In the mortgage closing process, a buyer submits required paperwork to the lender, who examines those documents and decides whether to approve a mortgage loan. The closing itself comes at the end of this process, when the loan documents are finally signed. The entire mortgage closing process usually takes about three months, but it can run longer if there are issues with your financial qualifications or the property itself.
- What Happens in the Mortgage Closing Process?
- Mortgage Closing Documents: What to Expect
- What Comes After the Mortgage Closing?
What Happens in the Mortgage Closing Process?
Overall, the closing process seeks to answer three main questions: how likely you are to repay the mortgage, how much the property is worth, and whether the property has a clear history of ownership. Whether you're purchasing a home or refinancing an existing home, you'll begin the process by choosing a mortgage lender. Selecting the right lender will depend on your specific needs and the mortgage rates you're offered. Once a lender has been selected, the mortgage closing process follows three basic steps.
Major Steps in the Mortgage Closing Process
- Borrower submits financial information, application, and credit-pull authorization
- Lender conducts review of borrower information, property appraisal, and title search
- Parties review and sign all mortgage closing documents
Initially, your mortgage broker or loan officer will help you start the mortgage process by gathering your tax returns, pay stubs, bank statements, and any other financial information the lender may require. In addition, you will be asked to sign certain preliminary documentation, including a loan application and a credit authorization allowing the lender to pull your credit report.
Once you submit all your documents and authorizations, the lender’s underwriter uses that data to analyze your qualifications for the loan. Underwriters consider numbers such as your credit score, income, and the value of the property. The lender will also order a title report to find any liens or encumbrances on your home. In addition, an appraiser will visit the property to provide an official estimate of its value. If your application is approved, the lender will extend a mortgage offer. This step usually comes in the form of a commitment agreement that outlines basic terms such as the mortgage amount, interest rate and loan term.
The final step is the closing itself. The participants at this meeting will vary depending on where you live. Sometimes the mortgage closing will be conducted by an attorney representing the bank, while in other areas the closing may be conducted by a notary or settlement agent. The title company may also send a representative—called the title closer—to ensure that all title conditions are met. At the closing, you will sign all the closing documents including the mortgage and the promissory note. The closing can take 45 minutes to several hours.
Mortgage Closing Documents: What to Expect
Numerous documents will be delivered to you during the closing process, and some will need to be returned with your signature. The first important document will be the commitment. This document states your loan terms and provides a list of additional documentation you may be required to provide before closing. Take note of the commitment and confirm that the mortgage rate, loan amount, loan type and term are all acceptable.
The appraisal is another important document you should receive either before or shortly after you receive the commitment. The appraised value will be an important factor in how your lender calculates the approved loan amount. The ratio of the loan amount to the value of your home is called the loan-to-value ratio (LTV), which is usually capped at 80%. This is why most lenders require a down payment of at least 20% for a conventional mortgage. Higher LTV ratios are possible, but they usually require the borrower to pay additional monthly fees known as mortgage insurance.
Before the closing date, a title report should also be generated. The title report verifies who owns the property and whether there's any outstanding question of ownership. Title reports also show the record of property taxes, judgments, liens, and any other encumbrances that may affect ownership of the property. Any issues on the title report, such as unpaid taxes or judgments, must be cleared before you can close the mortgage.
The two most significant documents at a closing are the promissory note and the mortgage. The promissory note is your promise to repay the money you are borrowing from the lender. The note contains your rate, along with the loan amount and term. The mortgage (or “deed of trust,” in some states) is the lender’s security interest in your home. If you default, the lender will use the mortgage to foreclose on your home and sell it to recover the debt you owe.
What Comes After the Mortgage Closing?
If you are purchasing a home or refinancing a second home, the loan will fund "at the table", which means you'll have the money in your bank account on the closing date. Refinances of primary residences fund after three business days, with Saturdays included unless they happen to fall on a federal holiday. During those three days, you have a right to cancel the loan without penalty. If you allow the loan to go through, the loan funds and proceeds are paid in accordance with the closing disclosure (CD).
Once your loan closes, you become responsible for making the monthly mortgage payments. The first payment is generally due on the second month after the closing, but you should check your promissory note and other closing documents to confirm your actual due date. Repeated failure to pay your mortgage on time can result in late fees, negative reporting in your credit history, and ultimately foreclosure.