ocuments can be intimidating even for the most
seasoned real estate professional. But things are even worse
today because most Title Companies offer their clients the
convenience of having a mobile notary bring the loan documents
to their homes to get signed. That means the Escrow Officer is
nowhere to be seen and most notaries don’t know enough to
properly answer peoples’ questions. Without any way of getting
clear answers, the signing process has become even more
frightening than before.
As usual, a little knowledge goes a long way to reduce the fear
factor. Certain forms are more important that others and an
educated borrower can quickly establish if the documents meet
their expectations or not. Unfortunately, it’s not uncommon for
Mortgage Brokers to change little (and sometimes not so little)
things right at the end of the process and many people end up
with surprises when it’s clearly too late to make changes.
So let’s look at the specifics. There are two forms in
California loan packages that are more important than all the
others; the Estimated Closing Statement and the Note itself. If
everything’s right on those two forms, the rest of the package
will probably be fine as well.
The Estimated Closing Statement is usually at the top of the
stack. It’s compiled by the Title Company and has their contact
information on the top of the page. It’s usually on legal-sized
paper and details all the costs and fees associated with the
transaction. In most cases, there will be two columns going
down the right-hand side of the page; one for debits and the
other for credits.
You can think of the far right-hand column as the ’source of
funds’ and the left column as the ‘use of funds’. So your new
loan amounts will be listed on the right-hand side, along with
any deposits or credits issued along the way. On the left-hand
side, it will show either the old loans being paid off (for a
refinance) or the money going to the seller of the property
(for purchase transactions).
The left-hand column will also list all the fees of the
transaction. These fees should closely correspond to the fees
listed on the original Good Faith Estimate provided by your
Mortgage Broker. You should immediately look at these fees to
see if there’s something there you didn’t expect. Keep in mind
that this list is the most recent and most reliable estimation
of the final closing figures, and there are often unforeseen
details that only pop up at this final stage. Some of those
details come up through the title report. If there are
delinquent property taxes on record, for example, they’ll have
to get paid. There may be another lien on the property or the
next tax installment might be due. These examples are
unavoidable but there are others that may have been added at
the last minute to boost profitability for the Mortgage Broker
or the Title Company. These are the things you need to be wary
of.
The Estimated Closing Statement will usually be broken down
into two main sections; lender fees and title & escrow fees.
All of the fees charged by OR through the lender will be listed
in the first section. This is where you want to look out for the
agreed upon origination fees and any points you decided to
purchase. You also want to look out for inflated processing
fees or other unexpected “junk fees” like administration fees
or application fees that you didn’t agree to at the beginning.
This first section will also list the prepaid items being
collected by the lender. Examples of these items would include
prepaid interest as well as reserve funds for an impound
account. An impound account is where your property taxes and
insurance are collected WITH your monthly mortgage payment. The
advantage is that you don’t have any unexpected bills during the
year. But the downside is that you have to bring in some extra
funds to the closing to setup the “reserve account”. This
reserve account ensures there will always be enough money
available to pay these bills at the time they are due, plus
some extra just in case.
These reserves can add up to a significant chunk of change so
the decision to have impounds can significantly affect the
amount of cash you have to bring to the Title Company. Also, if
you requested NO impounds and the Mortgage Broker put them in
anyway, you’ll see it right away because the prepaid items will
be much higher than previously disclosed. Keep in mind that some
A-paper lenders offer modest pricing improvements for loans WITH
impounds so some Mortgage Brokers try to sneak them in as a way
of improving the loan’s profitability.
The second section details all the fees paid to OR through the
Title or Escrow Company. These would include the title
insurance, escrow fees, recording, courier, endorsements,
notary and any liens or delinquent taxes listed on the title
report. Although the signing is often too late for negotiation,
both the title insurance AND the escrow fee may have some
flexibility so it never hurts to request a discount.
At the bottom of the Estimated Closing Statement, it should
tell you exactly how much you still owe to close escrow or how
much you can expect back after the transaction closes. Although
this figure will rarely be identical to the Good Faith Estimate,
it’s proximity to the original figure is an extremely good gauge
of you Mortgage Broker’s competence and experience. If it’s way
off, you might want to think about using someone else.
The second important form in the package is the Note, which
will usually be located about half way through the stack,
either in front of or behind the Deed of Trust. The Deed is
pretty easy to find because it’s a 14 or 15-page document with
“page 1 of 15″, “page 2 of 15″ and so on at the bottom of each
page, so you can flip through the stack and find it quickly.
