On the day you close the deal on your home purchase, you’ll be required to sign legal documents, known as closing documents, that will finalize your mortgage and establish you as the home’s new owner.
The Consumer Financial Protection Bureau issued a new Closing Disclosure effective Oct. 3, 2015, replacing the previously used HUD-1 Settlement Statement. The Closing Disclosure is easier to understand the information most important to borrowers.
Lenders are required to provide this document to you at least three business days prior to closing.
Review this document carefully and compare its information to the Loan Estimate your lender provided after you completed the loan application.
Key sections to review include:
- closing, transaction and loan information: Make sure the loan type checked off matches the one you agreed to. Also, check the term and product (e.g., fixed-rate or adjustable-rate).
- loan terms and projected payments: This section clearly spells out the loan amount, interest rate, any possible prepayment penalty and estimated monthly payment.
- costs at closing: Closing costs are summarized on page one and detailed on page two. Some of these costs include:
- loan costs, such as points, application fee, underwriting fee and appraisal
- title fees for resolving title issues and for transferring ownership of the home to your name
- other costs, such as transfer taxes, prepaid homeowners insurance and prepaid property taxes
- calculating cash to close: This section compares the final costs, down payment, deposit, etc. to the loan estimate and indicates which, if any, have changed.
- summaries of transactions: Borrower’s and seller’s transactions shown in table form.
- loan disclosures: This section provides information about the loan, including whether there is a demand feature (the ability for the lender to require early repayment of the loan) and information about escrow accounts (accounts established to pay certain property costs).
The new Loan Estimate summarizes the terms and conditions of your loan. It lists the loan amount, interest rate and estimated monthly payment. It also indicates whether or not you have a rate lock (an agreement not to change the interest rate), and if so, when it expires.
If you have an adjustable-rate mortgage (also called a variable-rate mortgage), this document should explain how your interest rate—and thus your payments—may change over time. It also includes information about whether the loan has a penalty for early payment and lists expected closing costs.
You should receive this document three business days after you complete the loan application. Review the Loan Estimate carefully to make sure it reflects the loan terms you agreed to and compare it to the Closing Disclosure you receive prior to closing.
The Promissory Note is a legal IOU that says you agree to repay the lender for the loan. It explains the consequences of failing to make your payments on time. The Promissory Note includes:
- the loan amount
- the loan interest rate
- dates when payments are to be made
- the total amount you’ll pay over the life of the loan
- the length of time for repayment
- whether payment amounts can change, and if so, how
- the address for sending your monthly payments
Deed of Trust
The Deed of Trust explains your responsibilities and rights as a borrower. By signing this document, you give the lender the right to foreclose on your home if you fail to pay your mortgage according to the agreed-upon loan terms. It also includes some of the basic information found in the Promissory Note.
Other types of documents you may encounter at closing include:
- state or locally mandated government documents: These documents fulfill specific government requirements to protect homebuyers, such as information about septic systems on a property.
- lender documents: Your lender may require you to sign an occupancy affidavit affirming that the home is your primary residence and not an investment or rental property.
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