Image courtesy of Flickr, Theen Moy
Here we cover the most common home loan documents and their purpose.
Obtaining a home loan is a multi-faceted process that requires the careful review of many documents. These documents can become confusing unless you have a general understanding of each one and their purpose.
Careful review of each loan document can assist you in making informed decisions and help you identify errors that may impact your home loan. Read on for an overview of the most important and most common documents you'll encounter while obtaining a mortgage.
This list of documents is organized in the order that you receive them after submitting a home loan application.
The Good Faith Estimate is a document sent to you within three business days of completing a loan application. It's required by the Real Estate Settlement Procedures Act (RESPA) and summarizes your loan terms while disclosing an estimate of all fees to expect at closing, including but not limited to origination charges, discount points, property taxes, appraisal, title insurance and credit report fees.
The purpose of the Good Faith Estimate is to help you evaluate the fees of different loan options in order to make an informed decision. The document includes a spreadsheet where you can compare estimates from different lenders side by side. Some closing expenses controlled by lenders can vary significantly and you can reference the difference in fees during negotiations while shopping around for the best deal.
Like the GFE, The Truth-In-Lending Disclosure document should be given to you within three business days of applying for a loan. This document discloses the overall home loan terms which is useful when comparing various home financing options.
The disclosure details the amount financed, number of payments, finance charges and annual percentage rate (APR) associated with a loan. The Truth-In-Lending Disclosure differs from the GFE because it shows the loan expense throughout its entire lifetime. In contrast, the GFE focuses on an estimate of charges that you'll incur for attaining the loan.
The HUD-1 is a standard real estate settlement form that is mandatory throughout the United States. It shows an entire itemized listing of the charges and credits within a real estate transaction. This document is prepared by your settlement/escrow agent at closing. Typically you receive the HUD-1 just a few days before settlement. Be sure to make the time to review each charge for accuracy as mistakes do occur.
The HUD-1 is broken into the following sections:
Keep this document filed away safely for future reference when filing your income taxes for quick reference to potential homeowner tax deductions.
A loan note is an agreement that outlines the terms of your home loan. This document is used as your written promise that you'll repay a loan and interest within a specific timeframe. The note includes the amount owed, interest rate, due date, date of first payment, where to make payments and fees associated with late payments.
A mortgage or deed of trust is a signed document that puts your property up as collateral for a home loan. It's purpose is to protect the bank's interests should you stop making payments. You sign these documents permitting the lender (or trustee) to sell your home if you don't meet the terms of your loan agreement. Whether you sign a mortgage or deed of trust depends on the state where you're transaction takes place.
A mortgage is the most commonly used document when a obtaining a home loan. Two parties sign the mortgage, the borrower and lender. Alternatively, when a deed of trust is used it's a transaction between you, your lender and a third-party trustee which is typically a title company. In a deed of trust you purchase the home and make payments to the bank while the trustee acts as a representative of the bank in case of foreclosure.
A major difference between a mortgage and a deed of trust is how the foreclosure process is handled. State law determines the procedure for foreclosures. Generally, most deeds of trust include a power-of-sale clause allowing a trustee to expedite the process of foreclosure on behalf of the lender. Mortgage foreclosures typically require judicial proceedings before they can be carried out.
Finally, the deed is a signed document that transfers ownership of real estate property between two parties. Deeds include the names of the sellers, the buyers and a description of the real estate property. For a property transfer to be valid it must be in writing and both parties must be competent, meaning that both parties must meet certain minimum requirements of age and soundness of mind. The seller turns the deed over during settlement to legally transfer ownership of their property to a new owner.
One important thing to note about loan documents is that outside of the federally regulated documents, other additional documents may vary from state to state. You may be given more documents than the ones listed above. If you're unsure of any form you receive ask for a detailed description of its purpose.
Additionally, some states have different requirements for home loan practices. One major home loan aspect which varies (that we've previously discussed) is the use of mortgages and deeds of trust. Contact your local or state government to find out which loan security vehicle is permitted within your state.
Although the preparers of your loan documents strive for accuracy, errors do occur. Since each document has a specific purpose that binds you to a legal agreement, be sure to perform your own due diligence by comparing and reviewing each document you receive for accuracy.
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