Key Takeaways
- All prior-to-funding conditions must be cleared before the loan can be funded at closing
- The closing agent (escrow officer, settlement agent, or attorney) facilitates the transaction but represents neither party
- Funding occurs when the lender releases loan proceeds to the closing agent for disbursement
- The right of rescission gives borrowers 3 business days to cancel certain refinance and home equity transactions
- The rescission period for covered transactions is 3 business days, with Sundays counted but not federal holidays
- Post-closing obligations include recording documents, delivering final title policy, and investor delivery requirements
Closing Procedures
The closing (also called settlement or consummation) is the final step in the mortgage origination process. Understanding closing procedures ensures smooth transactions and satisfied borrowers.
Pre-Closing Conditions
Before closing can occur, all prior-to-funding (PTF) conditions must be satisfied. These conditions ensure the loan meets underwriting requirements.
Common Pre-Closing Conditions
| Category | Typical Conditions |
|---|---|
| Income | Final pay stub, employment verification within 10 days |
| Assets | Updated bank statement, source of large deposit |
| Credit | Credit supplement, paid collections, judgment satisfaction |
| Property | Appraisal repairs completed, re-inspection, termite clearance |
| Title | Liens paid off, subordination agreement signed |
| Insurance | Proof of homeowner's insurance, flood insurance if required |
| Legal | Trust certification, divorce decree, power of attorney |
Clearing to Close (CTC)
When all conditions are satisfied, the file receives Clear to Close (CTC) status:
- Underwriter reviews all condition documentation
- Underwriter signs off that all conditions are met
- File is approved for closing document preparation
- Closing agent notified to schedule closing
Closing Agent Roles
Different parties may serve as the closing agent depending on the state and transaction type.
Who Can Act as Closing Agent
| Party | Common In |
|---|---|
| Title Company | Most states |
| Escrow Company | Western states (CA, WA, OR) |
| Real Estate Attorney | Eastern states (NY, NJ, GA) |
| Lender's Closing Department | Some table-funded transactions |
Closing Agent Responsibilities
The closing agent is a neutral third party who:
- Prepares closing documents based on lender instructions
- Schedules the closing with all parties
- Explains documents to borrowers (but cannot give legal advice)
- Collects signatures on all required documents
- Collects funds from borrower and lender
- Disburses funds to appropriate parties (seller, payoffs, fees)
- Records documents with the county recorder
- Issues title policy after recording (if title company)
What Closing Agents Do NOT Do
Closing agents are neutral and should not:
- Provide legal advice
- Represent either party's interests
- Negotiate terms between parties
- Make decisions on behalf of borrowers or lenders
Key Closing Documents
At closing, borrowers sign numerous documents. Key documents include:
Loan Documents
| Document | Purpose |
|---|---|
| Promissory Note | Borrower's promise to repay the loan |
| Deed of Trust/Mortgage | Security instrument pledging property as collateral |
| Closing Disclosure | Final loan terms and costs |
| Initial Escrow Disclosure | Explains escrow account for taxes and insurance |
| Right of Rescission Notice | Informs borrower of right to cancel (if applicable) |
Title Documents
| Document | Purpose |
|---|---|
| Warranty Deed | Transfers ownership from seller to buyer (purchase) |
| Title Affidavit | Seller certifies no undisclosed liens |
| Subordination Agreement | Junior lien agrees to remain junior (refinance) |
Other Documents
| Document | Purpose |
|---|---|
| Signature/Name Affidavit | Confirms borrower's identity and name variations |
| Occupancy Affidavit | Confirms borrower will occupy property |
| Compliance Agreement | Borrower agrees to correct document errors |
| 4506-C | Authorizes lender to obtain tax transcripts |
Funding Procedures
Funding is when the lender releases loan proceeds to the closing agent for disbursement.
Funding Methods
| Method | Description |
|---|---|
| Wire Transfer | Most common for large transactions |
| Warehouse Line Draw | For mortgage bankers using warehouse credit lines |
| Table Funding | Funds provided at closing table by third party |
Funding Conditions
Before releasing funds, lenders typically require:
- All closing documents executed correctly
- Closing agent confirmation of document receipt
- Verbal verification of employment completed
- All outstanding conditions satisfied
- Title clearance confirmed
Dry Closing vs. Wet Closing
| Type | Description | Common In |
|---|---|---|
| Wet Closing | Funds disbursed at closing table | Most states |
| Dry Closing | Documents signed but funds released later | NY, some escrow states |
In dry closing states, there may be a gap between document signing and funding/recording.
