The Mortgage Loan Process: From Pre-Closing to Closing

This document is a follow-up to The Mortgage Loan Process: From Lender Contact To Loan Approval. It is provided to borrowers who have responded positively to our email letter asking if they have been cleared to close.  

Phase 6: Pre-Closing Preparation  

What to Expect: At the closing, you will receive 30 or more documents! If you read each one with care and raise questions about what you don’t understand, the process would take an entire day or longer. In fact, all those involved, perhaps including you, want to be out within 1 or 2 hours, and want to view the closing as largely ceremonial.  

While an abbreviated process works well for the lender, who controls document content and has been through hundreds of closings, it often doesn’t work for the borrower – unless the borrower prepares for it.   

How to Prepare: Documents can be placed in 4 groups based on usefulness to the borrower, and on when the borrower needs to consult the documents, as summarized in the table below.   

Type of Document

Document Characteristic

Preparation Required

Junk Docs

Of no value to borrowers

Identify in order to sign quickly

Educational

Borrower should digest this information

Read carefully well before closing

Transactional (see Phase 7)

Contains critical loan information

Requires detailed check the day before closing

Future Use

Borrower may need this information after closing

Place in folder for easy retrieval after closing

 Weeding Out Junk Documents: About half of the documents you receive can be  signed quickly and pushed aside because they impart no useful information to you. Most are merely acknowledgements that a disclosure that the law requires lenders to provide has in fact been provided. Here is the professor’s junk list.  

Servicing Disclosure: You acknowledge being told that the lender who made your loan may not service it. 

Name Affidavit: You acknowledge that you are who you say you are. 

Mortgage/Deed of Trust: This is a long document that details the terms of the lien that the lender has on your property, and your obligations in connection with the lien, such as maintaining your homeowners insurance and paying the property taxes.  

ARM Rider: Repeats information in the note. 

Appraisal Report Disclosure: This document acknowledges receipt of the appraisal report.

Attorney Selection Notice: This document acknowledges that you have been advised of your right to have an attorney at the closing. 

Authorization to Release Information: This document authorizes the lender to obtain information from third parties, such as banks and employers, for the purpose of verifying the information you have provided.  

Consumer Privacy Policy Notice: This document performs much the same function, indicating the types of information about you the lender can disclose, and to whom it may be disclosed. 

Itemization of the Amount Financed: This document provides a breakdown of a useless number on the Truth in Lending form, which you can safely ignore.  

Affidavit Regarding Good Faith Estimate (GFE): This document requires you to acknowledge that the lender provided you with the GFE within the time period, and under the circumstances stipulated by the law. 

Fair Credit Reporting Act Notice: This document acknowledges that if you are delinquent or default on your payment, the lender will report it to a credit bureau.  

Equal Credit Opportunity Act Notice: This document requires you to acknowledge that you have been informed a) that the lender cannot discriminate against you on the basis of race, color, religion, and so on, and b) where to go to report violations. 

Tangible Net Benefit Worksheet: On a refinance where the lender is required by state law to assure that the borrower receives a net tangible benefit from the transaction, or elects to provide such assurance even if not required, the borrower must acknowledge receipt of the document attesting to the benefit. 

IRS Forms W-9 and 4506-T: These documents certify that you are a taxpayer, and authorize the lender to look at your tax returns. 

Escrow Account Waiver: In this document, borrowers who have paid lenders to waive the escrow requirement, acknowledge responsibility for making the payments themselves, and the consequences if they don’t. 

Read Educational Documents Now: Some documents in the closing package convey important information about the transaction that borrowers should know before starting the process. The educational documents cited below should be read well in advance of closing – for example, right now.  

Borrower’s Closing Affidavit: This document requires the borrower to acknowledge in writing some critical pieces of information upon which the lender depended in approving and pricing the loan. This includes the borrower’s intentions regarding occupancy of the property, the financial and employment information included in the application, and the condition of the property. (In some document packages, the borrower’s commitment regarding occupancy is broken out into a separate Occupancy Affidavit.) On a purchase transaction, the borrower must assume full responsibility for any contractual loose ends involving the seller.  

