09/19/07: What’s A Settlement?
By Benny L. Kass
Q: My wife and I are recent college graduates with decent incomes and we have decided to buy our first house. We have been reading everything we can find about the home-buying process, and have started to shop around for neighborhoods. However, we do not understand the closing process - which some people call a "settlement".
Is there a difference between a "closing" and a "settlement"? And exactly how does this work. What is required of buyers when we go to buy our house?
A: While there may be technical and legal differences between these two terms, for all practical purposes, they mean the same thing. It is the time when buyer and seller get together in the office of an attorney or a title company and everyone signs all the various legal documents required to enable the buyer to take legal title to the new property.
In fact, in California and other states out West, the process is called "an escrow". This is because the seller puts the deed into escrow with the Escrow Company and when the buyer's funds become available, the escrow agent records the deed and turns over the sales proceeds to the seller.
Many consumers ignore the importance of a settlement. They think that this is just the place where they have to sign papers, pay the necessary moneys and then grab the keys to the new property.
In fact, however, a settlement is perhaps the most important aspect of buying a house (which includes condominiums and cooperatives).
Let's see how it works.
You have just signed a contract to buy a house. The real estate agent will recommend a settlement company or attorney who can conduct the closing. Keep in mind that you - as the buyer - have the absolute right to select where the settlement will take place. You certainly can consider the agent's recommendation, but in many instances, there is a business relationship between the agent's company and the title company. This could mean that should problems arise during the settlement, the title company may side with the seller (or the agent) and not be a neutral party.
When you have made your selection, you or the agent will send the final contract to that attorney, who will then order a title search. This is important. You want to know that the seller who signed the sales contract in fact is the owner of the property. I know of situations where the seller thought that he/she was the sole owner, when in fact a brother or sister was also on title.
You also want to know if there are any problems with title (we lawyers call this "clouds on title". Are there any liens on the property? Have all previous mortgages been paid off - or will be paid off when settlement takes place? Are there any restrictions on how you can use your home, such as easements for next-door neighbors to cross (or drive) over your back yard to get to the public alley.
The title company will also obtain a survey of the property. At settlement, you or your attorney should carefully study this document. Are the fences on the property line? Does the house encroach on your next door neighbor. You want to be concerned about a concept called "adverse possession". This is a legal doctrine which says that if your neighbor has been using a portion your property "openly, hostilely and notoriously" for a period of time that is spelled out in your state law, your neighbor can go to court and claim ownership of that piece of land. And fences often create a presumption in law that the property line is where the fence is - and not where is really is on the official land records. In the District of Columbia and in Virginia the statutory period is 15 years; in Maryland, it is 20 years.
The settlement company should send you and the seller - in advance of the day of closing - a copy of the title report and the survey.
Once you are satisfied that the title and the survey are clean, you then begin the process of signing a slew of documents. Here are the most important ones:
- promissory note: this is your IOU to your lender. Read it carefully; don't let the settlement people rush you into signing, because this is a very important document. Is the amount of the loan correct? Is the interest rate proper? If this is an adjustable mortgage, read the terms and conditions as to when and how your monthly mortgage will increase. Is there a period of grace before you will be hit with a late fee? How much is that penalty?
- deed of trust: this is the mortgage document. You are giving a trustee selected by your lender title to the property, and if you go into default, the trustee can sell your house at a public auction. This is called a foreclosure, and unfortunately, we are seeing too many such foreclosures taking place now throughout the country.
- HUD-1 (the settlement statement): many years ago, the Department of Housing and Urban Development (HUD) adopted a uniform settlement statement which is now universally used for all residential settlements. This is a two page document, which shows the buyer's costs and charges on the left hand side of the document and the seller's expenses on the right hand side.
Read this carefully. Make sure that you understand every line item, since its your money. People and computers do make mistakes and the settlement table is the place to make the corrections. Is the lender requiring too much for escrow for taxes and insurance? Did the lender overcharge you for the appraisal and credit fee? Did the lender credit you for any moneys you have already paid? Has your earnest money deposit been credited to you?
- Deed: the seller will sign the deed, but as buyer you must review it. Are your names spelled correctly? Is the legal description proper? The deed must reflect how you are going to be taking title? Have you discussed this with anyone? If you are buying your property with your spouse, you probably want to take title as tenants by the entirety. But if you are buying with a friend (or a significant other), title can be held either as joint tenants or as tenants in common. Make sure that you fully understand the distinction between these two arrangements, before you agree to accept the deed. If you are in doubt, consult your attorney for a full explanation.
When all of the legal documents have been signed, you will give a check to the person conducting settlement. The title company will then record the deed and the deed of trust among the land records in the jurisdiction where your house is located. Then, perhaps several months after settlement, you will receive the recorded deed as well as a copy of your title insurance policy.
But before you leave the settlement table, insist on getting the keys to the property (unless you have previously agreed to allow the seller to remain in the house for a period of time). Also, get a copy of every document that you signed. It is also a good idea to get the phone number and new mailing address from the seller just in case you have any questions (or problems) after you move in.
A settlement is both the end and the beginning of the home buying process. Don't take it lightly.