You are ready to close on your loan – it’s an exciting time! As you sit down at the closing table, you may wonder how the money distribution works. Who pays out the funds from the loan? How do they receive the money?
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Keep reading to find out.
Who Distributes the Money?
First, let’s clear the air. The bank or lender that wrote and funded your loan isn’t the entity distributing the funds. Instead, there’s a third party called the closing agent. The closing agent typically works for the title company. If not, it could be a representative from your attorney. The agent receives the money, typically as a wire, from the bank and handles the disbursement at the closing.
Receiving the Funds
First, the closing agent must receive the funds. As we discussed above, the bank typically wires in the loan amount. But, buyers often have to bring funds to the table too. Buyers must bring a cashier’s check in order for the closing agent to accept it. You can’t bring cash or a personal check. You can also opt to have the funds wired, but you must arrange this ahead of time.
The closing agent or title company will have the appropriate amount of funds to disburse to the appropriate parties. They use your cashier’s check or wired funds to reimburse what they had to put into the transaction. Everyone is aware of the amount of money needed at least three business days before the closing when the Closing Disclosure gets released.
Disbursing the Funds
In general, closing agents pay the sellers’ mortgage company receives first. This payment is crucial in order for the property to exchange hands. The seller’s mortgage lien must be cleared from the property. After the first and any subsequent liens are cleared, the closing agent can disburse the remaining funds.
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After the seller’s mortgage company, the closing agent pays:
- Third parties – There could be numerous third parties involved in the transaction, but in general, there are appraiser, attorney, and title company fees. The closing agent will also pay any necessary government fees, such as tax service or recording fees.
- Real estate agent – The closing agent will pay the real estate agent from the proceeds of the sale. This money doesn’t come from your loan directly. It comes off the top of the seller’s proceeds. Realtors charge up to 5% of the sales price of the home. The seller and realtor agree on this amount before working together. The closing agent disburses the funds for the seller at the closing so the seller doesn’t have to come up with the funds himself.
- Escrow account funds – If you are setting up an escrow account (most loans do), you’ll need funds to set it up. At a minimum, lenders require 2 months of taxes and insurance to set up the account. Depending on the due date of the taxes and insurance, though, the closing agent may need more funds to ensure there are enough funds to cover the costs.
- Paying off any liens – If there are any other liens on the property aside from the seller’s mortgage, those most be paid at the closing too. Property liens transfer with the property, not the person, so it’s often a requirement as a part of funds’ disbursement.
The final funds remaining are for the seller. After all third parties, mortgage companies, and other creditors receive their funds, the seller gets the proceeds. Sellers know before the closing how much they will receive, just as buyers know how much they must bring to the closing. The Closing Disclosure shows both sides of the transaction.
If you have any questions about money disbursement at a real estate closing, make sure to ask the closing agent before the actual closing. The three business days before the closing that you have the Closing Disclosure is meant to give you time to digest the figures and ask any questions you may have.