If you have ever purchased or refinanced real estate, then you have most likely encountered the ‘stack’ of documents and signed them with the assistance of an Escrow Officer or Notary Signing Agent. Today I’m going to begin an overview of what’s in that package and the purpose of the most important documents. I will be focusing on residential purchase or refinance; however, you will see similar documents if your transaction involves commercial property.
A closing package will include Lender documents and Escrow documents. Your lender will create a closing package and submit it to a settlement agent for closing – this is typically a Title Company, Escrow Company, or Attorney. The settlement agent will then add their specific closing documents to complete the package. So let’s begin by looking at some of the most common lender documents.
There will be what we call ‘critical documents’ which includes the Closing Disclosure, Promissory Note, Deed of Trust or Mortgage, and Notice of Right To Cancel.
Closing Disclosure (CD) – The CD is usually 5 pages in length, this document will show you the loan terms including the new loan amount, interest rate, monthly principal and interest, whether your terms are fixed or adjustable and the length of the loan. If you have private mortgage insurance and/or an escrow account for your property taxes and homeowners’ insurance these will also be itemized on the first page. You will be able to see your estimated monthly payment, closing costs involved in your transaction and any funds to or from you as the borrower at closing. On the next pages you will see a breakdown of the closing costs, any payoffs for existing loans, some general information on your loan and contact information for the parties involved in your closing (lender, broker, settlement agent etc.).
Promissory Note– this is your promise to repay the loan. You will see the loan amount, interest rate, your monthly principal and interest as well as the due dates of 1st and last payments. Details of any prepayment penalties and fees incurred if you should default will be disclosed.
Deed of Trust or Mortgage– is the security instrument which protects the note holder (lender) if you should fail to repay the loan as promised. Essentially it is an agreement between the borrower and lender which states that the home buyer will repay the loan and that the mortgage lender will hold the legal title to the property until the loan is fully paid. There are three parties involved in a deed of trust:
Trustor: This is the borrower.
Trustee: This is the third party who will hold the legal title.
Beneficiary: This is the lender.
A Deed of Trust must include several pieces of information to be a legally binding document. These factors include: the original loan amount, a description of the property, names for all parties involved, the inception and maturity date of the loan, fees, what happens in case of default, riders and more, depending on the nature of the sale.
Notice of Right To Cancel – Under federal law, certain loans are given a rescission period. This provides the borrower with 3 business days (excluding Sundays and Federal holidays) during which time they may cancel the loan if they change their mind. It begins the day after the loan documents are signed and ends at midnight on the 3rd business day. There will be instructions on the document explaining how to cancel and the borrower will acknowledge receipt of the notice with their signature and date. Two additional copies will be left with the borrower in the event they choose to cancel.
The Right to Cancel is typically provided when you are refinancing a primary residence or taking out a Home Equity Line of Credit (HELOC). It is not permitted for a home purchase, refinance of investment properties or second homes. Additionally, if you are refinancing with the same lender they may or may not offer you a rescission period.
In addition to these ‘critical documents’, a loan package will frequently include but is not limited to the following documents:
- A copy of your original loan application
- An Errors & Omission/Compliance/Correction Agreement
- A W-9
- A Request for Transcript of Tax Return
- VA/FHA forms as applicable to the type of loan
- Signature & Name Affidavits
- An Occupancy Affidavit
- Owner Affidavit
Each lender is unique in the structure and requirements of their loan packages, and some lenders will allow you to sign some or all of your documents electronically.
In the next installment I will cover the most common escrow documents.
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