The Real Estate Closing Process

The Escrow Closing or Real Estate Closing Process is not as complicated as it seems, with a little help anyone can understand and feel comfortable with the process.

The escrow closing process follows certain steps in a certain order, once you understand these steps, the process becomes clear. Several of the steps are part of every closing; others are optional depending on the circumstances.

Real Estate Contract

The Real Estate Closing process begins when you make an offer by signing a purchase contract, and the offer is accepted by the seller. When this step is completed several people get involved in your closing.
The Title Company begins to research the title of the property. An appraiser and surveyor may also start working on your closing. These happen in the background, all preparing for the signing or closing.

Title Commitment Review

After signing the Purchase Contract, the title company will prepare a Title Commitment. The Title Commitment shows any liens, judgments and other problem with the real estate title or ownership.

It is also a commitment to insure the property in your name at closing, subject to any terms contained in the Title Commitment. Review it carefully and call the title company with any questions.

Disclosures Review

Before closing, the seller is required to make disclosures to the buyer. These disclosures vary from state to state but include any leases that may be on the property as well as other things the seller is aware of.

If there are building on the property the disclosures should also include any problems or required repairs on the buildings.

If the disclosures show significant problems you have a certain amount of time to cancel the deal. The exact amount of time you have to cancel is spelled out in the purchase contract.

Appraisal

An appraisal is performed by a licensed appraiser, who uses recent land sales, to estimate the market value of your land.

If you requested an appraisal on the property, you should receive it before signing. If you do order an appraisal, the purchase contract should be conditioned on the property appraising for at least the purchase price. The appraisal is optional.

Land Survey

A Survey is often part of the real estate closing. The Purpose of a real estate survey is to mark the property boundaries, and map them in relation to the surrounding properties.

If there isn’t an existing survey on the property, and the boundaries are not marked, you need a survey.
Surveys are often required when you build a house on the property. If you plan on building in the future, this is good time to get a survey as the seller may pay all or part of the cost.

Property Inspection

The inspection is your last chance to look at the land again before you buy. This is usually scheduled just before signing.

Depending on what you are buying this could be very important. If you are buying land only, it may be less important, but if you are buying land with buildings, equipment, etc., this is the time to make sure everything is in working condition.

Real Estate Escrow Signing

Finally, it’s time to show up at the designated place to sign the Real Estate closing documents. This is sometimes referred to as the Escrow closing, although the entire process is part of the escrow closing. The previous steps may happen without your knowledge, and explains why it takes so long.

You will need to bring the required money to close. The amount should be certified funds (cashier’s check, wire, etc.).

This is the time to review all the papers and have any questions answered. This is your last chance to have any concerns addressed by the seller or realtor. Once you sign the papers the land and any problems are yours.

Document Recording

After signing, and after the money has been cleared, the title company will record the deed, transferring the property into your name.

If you borrowed money to purchase, the mortgage documents will also be recorded. After the recording is completed, you become the official owner.

Possession

Date of possession will be sometime after Recording. It is usually an agreed number of days after the recording, as agreed in the purchase contract.

The HUD-1 Settlement Statement

The HUD 1 Settlement Statement was created by the Federal Department of Housing and Urban Development. It is the required closing statement on all real estate transactions which include a bank loan.
Although not required for other real estate transactions, most title companies use it for all transactions.

The form is a victim of congressional legislation, disclosure requirements and years of tweaking, making it unnecessarily complex. In spite of this it is the standard so needs to be understood. The form consists of 3 pages and we will explain each page separately.

I will refer to line numbers when explaining the HUD-1 Settlement Statement. The numbers range from 100 – 1400 and are on each line of pages 1 and 2 of the HUD1.

HUD 1 Page 1

Page 1 contains final figures, totals from page 2 and is divided into 7 sections. Lets look at each section separately.

General Information

This section contains the basic information about buyers, sellers and the property. It includes names, addresses, date of closing etc. A quick review to make sure all information is correct is all that is necessary.

Section 100: Gross Amount Due From Borrower

This section itemizes all charges to the borrower or buyer, except closing costs which are itemized on page 2 and the total entered on line 103 of this page

This section calculates the buyer’s total cost, including purchase price, closing costs and any adjustments for items prepaid by sellers. Prepaid items could include prepaid taxes, rent, assessments etc. Instead of paying these items to seller separately they are incorporated into the total here.

