That Makes Cents: Keeping Up With the Closing Paperwork

That Makes Cents: Keeping Up With the Closing Paperwork
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Buying a home requires a ton of paperwork. From your mortgage lender's forms to the escrow and title company's documents, you can easily find yourself overwhelmed and confused about which forms are what, and who they are for. Understanding these documents and where they fall into place on the closing spectrum will help you keep up with the paperwork.

Mortgage Docs You Must Know

State and federal law requires your mortgage lender to provide you with certain forms upon starting and completing the loan origination process. These forms state all of the terms, provisions and costs associated with your mortgage. Upon entering into escrow for a home purchase, you likely will need to get started or continue with your loan application. If you were pre-approved by your lender before you submitted your offer to purchase, you are continuing with a process that is already underway. Detailed here are the forms you will encounter when getting a mortgage loan.

Loan Estimate

Your lender must provide you with a form entitled "Loan Estimate," a three-page document that itemizes your closing costs. You must receive this within three business days of applying for a mortgage. It includes the following loan details:

  • Estimated interest rate
  • Estimated total monthly payment
  • Estimated closing costs, including loan origination fee, points, property taxes and third-party fees

The fees are all quotes, or estimated amounts. You will not get actual figures until all third-party service providers, such as escrow, title, and insurance companies, provide their fee later in the transaction if you decide to move forward. A loan estimate also tells you whether your mortgage contains any terms that can cause your payment or loan principal to increase, such as an adjustable rate or negative amortization feature. All lenders use a standardized loan estimate with clear language that's meant to be more user-friendly than fee-disclosure forms of the past. You can use the loan estimate to easily compare offers from different lenders when you shop around for a mortgage.

Initial Escrow Statement

Your mortgage may come with an "escrow account" or "impound account" feature. If you have one, your lender must provide you with an "Initial Escrow Statement." Escrow or impound accounts shouldn't be confused with the overall escrow you experience during your purchase transaction. The lender's specific escrow account is for the collection and payment of homeowners insurance premiums and property taxes after your transaction closes. It means that you must pay one-twelfth of your annual taxes and insurance along with your mortgage each month. The lender holds onto these funds in the escrow account and pays them when they come due.

At closing, you will need to deposit a certain amount into the escrow account to establish a reserve, or cushion, for the account. The exact amount is based on the time of year you will close, when the next tax payment is due, and the amount of your annual taxes and insurance premium. The initial escrow statement gives you a list of the deposits into the account, withdrawal or disbursements, and a running balance.

Closing Disclosure

Commonly referred to as the "CD" by your lender or real estate agent, the closing disclosure is a five-page form that you must review and sign before closing. Unlike the loan estimate, these fees are set in stone. If you sign the CD, you agree to all terms and costs disclosed, and your loan documents will reflect these. If you don't approve, then your lender may have to make revisions and re-disclose or will not be able to give you the loan. A mortgage company will not draft your final loan documents or close unless you sign off on the CD.

The lender sends you the CD no later than three days from loan document signing, or "closing," which should give you sufficient time to compare the closing costs with what you were initially quoted on the loan estimate, and to ask your lender any questions. The CD also includes information about:

  • Mortgage loan terms (interest rate, repayment period, loan type)
  • Projected monthly payment (Principal, interest, taxes, insurance)
  • Any parties paying fees (Lender-paid points)
  • Parties receiving fees (Escrow, title, county)

Promissory Note

Once your final loan documents are in and you're sitting with a notary public at the proverbial "closing table," that large stack of paper will include a promissory note. This note is a legal contract that binds you to repay the mortgage loan – basically, a promise to pay or IOU. It includes the following information:

  • Amount you owe
  • Interest rate
  • Payment due dates and late fees
  • Total amount you will pay
  • Length of time for repayment
  • Whether and how the payments can change
  • Payment address

The note remains with the lender until you pay off the loan, then it's marked as paid. It is not recorded with the county, unlike other legal documents.

Security Instruments: Mortgage, Deed of Trust

Although a home loan is commonly referred to as a mortgage, the mortgage is actually a legal document that acts as security for repayment of the loan. It gives the lender the right to take possession of the home should you fail to repay the debt or follow other terms of your loan. Likewise, a deed of trust, also known as a trust deed, acts as the security instrument for loan repayment. It functions much like a mortgage with the following differences:

  • Parties involved: A mortgage is between you and the lender only; a deed of trust is between you, the lender and a third party, or "trustee."
  • Effects of nonpayment: Judicial, or court-ordered foreclosure is required with a mortgage; nonjudicial foreclosure, or "trustee sale," is used when there's a deed of trust.

The security instrument, whether a mortgage or deed, is recorded with the county after closing. You receive the deed to your home when you pay off the loan. The type of instrument you receive depends largely on your state. Most states allow deeds of trust.