Mortgage Closing: How it Works

A mortgage closing occurs when a lender funds a home loan (either to purchase or refinance a property) and a lien is publicly recorded. A lot of activity takes place beforehand to make that happen.

Mortgage Closing: Why It's Necessary

When a home sale or refinance is initiated, escrow is opened with an escrow or title company, or with a law firm. State law and local custom determine whether closings are conducted by attorneys or escrow officers. The law firm or escrow company serves as a neutral third party that holds cash deposits and disburses funds to parties in the transaction -- for example, a mortgage lender being paid off or a real estate agent's commission. When all requirements for the sale of the property or mortgage refinance are met, the transaction is completed with a "closing."

The Closing Process: Who, What and When

In general, the following steps must occur in a mortgage closing:

  • Home buyers (purchase money mortgage) or homeowners (refinance mortgage) must be approved for financing needed to complete the transaction. Failure to qualify for a mortgage causes the transaction to fall through.
  • Mortgage lenders provide a Good Faith Estimate, which lists loan information and costs associated with the purchase or refinance mortgage. The lender will issue a new GFE any time there is a "material" change to the loan.
  • The home being purchased or refinanced must be appraised and meet the lender's requirements.
  • The closing agency also researches the property history to make sure the title is clear and a title insurance policy can be issued. Title reports also verify the property's legal description. If title problems are found, they must be resolved before closing.
  • The closing agent prepares title and conveyance documents, and issues a final closing statement specifying the terms of the mortgage. Ideally, the borrower gets a copy of these in advance so review them without pressure.
  • Deed and mortgage documents are signed and recorded, and funds are paid or received according to the closing statement.
  • A lien against the property is publicly recorded by the county in which the property is located.

Important for Borrowers

The final mortgage documents, including a final application and settlement statement, commit the buyer / borrower to the home loan. There should be no surprises -- the loan amount, loan terms and interest rate should be as was disclosed in the GFE or a preliminary closing statement. Borrowers should read all documents because they will be obligated accordingly once they sign.

They should pay close attention to the final settlement statement, called a HUD-1 form. On page three, the first column in the top three sections revisits the GFE. The second column displays the HUD-1 charges for easy comparison of the estimates to the actual costs. Borrowers should check the bottom of the second chart for differences between the GFE and HUD-1. Some costs, like the loan origination charge, can't increase at all, while others can't increase by more than ten percent. If there are overcharges, the lender has to refund them to the borrower.

Closing a mortgage can seem complicated, but it's worthwhile when buyers receive their keys, or homeowners get a better loan by refinancing.

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