(Second of Two)
As discussed in the first part of this article, step one in preparing for the mortgage deluge that borrowers face at the closing is to identify the junk documents that can be signed quickly and set aside. That cuts the document pile roughly in half.
Educational Documents
Step two is to read the “educational documents” that contain information that borrowers should know before starting the mortgage process. In doing the research for these articles, I was pleasantly surprised to find that some documents, while clearly designed to comply with the law and/or limit lender liability, also contained answers to many questions that I continually receive from borrowers. These documents should be read well in advance of closing.
Borrower’s Closing Affidavit: This document requires the borrower to acknowledge in writing some critical pieces of information upon which the lender depended in approving and pricing the loan. This includes the borrower’s intentions regarding occupancy of the property, the financial and employment information included in the application, and the condition of the property. (In some document packages, the borrower’s commitment regarding occupancy is broken out into a separate Occupancy Affidavit.) On a purchase transaction, the borrower must assume full responsibility for any contractual loose ends involving the seller. Borrowers are also required to declare that they have not taken on any new debt since they applied, and their employment status has not changed.
If the borrower has been 100% forthright in providing information on the application and other documents submitted to the lender, if the borrower’s financial status has not changed, and if all issues connected to the sale transaction have been resolved, the borrower can sign this document without hesitation.
Notice of No Oral Agreements: This document requires the borrower to acknowledge that the deal with the lender is wholly governed by the written agreements. The borrower cannot come back later and claim that “The loan officer told me…” If what the loan officer said is not in the documents, it has no force.
Signing this agreement at closing has not prevented borrowers from writing me after closing (sometimes years after closing) to complain that the loan they had was not the one their loan officer had told them they had. They had signed the notice but had not absorbed the content, probably because it was one of 30 or more documents they had to sign that day. That is why educational documents should be read well before the closing. Indeed, this one ought to be digested before dealing with a loan officer.
Notice of Right to Cancel: If you are refinancing, you have three business days from closing to cancel the deal and get all your monies back. This is a very important right that protects you against any skullduggery by the lender, but only if you are aware of it beforehand and are prepared to use it if necessary. Borrowers who do not become aware of this right until the closing rarely exercise it or use it to their advantage.
Note: If you do cancel, make sure your letter is registered and that you also inform the closing agent orally. This eliminates the possibility that the loan funds are disbursed before your letter arrives, which would be a nightmare for you.
ARM Program Disclosure: This document has important information about the ARM that is not in the note or the ARM rider to the note. This includes the recent value of the ATM index, the maximum payment over the life of the loan, and the month in which the maximum payment is reached.
Amortization Schedule: Some document packages include a schedule showing the payment and loan balance every month over the life of your loan. It is based on the assumption that the borrower never makes an extra payment or fails to make the scheduled payment. On-line calculators including mine allow you to update this schedule as needed.
Documents You May Need After Closing
Some documents instruct on borrower responsibilities after closing, and on what is expected to happen during the first year. You should keep them in a separate file folder for easy retrieval.
First Payment Letter: This document sets out the amount and composition of the initial monthly payment, where and how to send it, when it must be received, and so on. But be aware that before the first payment is due, you may receive another instruction that replaces the one you received at closing. This will happen if your loan is sold before the first payment is due, which often happens.
Escrow Account Statement: This document describes the responsibilities of the borrower in connection with the escrow account established for the payment of taxes and insurance.
Initial Escrow Account Disclosure Statement: This document shows expected inflows to and outflows from the escrow account during the first year of the loan.
Tax and Hazard Insurance Record: This document provides information on your property taxes and homeowners insurance. It is filled out by the settlement agent, not you, but you should retain it in your loan folder.
Correction Agreement: This document obliges you to assist the lender in recovering any lost documents, pay any fees that the lender failed to collect at closing, and be available for a quality control audit after closing. For good reason, these provisions stick in the craw of many borrowers, but bite your lip and sign it.
Binding Arbitration Agreement: This document obliges you to accept binding arbitration to settle any future disputes between you and the lender, and between you and any third parties involved in the loan process. This agreement remains in force even after the loan is paid off.
Future Flood Insurance Authorization: This document obliges you to purchase flood insurance if Government places your house on a flood plain after the closing. You must comply or the lender will buy it for you and pay an inflated price with your money. This is called “forced place insurance.”
Private Mortgage Insurance (PMI) Disclosure: If PMI is required on your loan and you pay a monthly premium, Federal law grants you the right to terminate the policy under certain conditions. The conditions are spelled out in this document. You will want to terminate your PMI as soon as you meet the requirements, but that will take at least 2 years.
Checking the Deal In Transactional Documents the Day Before Closing
You should expect to receive all your documents no less than 24 hours before the closing, because the lender is legally obliged to do so. Be sure to let the lender know that you expect that obligation to be met.
The focus of your day-before-closing examination should be three “transactional documents” which contain the loan prices and other critical features of your loan. You want to assure yourself that the deal you are getting is the one you negotiated to receive. If you find something amiss, you can either call the closing agent or loan officer immediately to get the issue clarified, or you can flag it for clarification the following day at closing.
Settlement Statement (HUD-1): The deal to which you agreed is shown on the last version of the Good Faith Estimate (GFE) you received from the lender. Add that GFE to the other documents you receive the day before closing. (There may or may not be a copy of it in the closing package.).
The deal you are getting is shown on the HUD-1 in your closing package. Relevant items on the HUD-1 show the corresponding entry on the GFE for easy comparison. For example, total fees due the lender are shown as Item A on page 2 of the GFE, and as line 803 on the HUD 1. They should be exactly the same.
Truth in Lending (TIL): The TIL is replete with garbage disclosures that should be ignored, but it also has important disclosures about your loan, which are all on page 1.
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The “Interest Rate and Payment Summary” should correspond to “Summary of Your Loan” on the GFE.
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Note the “Late Charge”.
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Under “Prepayment”, if the first box is checked, you will pay a penalty if you pay off early.
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If “Demand” is checked, the loan probably has a balloon payment, meaning that the remaining loan balance must be paid in full at some date. The TIL does not indicate the date, but the GFE does – it is the last item under “Summary of Your Loan”. If “Demand” is checked but there is no balloon shown on the GFE, you must find the entry in the note to see the conditions (if any) under which the lender can call the loan. If the right to call the loan is unconditional, demand that it be removed.
Fixed/Adjustable Rate Note: This important document spells out the terms of your loan, which should correspond exactly with those in the HUD1, the TIL, and the last GFE. Check the Interest rate and initial payment, and if it is an ARM, check the period until the first rate adjustment.
If your loan carries private mortgage insurance, the premiums should be checked. On monthly premium plans, the premium is included in the monthly payment shown on page 1 of the GFE, and again in item 6 on page 2. Upfront premiums are shown either in item 6 or item 9. On the HUD1, monthly premiums are shown on line 802, and upfront premiums on line 1003.
Item 303 on page 1 of the HUD-1 shows the total cash you need to close. If there are any issues connected to the amount, this is the time to resolve them. If there are none, get a certified check for the amount shown and bring it to closing.
If you do the homework on loan documents outlined in this and the first article, the actual closing should be a quick and tension-free ceremony.