Loan Closing

Loan closing is the final step towards settling a loan taken from a financial institution. It is also referred to as settlement, as this is the stage where the loan funds are distributed and the loan becomes final. The borrower does not contribute to the loan after this stage. 

Closing the loan signifies the stopping of any interest, dues, charges or repayments associated with the loan. It signifies that all defaults have been cleared and that all periodic payments have been completed. It marks the end of the borrower's liability and indicates the transfer of complete ownership, depending on the type of borrowing made. 

Loan closing is the final step towards settling or paying off a loan. This can refer to home loans, mortgages and personal loans. In the case of a personal loan, the borrower is free from debt, and repayment liability ceases to exist. In the case of mortgages, after settlement, there is the transfer of ownership along with the settlement.  

On closure of a property mortgage, the borrower will have to sign mortgage loan documents and the deed of the arrangement to the property will be executed. This means that the funds will be collected and distributed. The closing agent will then give the borrower the necessary instruments to bestow the legal ownership of the property. Since the mortgage loan settlement is a legal process, it requires the execution of steps by the law of the land. This means the requirements and procedures often vary in accordance with state laws. In the case of personal loans, the process is simpler as there is no involvement of ownership transfer.

The closure of a loan may involve realtors, insurance companies, escrow companies, attorneys of borrowers and sellers and lenders. All of the involved people sit together and sign documents to finalize the process. The costs associated with the execution of all of these are termed closing costs. It is paid by the seller and the borrower accordingly. The home loan closing costs are due on the day of closing of the loan (when the property is transferred).

Given below are some of the steps involved in closing loans :

#1 - Signing of loans 

The loan signing is the stage where all necessary paperwork, including the agreeing terms of the mortgage, is signed. This may include promissory notes, trust deeds and loan agreements. They reveal the terms of the loan, such as interest rates, consequences of defaulting payments and other terms and conditions.  

#2 - Loan funding 

The stage involved transferring funds to an escrow account. 

#3 - Recording 

The county recorder's office records the grant deed and mortgage documents to affirm legal ownership. 

#4 - Disbursement 

The parties involved in the settlement receive their respective payments. In the case of a mortgage, the leys will be transferred. 

Let us look at some of the examples to understand the concept better.

Example #1

Imagine Dan is a salaried employee who bought a house with a mortgage. The price of the mortgage was $100000, and he recently got his salary increase and decided to close the loan. He then submits the loan closing application to initiate the closing procedures.  

The final settlement was made, and he met his realtor and the attorneys to sign various documents. After that, the funds were transferred to an escrow account to be held until the transactions were finalized. The transfer of ownership then happened, and it was later recorded at the county recorder's office to confirm the legal ownership. After completing all formalities, Dan received the key as a mark of the closure. 

Example #2 - A Real-Life Example 

Epic River, a lending service platform, has decided to integrate with Finastra's (financial software application provider) Laserpro loan documentation system. This decision was taken to streamline credit unions' and community banks' loan closing procedures.  The partnership estimates automation of the transfer of borrower information to ensure accuracy and loan documentation. This is expected to reduce manual data entry and minimize errors. This is because manual entries can also be time-consuming and have limited operational flexibility. The integration is expected to bring solutions to all of these problems. 

Below are some of the points that highlight the importance of loan closing:

#1 - Clear ownership 

Only after signing the documents, transferring the key and settling does the borrower become the clear owner of the house or property. Once ownership is transferred, there will be almost zero interference in the handling of property. This helps the borrowers use the property rightfully. 

#2 - Compliance 

Closing loans involves removing liabilities and recognising income. This has to be done properly, as it could be seen as evading taxes.  

#3 - Improvements in credit score 

Closing loans can improve an individual's credit score. If paid in a timely manner, this could help them borrow further at low interest.  

#4 - Meeting of financial goals 

Individuals would have borrowed the sum for the fulfillment of certain goals. The closure marks the achievement of it in most cases.  

#5 - Mental peace  

Property lien removal, no-due certificates and document retrievals can happen only when the loans are settled. This brings mental peace to the borrowers.