The Note is usually near by.
The Note is generally a 4 or 5-page document and details the
loan amount, lender, interest rate, date of your first payment,
length of time the interest rate is fixed for, any interest-only
options and the prepayment penalty stipulations. You will have
already seen some of this on the Estimated Closing Statement
but you should definitely look at (1) the interest rate - make
absolutely sure that’s correct, (2) the length of the fixed
period - that’s important and (3) the prepayment penalty - that
will be on page 2 or 3. Many Notes have addendums, particularly
for prepayment penalties, so make sure to look past the Note to
see if there’s an addendum.
If everything on the Note looks good and the Estimated Closing
Statement is also as you expected, the rest of the package
should be fine. Once you’ve gone through those two documents,
the heavy lifting is over. But there are still a number of
things you should know while signing the rest of the documents.
First, the Note describes everything to do with the loan, but
it hardly mentions the property at all. The Deed of Trust deals
with the property and your obligation to keep it insured and in
livable condition, etc. Deeds of Trust are all standardized
these days so if there’s anything unusual, it will be detailed
in a separate document called a “rider”, similar to an
addendum. You can have riders for all kinds of things,
including an adjustable interest rate, a balloon payment, a
condominium, a rental property, a trust, a planned unit
development (or PUD) or a second home. Don’t be alarmed by
riders. They do it this way to simplify the Deed and make it
easier to understand. Just know that the Deed is almost
entirely boiler plate copy - very standard stuff. In fact, you
can see what’s filled in because it’s usually in a different
font. Everything else is standard.
There will be a document in the package called the
Truth-in-Lending Disclosure. This is the most regulated
document in the entire industry and is required for all
lenders. Along with a variety of other items, the
Truth-in-Lending disclosure tells you the APR, and everybody
has to calculate the APR the same way. Unfortunately, there are
so many loan options these days that it’s hard to put 2 programs
together in a head-to-head comparison, but it’s still good to
know what this form attempts to do.
When you get a loan, you normally pay some money - closing
costs - to complete the deal. So let’s say you’re getting a
$300K loan and you’re paying $5K in fees directly related to
the origination of that loan. So you pay $5K in and get $300K
out. $5K in, $300K out. So it’s really the same as paying
nothing and getting $295K out. Same thing. If you pay $5K in
and then get $300K out, it’s the same as getting $295K with no
fees. Well, the APR takes that into consideration and
calculates an interest rate that wraps in all these fees as if
they were already included, making the APR generally HIGHER
than the rate specified on the Note.
For Intermediate ARMs, the APR also takes the adjustable
portion of the loan into consideration, including the index and
the margin. It provides a weighted average interest rate for the
entire 30-year period based on the initial fixed period of 5, 7
or 10 years and then the remaining years at the adjustable
equivalent, assuming interest rates remain exactly as they are
today. Although this attempts to provide borrowers with more
complete information, it actually obscures the APR and makes it
less relevant considering the objectives for the loan. For
example, most people who get a 5/1 ARM (fixed for 5 years) have
no intention of keeping the loan longer than the fixed period,
making the index plus margin completely irrelevant.
This is particularly dangerous for Subprime loans where the
index plus margin might be 2 or even 3 percentage points higher
than the starting rate, making the APR MUCH higher than it would
otherwise be. If you only plan to keep the mortgage for the
fixed period, don’t spend too much time on the APR. It’ll be a
high number that will probably frustrate and confuse you.
Rather, spend more time on the starting interest rate and the
closing costs required to get that loan.
Overall, you can expect your loan package to have two sets of
instructions; one from the lender and the other from escrow.
You can expect all the documents we’ve discussed as well as a
long list of individual affidavits including a Signature Name
Affidavit, a Compliance Agreement, an Occupancy & Financial
Status Affidavit and various disclosures describing your rights
in the transaction.
Keep in mind that any refinance transaction in California
provides borrowers 3 business days to review all the
documentation and cancel the transaction if necessary. This
time is provided for your protection. Take the opportunity to
review all the documents. I know it probably all seems
confusing or even boring, but you’ll learn a lot about the
process by reading the documents involved. I know I did when I
still had my signing business, and now I’m doing loans full
time. You never know where this stuff leads.
About The Author: Patrick Schwerdtfeger is a fully licensed
Mortgage Banker located in Northern California. He is the
creator of “Beyond the Rate” (http://www.beyondtherate.com), a
detailed and candid podcast series providing essential
backstage information for California homeowners.
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