In the last post of this series, I mentioned that each loan is different. This is due to the lender having his own papers that he needs signed, but states also develop forms that they want you to have. Currently many states are reviewing what you should be informed of when accepting a loan, and the federal government has their say too. This makes it hard for me to write here it is, this is what is in all of your mortgage forms. I do want to give you a clue, since I know from experience, you will not have enough time to go over all of these documents.
The vast majority of the papers that have been set in front of you are disclosures. These disclosures will be explaining how the lender will handle your loan, who may be helping them administer the loan, what are different features in the loan, and what will happen in case of certain events in the loan (like prepayment or foreclosure). These documents are written by lawyers or legislators who want you to know your rights as well as the lender’s rights, so there is a balance between legal terminology and plain English. Since these disclosures are required by a state government, the lender has to verify that you obtained a copy, so there will be a lot of signing of disclosure acceptance verification forms. Many of these disclosures relate to items you may have already discussed with your lender or you may realize is a consequence of some other aspect of the loan that you are aware of. For example, the lender will have to check your credit history for a loan, so one disclosure will be about how this was done. The lender may have spoken to you about an appraisal or survey, so you will find one disclosure informing you of these services. There will be a disclosure explaining a feature of the loan like the borrower’s insurance. Do you need to read all of these disclosures? If you feel that your lender has been giving you forthright explanations of the terms of your loan, you can read these disclosures after you close on the house. However, if you are feeling lost, and your lender has not guided you enough, then you should read these before you sign.
All documents associated with a loan have to be signed, but not necessarily by everyone involved with accepting the loan for the house. Different states have their own rules, but usually only one person has to sign. Some documents will have to have both signatures. If the loan is only in the name of one person, but there is another involved, the lender may require a document to be signed by this person stating that they are aware of what is occurring.
The next large set of documents will probably be from the lender going into details of the loan, or even details of other types of loans that they offer. Since this comes from the lender, there will be no signature requirements. Since the disclosures above were mandated by a government entity, these documents will deliver the lender’s view of the loan, and how they will handle it. This package is general information, so it could be that much of it is irrelevant to you at this time, so I would say that you can hold off reading this till later.
There are four documents that you should understand, and that you should study. I mentioned in the last post of this series about how to evaluate loans by using two of these forms: HUD-1A and the Good Faith Estimate. The Good Faith Estimate is a two page form going over the likely charges that you will incur when you accept and use the loan to purchase a home. On the top of this estimate will be a section describing what type of loan you have, the interest rate, how much you are borrowing, the dates of the estimate and closing, and the percentages for the fees associated with originating the loan. The sections below this go into items which need to be paid to make the loan happen. An example of one of these items would be an appraisal or an inspection of the property. The next section will have items that need to be paid in advance of the loan, such as insurance or some interest. This is followed by a description of money that the lender will hold in reserve. This can be for property taxes and possibly insurance. The next section will deal with charges connected with the title of your home. The fees here can be a search to see that the title will be your alone, or they could be for those people who worked on the title like an attorney or notary. The next part will state the charge involved with transferring the title to you. You will then be informed of additional charges that may come with the loan, like a pest inspection. The final segment of this form gives an estimate of all these costs combined, so you can settle (obtain) the mortgage.
The HUD-1 or HUD-1A is similar to the Good Faith Estimate. Much of the information given is the same on both forms, but there are two key difference: 1) presentation of the data; and 2) the detail provided. The Good Faith Estimate is easier to read, but neither document is difficult. You need to take the time to learn the terminology, and then these forms can make sense. Go through my term’s list on my website, and you will then have a pretty good understanding of the references being made on these forms. The HUD form uses the government’s general ledger codes for an item; it then describes what the code is ; then there is a column stating the charge that you will have for that item. You will find that there could be a lot of blank spaces where a charge should be listed. That means you will have no expense for that item. When I purchased my home, the lender decided not to have a survey done, since there had been a survey made two years earlier of the property, so consequently I had no charge in that space.
All of these fees can be questioned. Go over each line in these two forms, and see if the fee looks reasonable. Lenders may pad the numbers to make a little more money. Sometimes you may find that lenders you will charge you for the high end of possible fees. Individual inspectors, lawyers, notaries or appraisers can charge vastly different amounts for the same service. The charge depends upon our costs added to our desired profit. You could try to negotiate with your lender on these costs. Ask family or friends how much they paid, or do a search for providers in your area to find out what they charge.
The third document that you should review is the Federal Truth In Lending Disclosure Statement. This is a two page form. Page one has the quick breakdown of your loan, while page two contains an explanation. The top section of this form has the APR, the finance charge, the amount, and the total payments of your mortgage. Compare the APR to the interest rate from the lender. Differences here mean you have extra fees on your mortgage. These fees are detailed on the HUD-1 form. If you cannot discover why there is a difference, then you should ask your lender for an explanation. You can get a great rate from your lender, but it is the APR that you will pay. The remainder of this form goes over your loan basics: payment schedule; security and property insurance; late payments; prepayments; assumption policy; variable rates; required deposit; and some notes about interest charges and what to look for when you do not pay. Most of this should be easily comprehended, but I want to write a bit three items. The assumption policy details if someone can take over your loan from you. Basically, if you decide that you cannot pay anymore, the lender will say if another person can take up where you left off, transferring everything to this new borrower. If the interest rate can change, the lender needs to explain this to you in a disclosure. If the variable rate box has been checked, then you should have this disclosure. If your lender is requiring you to make some type of deposit for the loan, then you will have this box checked.
The last document is one that you may or may not receive, but I would request it if you have not obtained a copy. It is the amortization table. This breaks down your loan payments between what you are paying towards the principle and what you are paying in interest. I suggest you look at it,because it is a good wake up call. When you start paying your mortgage, you will find that most of your payment is going towards the interest. Eventually the balance changes, to where you are paying more towards the principle in the end. Here is the secret to paying off your loan early and for less money: you want to pay more towards the principle each month than the interest. The lender will not let you pick the split between interest and principle, so each month you need to pay something extra towards the principle. The quicker the principle goes down; the less total money that you will pay in the end.
None of these documents are truly hard to understand. Even with some legal jargon and unfamiliar terms, you can take some time to master them. My experience was that so much was going on in my life outside of the loan itself that when presented with so much, I did not know what was important to review. In the next post, which will be on Wednesday, I will go over the documents that you may see during the closing, which have nothing to do with the mortgage.