What if We Don't Close by Our Closing Date?

The home buying process ends with a settlement or closing transaction. Since timing is very important to the process, a home buyer can pick the date on which to settle before the lock-in expiration date. If the parties are unable to settle on a specified date, they may need to go through the underwriting process for a second time, which will ultimately delay settlement for at least a few weeks.

Importance of Settlement Dates

Most home buyers typically choose to close toward the last day of the month, since they will need to have less cash for closing. Since a borrower pays interest on a loan for the first full month in advance, she will need to have less upfront cash to cover the first mortgage payment if she closes on the last day of the month. In other words, a borrower who closes on July 31 will have to pay interest for all 31 days in August. However, a borrower who closes on July 1 will have to pay all of July's interest plus all of August's interest (the first full month).

Congressional Enactments

Congress passed the federal Housing and Economic Recovery Act (HERA) of 2008 to supplement the Real Estate Settlement and Procedures Act (RESPA) as part of a nationwide effort to help consumers against deceptive lending practices in the mortgage industry. Both acts require that lenders provide borrowers with written disclosures of their actual loan costs, use settlement statements approved by the U.S. Department of Housing and Urban Development and provide a full itemization of lending costs at least three days before the closing date. RESPA also requires that lenders provide home buyers with a Good Faith Estimate within three days after initially applying for a loan. Furthermore, buyers have a right to review the HUD-1 Settlement Statement one day before their settlement date.

Settlement Statement Revisions

HUD-1 Settlement Statements reflect the actual costs to buyers and sellers incidental to their real estate transaction. The statement provides a detailed itemization for the borrower of all lender costs, real estate commissions, taxes, prepaid interest and settlement costs. Since the HUD-1 must be accurate and based on current information, a lender must send an updated form to reflect changes. In most cases, settlement companies prepare the form using the lender's breakdown of costs, information from tax authorities and commission charges from the real estate agent. Once a home buyer's settlement date changes, the settlement company must provide a newly revised form to include any new charges or deductions.

Consequences of Delayed Settlements

Under HERA and RESPA, lenders have a duty to change and reissue their Truth-in-Lending Disclosures if their rates increase by more than .125 percent. Lenders must send their revised disclosure statement at least three business days before the new closing date. Furthermore, since lenders use loan "lock-in" dates that effectively serve as a promise to borrowers that their rates will be honored until a certain date, home buyers who are not able to close by their original settlement dates risk that their promised interest rates will expire before their new settlement date. If this occurs, home buyers will need to go through the entire underwriting process again.

Considerations

Since real estate laws can frequently change, do not use this information as a substitute for legal advice. Seek advice through an attorney licensed to practice law in your state.

References

• U.S. Department of Housing and Urban Development: Buying Your Home --- Settlement Costs and Helpful Information
• The Federal Reserve Board: All About Lock-Ins
• U.S. Department of Housing and Urban Development: RESPA Statute Real Estate Settlement Procedures Act
• U.S. Department of Housing and Urban Development: Housing and Economic Recovery Act of 2008 FAQ
• Federal Deposit Insurance Corporation: Truth in Lending Act, Part 226

Resources

• U.S. Department of Housing and Urban Development: Buying a Home