On closing day, there will be a lot of documents to sign, so it is important to understand what information is contained in each document.
Throughout the underwriting process, your lender is required to keep you updated on the loan estimate. The estimate may change slightly through the underwriting process until numbers are produced on the final Closing Disclosure. Make sure that you carefully read and understand what you are signing and that the document is accurate and is what you have agreed to.
The Closing Disclosure overviews all of the important numbers of the real estate transaction includes:
- Term of the loan
- Interest Rate amount
- Cash to close
- Principal and Interest amount of payment
- Escrow disbursements for year one
- Closing costs
- Cost over the full life of the loan
ALTA Settlement Statement
The ALTA (American Land Title Association) Settlement Statement is produced by a law office or title company and is a bird’s eye view of the entire transaction. This was formerly called the HUD-1 settlement statement.
Both buyer and seller sign this document. It shows the same information as the Closing Disclosure, but also includes the seller’s numbers. The Settlement Statement displays the calculations of credits & debits involved in the transaction such as tax prorations and fuel credits for fuel in the tank.
First Payment Letter
The First Payment Letter overviews:
- the date of first payment
- who it’s payable to
- the interest rate
- the amounts of total principal
- interest amounts
If applicable, the letter will include escrow amounts set aside monthly for taxes, insurance, and private mortgage insurance.
The Promissory Note is your agreement with the bank. It confirms the property address, interest rate, first payment, maturity date (last payment), grace period, and prepayment clause.
The Promissory Note should also contain a Borrower’s Right to Prepay Clause that explains how you have the right to prepay at any time and without penalty.
Mortgage/Deed of Trust
The document that secures the lien against the property and indicates the borrower’s name on the title is called a Mortgage in some states, or Deed of Trust in others. The mortgage or deed of trust gives the lender the right to foreclose on the property if you fail to make monthly payments or break the contractual agreement.
It is usually the longest document in the closing package, ranging from 10 to 17 pages. The only page that is specific to you is the first page which states:
- who is on the mortgage
- the loan amount
- the maturity date
The rest of the document contains standard legal clauses.
Deed and Title
A deed is an official written document declaring a person’s legal ownership of a property, and transfers ownership from the seller to the buyer. The deed is the vehicle for transferring a title and is not the title itself.
The most important document the seller will be signing at closing is the deed, because it assigns the property from seller to buyer. Within the deed is the legal description of the property. The deed is recorded with the town, city or county registry overseeing the property location and subsequently mailed to the new owner.
A title is a document that shows legal ownership to a property. It is important that a title search has been performed by a title company to ensure that there are no liens, back taxes, or issues with the title that would prevent the sale of the asset or have financial repercussions for the buyer down the road.
Title insurance is typically required by the lender for when you have an outstanding mortgage, but can be optional for the borrower. Title Insurance will be offered to you by the attorney or title company. The intention of title insurance is to cover any risk of title defects such as financial loss or legal expenses. This is a one time fee.
Other Important Documents
The Amortization Schedule illustrates the amount of principal and the amount of interest which makes up the monthly payment. Amortization is paying off a debt over time with equal monthly payments. Part of the payment is applied to paying down the principal, and part of the payment is applied to paying the interest on the debt.
As you can see from the amortization example above, the monthly payment stays the same but:
- the amount that goes to pay down the principal goes up over 13 payments from $344.43 to $359.36
- the amount that goes towards paying interest goes down over 13 payments from $885.42 to $870.49
The amortization schedule includes:
- Loan amount
- Annual interest rate
- Loan period
- Number of payments per year
- Start date of the loan
- Scheduled payment amount
- Scheduled number of payments
The Escrow Statement outlines the forecasted next year of escrow disbursements. If using an escrow account to pay taxes, insurance, or private mortgage insurance, you will be provided an Escrow Balance Statement.
For example, if your homeowner’s insurance is $1,800 a year, then every month $150 will be placed into the escrow account.
Property taxes are calculated the same way, and the total amount will be held in escrow. The escrow amount is added to the principal and interest payment.
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