Borrowers are also required to declare that they have not taken on any new debt since they applied, and their employment status has not changed.  

If the borrower has been 100% forthright in providing information on the application and other documents submitted to the lender, if the borrower’s financial status has not changed, and if all issues connected to the sale transaction have been resolved, the borrower can sign this document without hesitation. 

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. You cannot come back later and claim that “The loan officer told me…” If you cannot find what the loan officer told you in the documents, it has no force. 

Notice of Right to Cancel: If you are refinancing, you have three business days from closing to cancel the deal and get all your monies back. This is a very important right that protects you against any skullduggery by the lender, but only if you are aware of it beforehand and are prepared to use it if necessary. That is why this document is classified as “educational.” Borrowers who do not become aware of this right until the closing rarely exercise it or use it to their advantage. 

Note: If you do cancel, make sure your letter is registered and that you also inform the closing agent orally. This ignores the possibility that the loan funds are disbursed before your letter arrives, which would be a nightmare for you. Do not sign the Election Not to Cancel until the 3-day window has expired.  

ARM Program Disclosure: This document has important information about the ARM that is not in the note or the ARM rider to the note. This includes the recent value of the ATM index, the maximum payment over the life of the loan, and the month in which the maximum payment is reached.  

Amortization Schedule: Some document packages include a schedule showing the payment and loan balance every month over the life of your loan. It is based on the assumption that the borrower never makes an extra payment or fails to make the scheduled payment. On-line calculators including mine allow you to update this schedule as needed. 

Set Aside Documents You May Need After Closing.  Some documents instruct on borrower responsibilities after closing, and on what is expected to happen during the first year. Keep them handy. 

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, you may receive another instruction that replaces the one you received at closing. This will happen if your loan is sold before the first payment is due, which often happens.  

Escrow Account Statement: This document describes the responsibilities of the borrower in connection with the escrow account established for the payment of taxes and insurance.  

Initial Escrow Account Disclosure Statement: This document shows expected inflows to and outflows from the escrow account during the first year of the loan.  

Tax and Hazard Insurance Record: This document provides information on your property taxes and homeowners insurance. It is filled out by the settlement agent, not you, but you should retain it in your loan folder. 

Correction Agreement: This document obliges you to assist the lender in recovering any lost documents, pay any fees that the lender failed to collect at closing, and be available for a quality control audit after closing. For good reason, these provisions stick in the craw of many borrowers, but bite your lip and sign it.  

Binding Arbitration Agreement: This document obliges you to accept binding arbitration to settle any future disputes between you and the lender, and between you and any third parties involved in the loan process. This agreement remains in force even after the loan is paid off. 

Future Flood Insurance Authorization: This document obliges you to purchase flood insurance if Government places your house on a flood plain after the closing. You must comply or the lender will buy it for you and pay an inflated price with your money. This is called “forced place insurance.” 

Private Mortgage Insurance (PMI) Disclosure: If PMI is required on your loan and you pay a monthly premium, Federal law grants you the right to terminate the policy under certain conditions. The conditions are spelled out in this document. You will want to terminate your PMI as soon as you meet the requirements, but that will take at least 2 years.  

Title Insurance Policy: As part of your mortgage transaction, you purchased title insurance to protect your lender. If at some future time you refinance your mortgage, you will probably be eligible for a reissue discount on the new mortgage, provided you can document your existing policy.  Make sure you receive a copy of the policy at closing, and place it in a secure place for easy retrieval. 

Phase 7: One Day Before Closing You Check the Deal

What to Expect: You should expect to receive all your documents no less than 24 hours before the closing, because the lender is legally obliged to do so. Be sure to let the lender know that you expect that obligation to be met. 

How to Prepare:  The focus of your day-before-closing examination should be three “transactional documents” which contain the loan prices and other critical features of your loan. You want to assure yourself that the deal you are getting is the one you negotiated to receive. If you find something amiss, you can either call the closing agent or loan officer immediately to get the issue clarified, or you can flag it for clarification the following day at closing. 

