Step 8: Finalizing Your Mortgage Loan

Even though you have a pre-approval letter, the loan isn’t official until closing day. While it’s usually a straightforward process, you could encounter a few hiccups. While these obstacles are often minor and quickly resolved, it is possible for a home purchase to get derailed on closing day.

In the Buying a Home How-To section, we reviewed what will happen during closing, from the final walk-through to getting the keys. In this final Financing How-To, we’ll review some things you might encounter with your loan on closing day.

A Revised Loan Estimate

Usually, once you receive your loan estimate from your lender, the lender is bound by the fees and charges included. A lender isn’t permitted to make revisions if they make mistakes, miscalculations, or underestimate the charges. However, there are some instances in which a loan estimate may be revised. According to the TILA-RESPA Integrated Disclosure (TRID) rule, there are six events that justify a revision of the loan estimate. These include:

  • Interest rate locks: If the interest rate is not locked when the loan estimate is issued, the lender can revise the estimate once the rate is locked.
  • Changes in the buyer’s eligibility for the loan or changes that affect the value of the property being purchased: A buyer can experience certain changes that can affect their eligibility, such as a credit rating drop, becoming unemployed, getting a divorce, etc. A revision is also usually required if the lender is unable to verify the buyer’s income. If the appraisal for the property comes in higher or lower than expected, that could also require a revised loan agreement.
  • Buyerrequested changes: If the buyer requests certain changes that impact the credit terms or the settlement costs, the lender may want to revise the original loan estimate.
  • Changes that cause an increase in settlement charges: If a change causes the settlement charges to increase beyond the tolerance variations set out in the TRID rule, the lender is granted the right to revise the loan estimate.
  • The original loan estimate expires: If the buyer does not provide the lender with a Notice of Intent to Proceed with Loan Application (NIPLA) within 10 business days of receiving the loan estimate, then the estimate can be revised by the lender if necessary.
  • Construction loan settlement is delayed: In new construction, settlement typically occurs within 60 days of receipt of the loan estimate. If the settlement doesn’t take place within 60 days, the lender can revise the estimate.

If you receive a revised loan agreement not tied to a request from you, ask your lender to explain the reason for the revision. Find out how the revised estimate will affect your loan transaction, including your loan amount, the interest rate, your monthly payment, and closing costs. The more you know prior to closing, the better off you’ll be.

The Mortgage Loan Is Denied at Closing

This is very rare, but it does happen sometimes. It’s also very preventable — just don’t do anything that might impact your standing between your pre-approval and your closing date. Here are some of the situations that could cause a denial at closing:

  • Your credit score went down. The lender will re-check your credit to see if anything has changed. If you’ve missed payments or your credit score dropped below the minimum score requirement, your loan could be denied.
  • Your debt-to-income ratio went up. While it may be tempting to buy a bunch of new furniture for your new house, don’t run up your credit cards before closing! Don’t take out a new car loan or make any other large purchases, either. This will impact your debt-to-income ratio, and if it’s too high, the lender can deny your loan.
  • Your employment status changed. Losing or changing your job right before closing could impact your loan. The lender will do an employee verification check before your scheduled closing. If they can’t reach the employer you supplied them with when you applied for the loan, that could cause a delay or even a denial.
  • You don’t have enough money to cover the closing costs. If you didn’t budget properly and you don’t have enough money to cover closing costs like the home inspection, the title search, or even the HOA dues, you won’t be able to close on your loan.

Inaccuracies on the Closing Disclosure

Three days before your closing, you’ll get the closing disclosure. You’ll want to review this very carefully as soon as possible. Even a small mistake, such as your name being misspelled, could cause problems with your loan. Review the loan amount, the interest rate, your estimated monthly payments, and the cash to close. Make sure the numbers match your loan estimate. If there’s a typo, a misspelling, or something looks off, you’ll want to contact your lender immediately and get the issue resolved before closing day.  Here are some important things to verify on your closing disclosure:

  • The loan terms: The loan terms include details such as the length of time the loan will last if you make just the minimum monthly payment. This is usually 15 to 30 years, depending on what type of loan you choose. This part of the disclosure also details the loan’s interest rate, your monthly payment amount, and any prepayment penalties or balloon payments.
  • Closing costs: The closing costs are all the fees related to the purchase of your home. These fees include everything from the application fee to the underwriting fee, and the amount can be anywhere from two to five percent of the home’s selling price.
  • Total loan cost: The total loan cost is what you’ll pay for your home over the life of your mortgage loan. This total is significantly higher than the purchase price because it includes the interest you’ll pay on your loan.
  • Prepaids: Prepaids are costs associated with your home that need to be paid in advance when getting a loan. Prepaids include costs such as your property taxes, homeowners insurance, and mortgage interest that will accrue between the closing date and the end of the month. The earlier in the month you buy your home, the more you will have to pay in prepaids.
  • Escrow: Escrow is a complex financial arrangement in which a third-party account holds and regulates the payment of the funds required for both you (the buyer) and seller during the closing process. The funds are held in a secure, non-interest-bearing account, overseen by an escrow company to protect them from chargebacks, fraud, and illegal usage.
  • Summaries of transactions: Located on page three of the closing disclosure, the summary of transactions shows a line-by-line comparison of the buyer’s and seller’s transaction details.
  • Loan disclosure: The loan disclosure is a document in which the lender provides all transparent information regarding the terms included in the loan they are offering.
  • Finance charge: The finance charge is the total amount of interest and loan charges you’ll pay on your mortgage if you keep the loan for the entire lease term (until the very last payment is made). The finance charge also includes all pre-paid loan charges.
  • APR: The annual percentage rate, or APR, is the amount of interest you’ll pay every year on your mortgage, averaged over the full term of the loan. The difference between an interest rate and an APR is the interest rate pertains to the current cost of borrowing while the APR uses the interest rate as a starting point and takes into account the lender fees required to finance the loan.

How to Calculate Cash to Close

Since not having enough funds available to close could lead to a delay, here’s how to calculate the amount you’ll need for closing day:

  1. Take the total closing costs and subtract any closing costs that are being rolled into the loan amount.
  2. Take that number and add the down payment amount.
  3. Take the number calculated in step two and subtract the deposit amount you made when the offer was accepted.
  4. Take the number calculated in step three and subtract any seller credits.
  5. Take the number calculated in step four and add or subtract any adjustments, overpayment refunds, and any other credits. This final total will be your cash to close amount.

For peace of mind, have a little extra available, just in case something unexpected comes up and you need additional funds. By properly calculating how much money you’ll need to close and carefully reviewing all your documents, your closing should go relatively smoothly. Soon, you’ll be celebrating your new home. Congratulations!