Section 200: Amounts Paid By/For Borrower

This section includes items already paid by buyer or paid for buyer. This would include deposits, earnest money, loan assumptions, or any other figures which reduce the amount paid by buyer at closing.
It also includes adjustments for items unpaid by seller. This includes the pro-ration of the seller’s portion of property taxes, rents deposits etc.

Section 300: Borrower Totals

This section includes 3 lines. The first line is the total from section 100 or Gross Amount Due from Borrower. The second line is the total from section 200 or Amounts Paid By or In Behalf of Borrower.
The third line is the total amount of cash buyer will pay at closing. This is calculated by taking the Gross Amount Due From Borrower section 100 less the amounts paid by or for borrower in section 200.

Section 400: Gross Amounts Due To Seller

This section is the Gross or total amount due to the seller. This includes the sales price and any adjustment for items paid by seller in advance such as prepaid property taxes.

Section 500: Reduction In Amount Due Seller

This section includes all items that reduce the amount to seller at closing. This includes loan payoffs, and loans being assumed. It includes not just costs but any items that reduce the amount to seller at closing. It also includes the closing costs total which are itemized on page 2.

Section 600: Seller Totals

This section includes 3 lines. The first line is the total from section 400 or Gross Amount Due to Seller. The second line is the total from section 500 or Reduction in amount due to Seller.
The third line is the total amount of cash seller will receive at closing. This is calculated by taking the Gross amount due seller section 400 less the costs and other reductions from section 500.

HUD 1 Page 2

Page 2 of the HUD 1 Closing Statement itemizes all closing costs. The buyer costs are in the left column and seller costs in the right column. Both columns are on the right side of the page with the descriptions to the left. These costs are divided into sections and numbered as follows:

700’s – Real Estate Broker Fees

800’s – Loan Fees

900’s – Prepaid Loan Fees

1000’s – Reserves Deposited With Lender

1100’s – Title Charges

1200’s – Government Recording and Transfer Fees

1300’s – Additional Or Any Fees That Don’t Fit In The Above Sections

These fees are totaled at the bottom of the page for both buyer and seller. Buyer’s total is carried over to line 103 of page 1 and seller’s total to line 502 of page 1. By carrying them to the first page they are included in the totals at the bottom page 1, which we already reviewed.

HUD 1 Page 3

Page 3 is a new page on the Settlement Statement. It does not include amounts that are carried over to other pages. Instead, it is for informational purposes. It is divided into 2 sections. The top section is the

Good Faith Estimate.

When you apply for a loan the lender will give a Good Faith Estimate of Fees. This page shows the estimated figures received when you applied for the loan and the actual fees at closing. Most fees cannot vary from the original estimate. Those that can are listed as such.

The second section spells out all the loan terms and should be reviewed carefully if you have a loan.

HUD 1 Review For Buyers

Buyers should review the settlement statement in the following order:

Review the Good Faith Estimate and Loan Terms on Page 3. These should agree with the information previously received from the lender. The Lender can not add fees that did not appear on the original estimate received at time of loan application.
Review page 2. Review the left column of figures and ignore the other as it is the sellers costs. Ask about any fees that you don’t understand or that seem excessive.
Review page 1. The total from page 2 will be carried over and appear on line 103 of page 1. Review just the left column. Section 100 itemizes your total costs and section 200 itemizes items already paid by or for you. Any Earnest Money already paid should appear on line 201 with any other money paid appearing below that. The totals at the bottom are the difference between the two sections, and the amount you will pay at closing.

HUD 1 Review For Sellers

Sellers can ignore page 3 as it only relates to buyers. You should review the settlement statement as follows:
Review page 2. Review the right column of figures only. The left column is the buyers column. Ask about any fees you don’t understand or that seem excessive.
Review page 1. Review just the right column. Section 400 lists all amounts due to the seller. Section 500 lists any reductions to the amount the seller will receive at closing. This includes any payoffs, unpaid taxes, earnest money received etc. The totals at the bottom are the difference between these two sections, and the amount the seller will receive at closing.

Summary

Many people’s eye glaze over the first time a HUD-1 Settlement Statement is explained to them. But after looking it over and asking questions it is easier to understand. Remember you only have to learn it once, as all real estate transactions use the same form.

NOTE

As of 2016 this form has been replaced for most types of real estate transactions.