In Parts 1 and 2 of this series, I explained how the large
number of documents involved in a mortgage closing can be
divided into 4 groups that should be viewed differently by
borrowers. In this installment I review the categories
I refer to as the “Educational Documents” and the “Future
Use Documents”.
Educational Documents
Educational documents can be read at any time before
closing, the earlier the better.
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. You 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.
Borrowers sometimes write 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 at closing but had not absorbed the
content, probably because it was one of 30 or more documents
they had to sign that day. Borrowers need to understand, as
early in process as possible, that they cannot rely on
anything that loan officers tell them unless it is written
down.
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. You
can learn what you need to know from my article
Rescinding a Mortgage Refinance.
ARM Program Disclosure: This
document has important information about the adjustable rate
mortgage (ARM) that is not in the note or the ARM rider to
the note. This includes the recent value of the ARM index,
the maximum payment over the life of the loan, and the month
in which the maximum payment is reached. It is only
relevant, of course, if you have selected an ARM.
This was a critically important disclosure prior to the
financial crisis because of the proliferation of what were
called “option ARMs” that were very complicated and carried
heavy risks for borrowers. Those types of ARMs are no longer
being written.
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
type of schedule as needed.
Future Use
Documents
Some documents instruct on borrower responsibilities after
closing, and on what is expected to happen during the first
year. They require little attention before closing beyond
recognizing them for what they are. 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 at an
inflated price for which you will be billed.
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.
Having identified the junk documents that do not require
your attention, educational documents that can be read at
your leisure, and future use documents that require only to
be set aside, you have completed the easy part of the
closing process. The difficult part is the transactional
documents that indicate whether or not you are actually
getting the deal you negotiated or were promised.
These are the subject of Part 4 of this series.
