After the borrower has been approved, the legal documents required for the loan closing are prepared by the lender and forwarded to the closing agent. Before funds are released to the closing agent, the borrower must sign the loan documents and meet any conditions required by the lender. The lender will submit instructions to the closing agent that outline the procedure and conditions for loan closing. Closing agents can be title companies, escrow companies and lawyers. Each lender may have its unique instructions (lenders instructions) for loan closing and each state may differ on some of the legal requirements. There are several major documents that are included for all closings.
Required Documents For Loan Closing:
- Mortgage Note: The mortgage note outlines the amount of the debt, the terms and payments, the interest rate, margins and caps for ARMs, the name of the lender (beneficiary), the name of the borrower (mortgagor), and any other material item required by the lender. The borrower(s) must sign the note.
- Security Instrument — Deed of Trust/Mortgage: A deed of trust is an instrument given by the borrower to a third party (trustee) vesting title to the property in the trustee as security for the borrower's repayment of the mortgage loan. A mortgage is the conveyance of interest in real estate used as security for repayment of a note. Depending upon the state and customs within that state, one of these instruments is generally used as security for the mortgage note. In the event a borrower defaults on the note, the security instrument outlines the legal procedure enabling the lender to take ownership of the property. Usually the security instrument is recorded as a public document.
- Deed of Trust Riders: When the mortgage loan is an Adjustable Rate Mortgage, lenders require a rider that is recorded along with the security instrument.
- Truth in Lending Statement — Regulation Z: The lender will provide an updated Truth and Lending Statement to reflect the actual costs of the loan and indicate the annual percentage rate.
- Closing Statement — HUD 1: After the loan has closed, the closing agent will provide a closing statement document that outlines the final costs of the loan. Borrowers can expect to receive this document within 3-5 days after loan closing.
After the closing agent has received the loan documents, the down payment if required, and other incidental closing items from the lender, they will make arrangements for the buyer (borrower) and the seller (on a sales transaction) to sign the necessary documentation to consummate the transaction. After the documents have been signed, the closing agent will request the loan funds from the lender. Lenders review the package before the funds are released to the closing agent. In some states the lender will release funds if the closing agent guarantees that the loan package meets all of the lender's requirements.
One additional document that is required by most lenders prior to closing is the hazard insurance policy. At a minimum, the policy must have fire and extended coverage with a special form endorsement that covers the loan amount. Borrowers can increase coverage for other items, such as earthquake damage, theft, flood, etc.
After loan funding, the closing agent will make disbursements based upon the instructions from the lender, seller and buyer. For example, if there is an existing loan to be paid in full from the loan proceeds, the closing agent is responsible for making that payment. The closing agent will also make arrangements with a title company or county recorder to record any public documents, such as grant deeds or deeds of trust.