(First of 2)
At the end of a mortgage loan process that takes weeks and sometimes months, all the pieces come together at a “closing”. The major objective of a closing is to sign contracts and disburse the loan funds,
But that objective in itself would require only a few documents, not the 30 or more that borrowers must deal with in a typical closing. The barrage of documents often makes the closing process a frightening ordeal for borrowers.
Most of the additional documents are either required by the Federal or a state Government, or by lenders protecting themselves against legal liabilities imposed on them by Government. Disclosures mandated by Government often lead to new lender disclosures where the borrower acknowledges that the mandated disclosure was received.
If a borrower at closing read every document and raised questions about everything they didn’t understand, the process would take days to complete. In practice, everybody involved, usually including the borrower, wants to be out within 1 or 2 hours and want to view the closing as largely ceremonial.
That works for the lender, but very often it doesn’t work for the borrower. My colleague Jack Pritchard, who has managed many hundreds of closings and provided advice and counsel on these articles, tells me that very few borrowers are adequately prepared for the closing. While they have the legal right to receive all the documents no less than 24 hours before the closing, few do. Without guidance on what to look for, it wouldn’t do them much good in any case. The purpose of these articles is to provide such guidance.
The Document Package
A document package is a set of documents applicable to an individual transaction. Document packages differ for conforming, non-conforming, FHA and VA loans. Different types of mortgage require different documents, and the same is true of different types of property. Individual states have their own document requirements, and the same is true of many individual lenders. This means that the number of different document packages number in the millions.
To meet the need to generate the right package of documents for every transaction, an industry of mortgage document specialists has arisen. I used one such firm in researching these articles, paying it $25 for every document package I downloaded.
While no one document package is likely to contain exactly the same documents as any other, many documents including those required by the Federal Government appear in all packages, and others appear in many. The closing documents described below appear in all or most document packages.
Categorizing Documents
Documents can be placed in 4 groups based on their usefulness to the borrower, and on when the borrower should consult the documents, as summarized in the table below.
|
Type of Document |
Document Characteristic |
Preparation Required |
|
Junk |
Of no value to borrowers |
Identify in order to sign quickly |
|
Educational |
Borrower should digest this information |
Read carefully well before closing |
|
Transactional |
Contains critical loan information |
Requires detailed check the day before closing |
|
Future Use |
Borrower may need this information after closing |
Place in folder for easy retrieval after closing |
Weeding Out Junk Documents:
About half of the documents you receive can be signed quickly and pushed aside because they impart no useful information to you. Most are merely acknowledgements that a disclosure that the law requires lenders to provide has in fact been provided. Here is my junk list:
Servicing Disclosure: You acknowledge being told that the lender who made your loan may not service it.
Name Affidavit: You acknowledge that you are who you say you are.
Mortgage/Deed of Trust: This is a long document that details the terms of the lien that the lender has on your property, and your obligations in connection with the lien, such as maintaining your homeowners insurance and paying the property taxes.
ARM Rider: Repeats information in the note.
Appraisal Report Disclosure: This document acknowledges receipt of the appraisal report.
Attorney Selection Notice: This document acknowledges that you have been advised of your right to have an attorney at the closing.
Authorization to Release Information: This document authorizes the lender to obtain information from third parties, such as banks and employers, for the purpose of verifying the information you have provided.
Consumer Privacy Policy Notice: This document performs much the same function, indicating the types of information about you the lender can disclose, and to whom it may be disclosed.
Itemization of the Amount Financed: This document provides a breakdown of a useless number on the Truth in Lending form, which you can safely ignore.
Affidavit Regarding Good Faith Estimate (GFE): This document requires you to acknowledge that the lender provided you with the GFE within the time period, and under the circumstances stipulated by the law.
Fair Credit Reporting Act Notice: This document acknowledges that if you are delinquent or default on your payment, the lender will report it to a credit bureau.
Equal Credit Opportunity Act Notice: This document requires you to acknowledge that you have been informed a) that the lender cannot discriminate against you on the basis of race, color, religion, and so on, and b) where to go to report violations.
Tangible Net Benefit Worksheet: On a refinance where the lender is required by state law to assure that the borrower receives a net tangible benefit from the transaction, or elects to provide such assurance even if not required, the borrower must acknowledge receipt of the document attesting to the benefit.
IRS Forms W-9 and 4506-T: These documents certify that you are a taxpayer, and authorize the lender to look at your tax returns.
Escrow Account Waiver: In this document, borrowers who have paid lenders to waive the escrow requirement, acknowledge responsibility for making the payments themselves, and the consequences if they don’t.