Owning a home. It is the American dream, right? However, once you get started on your path to home ownership, you will find that there is much work in the process that goes beyond choosing a home and acquiring the loan to pay for it. Closing on your home requires quite a few thoughtful steps. This guide will help walk you through them.
CFPB “Know Before You Owe”
CFPB stands for the Consumer Financial Protection Bureau. It was created as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and offers protection for consumers when it comes to loans, including mortgage loans, and credit cards.
In October of 2015, the CFPB created the “Know Before You Owe” initiative. The purpose of this initiative is enhance the ability of consumers to make informed decisions about their home loan choice. The CFPB offers several resources and tools on Owning a Home at consumerfinance.gov that can help you avoid unpleasant surprises at the closing table or that could jeopardize your ability down the road to stay in your home.
Items to Shop Around For
- Home Inspection Services. Once you’ve found the home that’s right for you, it is important to have a thorough home inspection. Your home inspection lets you know if there are problems, or potential problems, with the home that may result in costly repairs. This gives you an opportunity to adjust your offer on the home to accommodate the costs of the repairs or create a deal in which the seller is responsible for making those repairs.
Your priorities in finding an inspector for your home involve finding one with a reputation for honesty and thoroughness. Ask people you know and trust if they have recommendations. If no one has one to give you, consider looking online or even using a referral service. Always check reviews to see what other home buyers have to say about the inspector.
The sooner you schedule your inspection, the faster you’ll be able to decide if the home is a good investment for you or if you may no longer wish to purchase the property.
- Homeowners Insurance. Most lenders require you to have adequate homeowners insurance to cover their investments in your home. At the same time, you will need to protect your investment in the home. It is a good practice to do the following when searching for the right insurance company for your home purchase needs.
- Get quotes from several different companies in writing so that you can compare coverages, costs, deductibles, and more.
- Work with trusted agencies – seek recommendations from friends, family, or online resources if necessary.
- Research the reputation of the company you’re considering doing business with. Look through online reviews and ask around town when dealing with local agencies.
Don’t overlook the importance of flood insurance – even if your home is not located in a high-risk area for flooding. Floods are not covered by most homeowner’s insurance policies.
- Title Insurance and Closing Services. Closing costs vary greatly from one lender to the next and can cost new home buyers thousands of dollars. Some of those costs go to third-party services that you can shop for the best prices. Your lender or real estate agent may recommend a service, but you are under no obligation to use that service and may save money by choosing to do your business elsewhere.
Two of those services are the closing services and title insurance. When it comes to choosing a closing service, look for businesses that offer competitive rates and have excellent reputations for services. Ask for quotes and don’t be afraid to ask for, and verify, references.
Most banks will require that you purchase a lender’s title insurance policy to protect their investment in your home, but you should also consider purchasing an owner’s title insurance policy to protect your investment.
Every little bit you can save at the closing table is money you do not have to come up with up front to purchase your home and is money you can later invest in things to make your new house feel more like your home.
Understanding Your Loan Estimate
One of the key documents that the "Know Before You Owe" program requires is the Loan Estimate. The Loan Estimate shows all of the details of the loan program you have selected to finance your home purchase. This document provides, in simple and easy to understand terms:
- Loan Terms offered, including the Loan Amount, Interest Rate and Monthly Principle and Interest payment. It will also identify any prepayment penalties or balloon payments required if they are part of the loan terms.
- Projected Payments over the loan term. This is important if you have an adjustable rate mortgage or if the loan requires Mortgage Insurance for the initial years of the loan term. You should make sure you understand how your Monthly Payment will change over the term of the loan and be comfortable with your ability to make that monthly payment for the entire term of the loan.
- Costs at Closing. This is the Estimated amount of cash you will be required to bring to the table at closing. Make sure your finances are in order so that you will be able to make all of these required commitments.
The "Know Before You Owe" program makes it illegal for lenders to initially offer you a loan under one set of terms and then to switch out that loan offer with much higher costs in a revised offer.
However, there may be legitimate reasons for a Loan Estimate to change. These include changes to the loan programs offered by the lender, changes in the down payment amount you have available, changes to the home value that become apparent after an appraisal, changes in your credit score, or the inability of the lender to verify income information.
If your Loan Estimate changes, make sure the lender explains why the changes were made and you know how those changes impact your ability to afford the home over the long term.
Right Before Your Closing Date
Your lender is legally required to provide you with a Closing Disclosure three days before you are scheduled to close on your home. The Closing Disclosure provides the same information included in your Loan Estimate, including Loan Terms, Projected Payments, and Costs at Closing.
Additionally, it will provide a more detailed breakdown of the following:
- Closing Costs. Including Origination Charges, Services Borrower Did Not Shop For, and Services Borrower Did Shop For
- Other Costs. Including Taxes and Other Government Fees, Prepaids, Initial Escrow Payment at Closing and Other costs.
- Cash to Close Calculations.
- Summaries of Transactions. Which details both Borrower's and Seller's cash flows.
- Loan Disclosures. Which describes any additional information about the loan, including details the finance charges to be paid over the loan term and Annual Percentage Rate.
You should contact your closing agent one week before closing to ask who will be sending the document and how you’ll be receiving it. It may come via postal services, email, or you may be required to download it from their website.
Compare the Closing Disclosure to the most recent Loan Estimate and make sure it matches your Closing Disclosure. Also, carefully review your Closing Disclosure during this time to make sure you understand it fully, allowing yourself time to ask any questions you may have. Some fees will change by small increments, which is normal, though some fees may change substantially. If you are surprised by some of the changes, don’t hesitate to question them. If anything is different from what you were expecting, especially regarding your loan, make sure to ask questions and demand answers before you close.
Once you have gone through all the steps above, asked and received answers to all your questions, and have the funds in hand, it is time to close on your new home. Congratulations! It is a big step and one you are sure to enjoy for many years to come.