Almost every homebuyer using a mortgage will come across these documents before receiving keys to their new home. Here's what they are and what they mean.
First-time homebuyers might find the stack of papers they need to sign to be daunting, but once you know a bit about the mortgage process, it’s easy to understand. An attentive loan officer will also be of first importance to you.
The following is an overview of the documents you are likely to see at a residential closing, presented in the order they appear in the standard mortgage process. While these documents may relate to different steps in the process, you will sign many of them at the closing, which is the last step.
Step 1: Application
Most home purchases begin with an application for a mortgage loan. One document will likely appear at the closing.
Conventional loan programs use a standard form created by Fannie Mae and Freddie Mac, known as the Uniform Residential Loan Application. The FHA, VA, and USDA loan programs use this application, but may also require an addendum.
You will provide a great deal of information to the lender when you apply for the loan, including personally identifying information like your date of birth, documentation of your income and debts, and other factors that lenders need to know in order to make a decision. Lenders often present a final version of the loan application for the borrower to sign at closing.
Step 2: Consultation and Prequalification
Once you have submitted your loan application, you begin the process of prequalifying for a mortgage loan. A mortgage advisor can work with you to find options for your particular situation. Two important documents come out of this stage of the mortgage process.
Sellers and their real estate agents want some assurance that anyone expressing serious interest in buying a property has the means to do so. A pre-approval letter demonstrates that you have a certain amount of financing already lined up.
Good Faith Estimate
The Truth-in-Lending Act requires lenders to provide information about how much a loan will cost you in terms of fees, interest, and other costs. The Good Faith Estimate (GFE), or Loan Estimate, provides you with an overview of the likely costs associated with your future loan.
This document covers everything from the lender’s service charges to the monthly payment of principal, interest, and escrow. It allows you to compare different loans to determine which would be best for you.
Step 3: Home Shopping
This step covers the process of looking for a home with a real estate agent, making an offer, and negotiating a sales price. You may sign several documents during this stage, such as a sales contract, but these usually do not show up at closing.
Step 4: Processing
Once you have a contract on a home, your lender will get to work on putting your loan together. During this stage, the lender will generate a document that you can expect to see at the closing.
Truth-in-Lending Disclosure Statement
Your lender will provide you with a Closing Disclosure statement that shows the loan terms, the fees you must pay at closing for the loan, and a breakdown of your monthly payment. The terms of the loan must match those given to you in the GFE.
Steps 5 and 6: Appraisal and Underwriting
During these stages of the mortgage process, the lender may have a new appraisal conducted to confirm the home’s value. It will conduct a thorough review of every part of the loan application and all supporting documents before giving final approval. Two key documents for your loan will emerge from this step.
This document is probably the most important of all of the mortgage documents since it creates the legal relationship between you and the lender. A promissory note is a contract in which you pledge to repay the full amount that the lender has given you to buy the house, along with interest.
Deed of Trust
Of roughly equal importance to the promissory note, the deed of trust gives the lender a security interest in the home you are buying. To put that another way, the deed of trust pledges the home as collateral for the loan. It gives the lender the right to foreclose on the property if you default on your mortgage payments.
Step 7: Closing
The final stage of the mortgage process brings everyone together to complete the deal. You might all meet at a title company office, or you and the seller might come in at different times to sign paperwork. Either way, the closing ends with the money for the home in escrow and you holding the key to the front door.
Image by trenttsd from Flickr [Creative Commons]
The title company, or whoever else might be acting as the escrow agent, will prepare a document that shows what has happened to all of the money involved in the sale. A form known as the HUD-1 Settlement Statement used to be the standard for this purpose, but it is not as common as it once was. Both the buyer and the seller must sign this document.
The closing disclosure shows the total amount of money owed by you, minus the amount of the loan. It shows how all of the expenses and disbursements associated with the sale have been or will be paid, including loan origination fees, real estate agent commissions, escrow fees, title insurance, and payment of the seller’s mortgage. It also shows how property taxes for the current year will be split between the buyer and the seller. Finally, it shows how much money will go to the seller.
The deed conveys title to the home from the seller to you, the buyer. You probably won’t have to sign the deed, but from your point of view, it might be the most important document.
Affidavits, Declarations, and Agreements
The lender and/or the title company may want you to sign certain documents stating that you have provided accurate information and that you have received various required disclosures. You may also have to sign documents that function as separate contracts, such as a tax proration agreement if you and the seller are splitting the year’s property taxes.
Learn about what your mortgage process may look like.
Borrowing money to buy a home might seem like an overwhelming process, but it doesn’t have to be! We’re here to answer your questions. Check out our mortgage process page, or fill out a few quick questions and we’ll get back to you as soon as possible!