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Settlement (Closing)

Settlement is the procedure for funding the loan (see Figure 1.8). Several additional documents must be gathered or prepared for settlement:

• Deed (for home purchase, not refinance)

• Notes and addenda

• Deed of trust or mortgage (depending on your state) and riders

• Mortgage insurance certificate

• Title insurance policy (or binder)

• Survey (in most states)

• Homeowners' insurance policy

• Miscellaneous affidavits and agreements

• Certificate of occupancy (newly constructed homes)

• FHA/VA documents (for FHA/VA loans)

• Uniform Settlement Statement (HUD-1)

FIGURE 1.8 Step 6: Settlement

Step 6: Settlement

Many costs are involved in closing a mortgage loan, and they vary greatly depending on the state, county and metropolitan area. Figure 1.9 shows an example of the range of possible settlement costs. Comparison shopping can help you save money on title insurance, settlement attorneys, and homeowners' insurance.

The lender charges the bulk of the settlement costs. Chapter 5, “Shopping for a Mortgage,” tells you how to lower those costs. Title insurance, settlement attorneys, and homeowners' insurance costs are three other items where you can save money by shopping around.

FIGURE 1.9 Range of Settlement Costs (for a $100,000 Mortgage)

Range of Settlement Costs (for a $100,000 Mortgage)

The logistics of settlement – location, method, and disbursement of funds – vary depending on state law and local custom. Your lender, attorney, or real estate agent can explain how settlements are transacted in your area and can estimate your costs. Settlement of a refinance mortgage is generally less complicated and less expensive because no transfer of title is involved.

Newly Constructed Homes

If the home that you are buying is under construction when you apply for your mortgage, the settlement process becomes somewhat more complicated than the process for an existing home. After your house has received its occupancy permit, your lender inspects the house to make sure that it has been finished according to plans. The lender may require additional finish work or repairs before funding your mortgage.

Frequently, homebuyers want to move into a new home before it is completely finished. (They may have to vacate their apartment or old house.) Some lenders will not settle until the house is 100- percent complete. Often, they hold back some of the mortgage until the house is completed. For example, a lender may fund only $90,000 of a $100,000 mortgage, pending completion of landscaping, a garage, or a finished basement. When a lender holds back funds, a homebuyer often can hold back payment to the builder. Holdbacks protect both the lender and the homebuyer from builders who fail to complete all the work that they promised. These holdbacks are also known as completion escrows.

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