Right of Rescission
The right of rescission is a consumer protection that allows borrowers to cancel certain mortgage transactions within a specified period.
When Rescission Applies
The right of rescission applies to:
- Refinances on primary residences
- Home equity loans on primary residences
- HELOCs on primary residences
When Rescission Does NOT Apply
No rescission right for:
- Purchase transactions (buying a home)
- Investment property loans
- Second home loans
- Construction-only loans
Rescission Period
Critical timing: Borrowers have 3 business days to rescind after the later of:
- Consummation (closing)
- Delivery of material disclosures
- Delivery of rescission notice
Business day definition for rescission: All calendar days except Sundays and federal holidays.
Calculating the Rescission Period
Example 1: Loan closes on Monday
- Day 1: Tuesday
- Day 2: Wednesday
- Day 3: Thursday
- Rescission expires at midnight Thursday
- Funds can be disbursed Friday
Example 2: Loan closes on Friday
- Day 1: Saturday (counts!)
- Day 2: Monday
- Day 3: Tuesday
- Rescission expires at midnight Tuesday
- Funds can be disbursed Wednesday
Example 3: Loan closes on Wednesday before Thanksgiving
- Thursday = Thanksgiving (federal holiday - doesn't count)
- Day 1: Friday
- Day 2: Saturday
- Day 3: Monday
- Rescission expires at midnight Monday
How to Rescind
To rescind, the borrower must:
- Notify the lender in writing before midnight on the third business day
- Send notice to address provided in rescission disclosure
- Any written form of notice is acceptable (letter, fax, email)
Effect of Rescission
If borrower rescinds:
- Security interest is voided
- Lender has 20 days to return all fees paid
- Borrower returns loan proceeds to lender
- Transaction is completely unwound
Waiving Rescission
Borrowers can waive rescission only if:
- There is a bona fide personal financial emergency
- Borrower provides written statement describing the emergency
- Statement is signed and dated by all borrowers
- Waiver cannot be provided on a preprinted form
Post-Closing Obligations
After closing, several tasks must be completed to finalize the transaction.
Recording
The closing agent must record documents with the county recorder:
| Document | Purpose |
|---|---|
| Deed of Trust/Mortgage | Creates public record of lender's lien |
| Warranty Deed | Transfers ownership (purchase) |
| Subordination Agreement | Documents lien priority |
Recording typically occurs within 1-3 business days after funding.
Title Policy Delivery
After recording, the title company:
- Issues the final Lender's Title Policy
- Issues the Owner's Title Policy (if purchased)
- Provides copies to all parties
Investor Delivery
For loans sold to investors (Fannie Mae, Freddie Mac, etc.):
| Requirement | Timeline |
|---|---|
| Note delivery | Within 3-5 days of closing |
| Trailing documents | Within 120 days |
| Final title policy | Within 120 days |
| Recorded documents | Within 180 days |
Post-Closing Review
Lenders conduct post-closing quality control:
- Verify all documents signed correctly
- Confirm all conditions satisfied
- Review for compliance issues
- Prepare file for investor delivery
Common Closing Issues
Document Errors
If errors are discovered:
- Minor errors may be corrected with a correction agreement
- Signature errors may require affidavit of signature
- Major errors may require document re-execution
Funding Delays
Common causes of funding delays:
- Missing conditions
- VOE issues (employer not responding)
- Title problems discovered
- Borrower dispute with seller
Failed Funding
If funding fails after closing:
- Transaction may need to be rescinded
- Documents may need to be re-executed
- New disclosures may be required
- Rate lock may need to be extended
Exam Tips for Closing Procedures
For the SAFE MLO Test, remember:
- Clear to Close (CTC) means all conditions are satisfied
- Closing agent is neutral and doesn't represent either party
- Promissory note = promise to repay; Deed of Trust = security instrument
- Right of rescission = 3 business days on refinances/HELOCs on primary residence
- No rescission on purchase transactions or investment properties
- Business days for rescission = all days except Sundays and federal holidays
- Rescission can only be waived for bona fide personal financial emergency
- Recording creates public record of the lien
- Loan funds are disbursed after rescission period expires (for covered transactions)
For which transaction type does the borrower have a 3-day right of rescission?
How are business days counted for the rescission period?
What document creates the lender's security interest in the property?
Under what circumstance can a borrower waive the right of rescission?