA fees, repairs and other items (outside the actual purchase) are reconciled. For example, if you buy the house mid-way through the year, you are given credit for property taxes up to that date. So when you get your property tax bill and pay it, you will not be paying for a time when you did not own the property. The same goes for repairs. In some cases, if the home needs repairs, and you negotiate those repairs into the sale, you may get a credit to pay for those repairs. In essence, “settlement” takes care of all of the miscellaneous items outside the actual home.
Payment is pretty much self-explanatory. You must pay for the purchase. If it is a “cash deal” you simply hand over certified funds (by way of a cashier’s check or a wire transfer). But when there is a loan involved, the lender has many requirements. The lender will want a survey – to see that the home and property on the deed of trust is actually part of the estate. The lender will also want “title insurance” for any liens that may show up on the property later on. And the lender will want their own lien filed t reflect that they have an interest in the home. In Colorado, this is done in a “Deed of Trust”. Basically the Deed of Trust says the lender “trusts” you to pay for the home or they take the deed (or ownership). But before they file a Deed of Trust, they will have you sign a promissory note. This is the actual loan or “promise to pay”. In addition to all of these documents, the lender will have you sign an “assignment of rents” – that says if you stop paying the home loan and you rent out the home, the lender can take the rent. Depending on the lender, there may be many more documents. But in essence they all serve the same purpose: To protect the lender, to get you the money to pay for the home and finally to transfer that payment to the seller.
The final step of the closing is to transfer ownership from the seller to the buyer. In Colorado this is done with a document called the “General Warranty Deed”. It is the title to the home (subject to any deeds of trust aforementioned). At the time of ownership transfer you may also get rights to the Clubhouse, golf course, community swimming pool, parking spaces, etc. In other words whatever you bought will be transferred to you.
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