After a home buyer has identified which documents can be signed quickly and set aside at closing, the second step is to read the “educational documents” that contain information that borrowers should know before starting the mortgage process.
Many of these “educational documents” not only comply with the law and/or limit lender liability, but also contain answers to many home buyers’ questions. These documents should be read well in advance of closing.
Notice of no oral agreements: This document requires the borrower to acknowledge that the deal with the lender is wholly governed by the written agreements. The borrower cannot come back later and claim that "The loan officer told me ..." If what the loan officer said is not in the documents, it has no force.
Signing this agreement at closing has not prevented borrowers from complaining that the loan they had was not the one their loan officer had told them they had. They had signed the notice but had not absorbed the content, probably because it was one of 30 or more documents they had to sign that day. That is why educational documents should be read well before the closing. Indeed, this one ought to be digested before dealing with a loan officer.
Notice of right to cancel: Borrowers are refinancing, have three business days from closing to cancel the deal and get all monies back. This is a very important right that protects the borrower against any dishonesty by the lender, but only if the borrower is aware of it beforehand and is prepared to use it if necessary. Borrowers who do not become aware of this right until the closing rarely exercise it or use it to their advantage.
Note: Buyers who cancel should make sure the letter is registered and that the buyer also informs the closing agent orally. This eliminates the possibility that the loan funds are disbursed before the letter arrives.
Documents borrowers may need after closing
Some documents instruct on borrower responsibilities after closing, and on what is expected to happen during the first year. Borrowers should keep them in a separate file folder for easy retrieval.
First payment letter: This document sets out the amount and composition of the initial monthly payment, where and how to send it, when it must be received, and so on. But be aware that before the first payment is due, borrowers may receive another instruction that replaces the one they received at closing. This will happen if the loan is sold before the first payment is due, which often happens.
Private mortgage insurance (PMI) disclosure: If PMI is required on the loan and the borrower pays a monthly premium, federal law grants the borrower the right to terminate the policy under certain conditions. The conditions are spelled out in this document. Borrowers will want to terminate the PMI as soon as the requirements are met.
Checking the deal in transactional documents on the day before closing
The major priority for borrowers ought to be that the deal received is the one promised. To do that, borrowers need three "transactional documents" that contain the loan prices and other critical features of the loan. These are the Settlement Statement (HUD-1), Truth in Lending (TIL), and Fixed/Adjustable Rate Note. Borrowers also should bring the last version of the Good Faith Estimate (GFE) that they received because there may or may not be a copy of it in the closing package.
The lender is legally obliged to provide all documents no less than 24 hours before the closing. The borrowers should let the lender know that they expect that obligation to be met. If something is amiss, the borrowers can either call the closing agent or loan officer immediately to get the issue clarified, or flag it for clarification the following day.
For borrowers who do the homework on loan documents outlined in this article, the actual closing should be a quick and tension-free ceremony.
The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.
