Closing is the final step in the FHA home buying process. This is when the buyers sign all remaining paperwork, pay their closing costs and fees, and get the keys to their new house. Hooray!
But what actually happens during the FHA closing? What should a home buyer know about this process, in order to avoid hiccups and obstacles? Here’s an in-depth look at the typical closing process for an FHA loan.
The FHA Closing Process at a Glance
The FHA loan closing process can be held in one of several locations. They usually occur at the title company’s office, a real estate attorney’s office, or your mortgage lender’s office. There could be some other agreed-upon location as well, but those are the three most common locations.
Here’s an overview of what happens during an FHA closing process:
- You (as the home buyer / borrower) will review and sign all of the loan documents, including these. Be sure to ask questions about any documents you don’t understand, and to have them explained clearly, before signing.
- You will be asked to provide proof that you have a homeowners insurance policy in place, such as a homeowners insurance binder.
- You’ll have to provide a cashier’s check to cover your down payment, your closing costs, taxes, and (in some cases) prepaid interest. You should receive a Closing Disclosure document three business days before your FHA closing process. This document will outline your total costs that must be paid when you close.
- Your mortgage lender will release the funds covering your home loan amount to the closing agent.
- In some cases, borrowers are required to set up an escrow account with their lenders. This account allows you to pay your property taxes and homeowners insurance premiums along with your monthly mortgage payment (it’s all rolled into one payment).
Note: While these are the most common steps during the FHA closing process, you might encounter other steps as well. The process varies slightly from one borrower to the next. This is what usually happens during an FHA closing.
A “Good and Marketable” Title
Title research is another important part of this process. The title search usually starts before closing, and the paperwork relating to the search gets finalized and signed the day you close on the loan (in most cases).
In real estate, a title is a legal document that shows ownership of a home. The Department of Housing and Urban Development (HUD) requires mortgage lenders to take certain title-related actions leading up to, and during, the FHA closing process.
For instance, HUD’s Single Family Housing Policy Handbook states:
“The Mortgagee [or mortgage lender] must obtain evidence of prior ownership when a Property was sold within 12 months of the [FHA loan] case number assignment date. The Mortgagee must review the evidence of prior ownership to determine any undisclosed Identity-of-Interest transactions.”
Additionally, the handbook says the Mortgagee “must ensure that all objections to title have been cleared and any discrepancies have been resolved to ensure that the FHA-insured Mortgage is in first lien position.”
In other words, there cannot be any disputes or issues relating to the property title. If there are, the FHA closing process might be delayed until those issues are resolved. HUD refers to this as having a “good and marketable” title.
Settlement Certification at the Closing
Home buyers who use FHA loans must also sign the borrower’s portion of form HUD-92900-A, as well as a Settlement Certification.
The 92900-A is an FHA-specific addendum that goes along with the Uniform Residential Loan Application (described in detail here). It’s a standard document that must be signed by all borrowers on or before closing day. It discloses information about the loan, such as the amount being borrowed and the mortgage insurance premiums.
The Settlement Certification is a document that must be signed by both the home buyer (borrower) and the seller. Among other things, borrowers must certify that they “have no knowledge of any loans that have been or will be made to me (us) or loans that have been or will be assumed by me (us) for purposes of financing this transaction, other than those described in the sales contract.”
The borrowers must also certify that they haven’t been “paid or reimbursed for any of the cash down payment,” and that they will not “receive any payment or reimbursement for … closing costs which have not been previously disclosed in the sales contract … or application for mortgage insurance.”
The Settlement Certification is often signed during the FHA closing process, but it can be handled before that in some cases.
It is your mortgage lender’s responsibility to have you sign these documents. But as a borrower, it’s always good to be proactive. If you’re days away from the closing but haven’t yet signed them, ask your lender about it. Make sure they’ll have these documents ready when you close.
Monthly Escrow Obligations for FHA Borrowers
During your FHA mortgage closing, you might be required to set up an escrow account to pay for certain housing-related costs, such as property taxes and homeowners insurance.
According to HUD Handbook 4000.1, the Mortgagee (or lender) “must collect a monthly amount from the Borrower that will enable it to pay all escrow obligations…”
There must be enough money in the escrow account to cover the following obligations when they become due:
- homeowners (or “hazard”) insurance premiums;
- applicable real estate taxes;
- FHA Mortgage Insurance Premiums (MIP);
- special assessments;
- flood insurance premiums when applicable;
- Ground Rents if applicable; and
- “any item that would create liens on the Property positioned ahead of the FHA-insured Mortgage, other than condominium or Homeowners’ Association (HOA) fees.”
If you have questions about the FHA closing process, or the steps leading up to it, be sure to ask your mortgage lender, escrow company, or title company. Communication and cooperation are the key to a successful closing.