From Pre-Approval to Closing: The Essential Documents You'll Sign to Buy a Home

Buying a home is a major milestone. However, the process can be quite intricate, with several steps involved.To validate the legality of the transaction and safeguard the interests of all parties, it is important to understand the documents you will encounter along the way. In this blog, we will go over the most important documents you'll sign on your journey to homeownership, focusing particularly on closing documents. Let’s get started!

Pre-Approval Documents

• Loan Application (Form 1003): The journey begins with the loan application. This document collects your personal, financial, and employment information. Lenders use this data to determine your eligibility for a mortgage.
• Pre-Approval Letter: Once your loan application is reviewed and your creditworthiness is assessed, you'll receive a pre-approval letter. This document outlines the loan amount you qualify for and signals to sellers that you are a serious buyer.

Purchase Agreement

• Offer to Purchase: This document, also known as the purchase agreement, is your formal offer to buy the home. It includes the proposed purchase price, terms of the sale, contingencies (like home inspection and appraisal), and the closing date.
• Seller's Disclosure: The seller is required to disclose any known issues with the property. This document ensures transparency and helps you make an informed decision.

Loan Documents

• Loan Estimate: After the seller accepts your offer, you'll receive a loan estimate. This document provides an overview of the loan terms, estimated interest rate, monthly payment, and closing costs.
• Intent to Proceed: To move forward with the loan application, you'll sign the intent to proceed form, confirming that you agree to the terms outlined in the loan estimate.
• IRS Form 4506-T: This form allows the lender to obtain a transcript of your tax return from the IRS. It is used to verify the income information provided on your loan application.

Home Inspection and Appraisal

• Home Inspection Report: This report, conducted by a professional inspector, details the condition of the home. While you won't sign the report, you'll review it and decide whether to proceed, negotiate repairs, or withdraw your offer.
• Appraisal Report: The lender will order an appraisal to ensure the home's value matches the loan amount. Like the inspection report, you won't sign this document, but it's a crucial step in the process.

Title and Insurance Documents

• Title Search and Title Insurance: The title search ensures there are no legal issues with the property's ownership. You'll sign the title insurance policy to protect against any future claims.
• Homeowner's Insurance: Before closing, you'll need to secure homeowner's insurance. This document protects your investment from potential hazards and is a requirement for obtaining a mortgage.

Closing Documents

As you approach the closing day, you'll encounter several critical closing documents. These are the final steps in transferring ownership from the seller to you.

• Closing Disclosure: This document provides a detailed breakdown of all loan terms and closing costs. You'll receive this at least three business days before closing, giving you time to review and ensure everything matches the loan estimate.
• Promissory Note: By signing the promissory note, you agree to repay the mortgage according to the specified terms. This legal document outlines the amount you owe, the interest rate, and the repayment schedule.
• Loan Application: At closing, you might need to re-sign the original loan application (Form 1003) to confirm that there have been no significant changes to your financial status since you initially applied for the mortgage.
• Initial Escrow Disclosure Statement: This document provides an estimate of the escrow account’s activity for the first year. It details the monthly payments for property taxes, homeowner’s insurance, and any other escrow items.
• Deed of Trust or Mortgage: This document secures the promissory note by providing the lender with a claim against your property if you default on the loan. It essentially puts the house up as collateral for the loan.
• Title Insurance Policy: In addition to the title search, you will receive the actual title insurance policy at closing. This document protects you (the owner) and the lender from potential future claims against the property.
• Bill of Sale: While not always required, the Bill of Sale transfers ownership of any personal property included in the sale, such as appliances or furniture.
• Affidavits and Declarations: These documents, which vary by state, may include statements confirming your identity, the property's condition, or your understanding of the loan terms.
• Settlement Statement (HUD-1): In some cases, you'll receive a HUD-1 settlement statement, which itemizes all closing costs and expenses. This document is especially common for reverse mortgages and certain types of loans.
• Certificate of Occupancy: If you're purchasing a newly constructed home, the certificate of occupancy verifies that the property meets local building codes and is safe to inhabit.
• Notice of Right to Cancel: For certain types of loans, particularly home equity lines of credit (HELOCs) and refinances, you’ll receive a Notice of Right to Cancel. This document gives you three business days to cancel the transaction without penalty.
• Homeowners Association (HOA) Documents: For properties that are part of an HOA, you’ll need to review and sign documents related to the association’s rules and fees. These documents ensure you are aware of your obligations as a member of the HOA.
• Power of Attorney (if applicable): If you cannot attend the closing in person, you may grant someone else the authority to sign closing documents on your behalf through a power of attorney. This legal document must be notarized and may require approval from the lender.
• Property Deed: Once all closing documents are signed, the property deed is recorded with the local government, officially transferring ownership to you. You'll receive a copy of the deed for your records. There are different types of deeds, such as a warranty deed or a quitclaim deed, depending on the level of protection and guarantees provided regarding the property’s title.

Post-Closing Documents

• Mortgage Servicing Disclosure: After closing, you'll receive a mortgage servicing disclosure, which informs you whether the lender will service your loan or transfer it to another company.
• First Payment Letter: This document outlines the details of your first mortgage payment, including the due date, amount, and where to send the payment.

Conclusion

If you’re a first-time homebuyer, you will need to understand and sign many important documents along the way. Each step—from the time you fill out your initial loan application to when the final closing documents are signed—is an opportunity to protect your interests. So, continue to prepare and educate yourself to enjoy a successful home-buying experience. Remember, carefully reviewing each closing document and asking questions when any part is unclear will greatly affect your decision-making process without subjecting you to unnecessary risks.Happy house hunting!