Settlement Statement (HUD-1): The deal to which you agreed is shown on the last version of the Good Faith Estimate (GFE) you received from the lender. Add that GFE to the other documents you receive the day before closing. (There may or may not be a copy of it in the closing package.).  

The deal you are getting is shown on the HUD-1 in your closing package. Relevant items on the HUD-1 show the corresponding entry on the GFE for easy comparison. For example, total fees due the lender are shown as Item A on page 2 of the GFE, and as line 803 on the HUD 1. They should be exactly the same.  

Truth in Lending (TIL): The TIL is replete with garbage disclosures that should be ignored, but it also has important disclosures about your loan, which are all on page 1.

* Note the “Late Charge”. 

*The “Interest Rate and Payment Summary” should correspond to “Summary of Your Loan” on the GFE. 

* Under “Prepayment”, if the first box is checked, you will pay a penalty if you pay off early. 

* If “Demand” is checked, the loan probably has a balloon payment, meaning that the remaining loan balance must be paid in full at some date. The TIL does not indicate the date, but the GFE does – it is the last item under “Summary of Your Loan”. If “Demand” is checked but there is no balloon shown on the GFE, you must find the entry in the note to see the conditions (if any) under which the lender can call the loan. If the right to call the loan is unconditional, demand that it be removed. 

Fixed/Adjustable Rate Note: This important document spells out the terms of your loan, which should correspond exactly with those in the HUD1, the TIL, and the last GFE. Check the Interest rate and initial payment, and if it is an ARM, check the period until the first rate adjustment.  

If your loan carries private mortgage insurance, the premiums should be checked. On monthly premium plans, the premium is included in the monthly payment shown on page 1 of the GFE, and again in item 6 on page 2. Upfront premiums are shown either in item 6 or item 9. On the HUD1, monthly premiums are shown on line 802, and upfront premiums on line 1003.  

Item 303 on page 1 of the HUD-1 shows the total cash you need to close. If there are any issues connected to the amount, this is the time to resolve them. If there are none, get a certified check for the amount shown and bring it to closing. 

Phase 8: The Closing

 The last phase is when the deal is done: the contracts and final versions of all required documents are signed, and the disbursement of funds is authorized.  

What to Expect: If you have done all your homework, the closing should be a breeze. You will sign many documents that you have already examined. The closing agent will focus on The HUD-1 Settlement Statement, which you have already checked against the GFE, the note and the Truth in Lending form.   

How to Prepare: See Phases 6 and 7. Bring a copy of your drivers license to closing to verify your ID, and the certified check you drew the previous day. Personal checks are not accepted except for small amounts. 

Bargaining Power at the 11th Hour:  The resolution of any conflicts that arise at the closing will be heavily influenced by the bargaining power of the two parties. On a refinance, the borrower holds all the cards because he has the option of closing and then rescinding within the following three business days, with the lender obliged to return all fees paid by the borrower to the lender or to third parties. (Not all lenders abide by this rule, but the CNLs on the professor’s site do) If you rescind, the loan becomes a cost to the lender rather than a source of revenue. The right of rescission does not apply if your property is an investment rather than the home in which you live.  For the details, read Rescinding a Mortgage Refinance. 

The right of rescission on a refinance does have a small downside, which is that you must wait for the three day period to expire before the loan is actually funded. In an emergency, it may be possible to waive the right to rescind and fund immediately, but don’t count on the lender being willing to do this. 

If you are purchasing a house, there is no right to rescind the loan, which when exercised would prevent the purchase.  You have little bargaining power in connection with any issues arising in connection with the loan.  

However, most last minute issues that arise will probably be in connection with the purchase rather than the loan, and your bargaining power is about the same as that of the seller. Both of you want the deal to go down, but if an issue arises that must be negotiated, both want to give the impression that they are willing to walk away. For this reason, it is inadvisable to schedule your move into the purchased home on the day you close. If your moving van is parked in the closing agent’s parking lot, your bargaining power with the seller is nil.

 Good luck!

 

 

 

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