The day has finally arrived to close your mortgage loan and settle on your new property. At this time, you must be prepared to review and sign a lot of important closing documents.
Typically, there are several copies of each loan closing document ― so that the buyer, seller, and mortgage lender have executed copies signed by all parties. Although the loan settlement process can vary from lender to lender (and state to state), there are certain mortgage closing documents that you should be familiar with.
Before we get into mortgage closing documents, you should first understand the basic paperwork that is associated with a mortgage loan:
Mortgage
A “mortgage” is a contractual agreement between a borrower and a lender for the purpose of buying real estate. More specifically, a mortgage is a written document verifying that the lender has a lien on a property as security for the repayment of a debt. A “lien” is basically a legal claim to property which is imposed by a contract (the mortgage is that contract). The lender retains a lien on the property until the debt is fully repaid, at which point the lien is transferred to the borrower (a.k.a. “homeowner”). A lien also represents the lender’s right to claim the borrower’s property if the borrower defaults on the loan.
Deed of Trust
A “deed of trust” is used in place of a mortgage in some states (including California and Texas). A deed of trust, like a mortgage document, is a contract that evidences property as security for a debt. Unlike mortgages, deeds of trust contain 3 parties: the trustor (borrower), the beneficiary (lender), and the trustee (an outside company). By signing a deed of trust, the borrower transfers the legal title for the property to the trustee until the loan balance is paid. If the borrower defaults in the payment of the debt, the trustee may sell the property without legal proceedings.
Note
The “note” (also called a “mortgage note” or “promissory note”) is a written promise to repay a specific sum of money, plus interest, at a certain rate for a set period of time. The note certifies that the buyer is aware of the debt and promises to pay according to the agreed terms of the mortgage loan. It also establishes any penalty fees and steps the mortgage lender may take if the buyer fails to make mortgage payments.
The following information describes the documents that are specifically associated with mortgage loan closing:
Good Faith Estimate (GFE)
The Good Faith Estimate, or GFE, is an important mortgage closing document because it enables the buyer to have a pretty accurate understanding of the overall mortgage closing costs, as well as the monthly payments on the mortgage loan. On January 1, 2010, the HUD (U.S. Department of Housing and Urban Development) introduced a standardized form for all lenders to use, ensuring that borrowers are aware of the components of their loan ― including the interest rate, term length, penalties, fees and all other expenses. Because each lender is required to use the same 3-page GFE form, buyers can easily compare products from multiple lenders to find the best offer. [See: How to Find the Best Mortgage Lender]
Truth-in-Lending Statement
The Truth-in-Lending Statement is a very important mortgage closing document because it discloses the terms of the loan ― including the mortgage rate, the loan amount, the annual percentage rate (APR), and the total payments required. If no changes were made to the loan terms since the time of loan application, this form is not required.
HUD-1 Settlement Statement
The HUD-1 Settlement Statement is a form that shows the buyer/borrower the total amount of money that must be paid at mortgage loan closing. The borrower may request the HUD-1 Settlement Statement from the lender 1 day before the actual settlement, to review in case there are items in question. This document must be signed by both the buyer and the seller at mortgage closing time.
Initial Escrow Statement
The Initial Escrow Statement lists the estimated property taxes, homeowners insurance premiums, and other expenses to be paid from the escrow account during the first 12 months of the loan. This mortgage closing document establishes the escrow payment amount, as well as any extra funds required to be used as a cushion.
Mortgage Servicing Disclosure Statement
The Mortgage Servicing Disclosure Statement informs the borrower whether their lender intends to service the loan themselves, or sell/transfer the loan to another lender (who may become the new mortgage holder).
Deed
The Deed is an important mortgage closing document that transfers the title of real property from the seller to the buyer. The deed includes a detailed description of the property being transferred, and must be signed according to the state laws where the property is located. The deed is mailed to the buyer after the mortgage closing agent officially records the deed at the local government office.