"What in the world am I signing?": An overview of closing documents

     If you have recently been involved in a closing of a new home purchase transaction or have refinanced your existing mortgage, you'll agree that the Paperwork Reduction Act from the Reagan administration has not yet filtered down to the title and lending industries. 

     It is often overwhelming to view the 30 to 40 documents that comprise a real estate closing package. Most o the instruments executed at closing are standardized and regulated by state and federal law; however, a few will very from lender to lender as will as with each loan program.

     The HUD-1 settlement statement is typically presented and reviewed first with both the seller and the borrower.

     This document will list all the credits and debits incurred by each party. It discloses the amount of net proceeds to the seller and the amount of funds due from the buyer which will need to be remitted in the form of a cashier's check or guaranteed funds at closing.

     The federal trust-in-lending disclosure (or TIL) is often the most confusing instrument at closing for a purchaser because it reflects the "annual percentage rate" (APR). Many borrowers are alarmed when they see the APR because it is typically higher than their interest rate or note rate.

     The APR reflects the interest paid over the life of the loan as well as upfront and prepaid closing costs.

     The TIL further states whether the loan is assumable or has a prepayment penalty and recites the monthly payment including the principal, interest and private mortgage insurance, if applicable.

     The note is one of, if not the most, important documents signed by a borrower. It is the personal promise to prepay the loan to the lender or investor. It will reflect the principal amount of the loan, interest rate, monthly payment (principal and interest only), date of the first and last payment, and once again, any prepayment penalty.

     In the event of an adjustable- or variable-rate loan, the note will state the interest rate change dates, indexes and margins for change, and rate caps or limitations. The note will always be signed by those obligated for the repayment of the loan.

     The mortgage is usually the lengthiest document at closing. It is the "security instrument" or the vehicle which collaterals the property as the borrowers are granting an "equitable interest" to the lender.

     The mortgage will reiterate the loan particulars, and always contains the legal description of the property being purchased.

     The standardized language contained in the mortgage explains the responsibilities of the mortgagors (borrowers) to maintain homeowners insurance and keep taxes paid current on the property, as well as occupancy and property condition requirements. 

     After being signed, witnessed and notarized, the mortgage is recorded as public record at the county recorder's office.

     The residential loan application is a verified version of the data taken initially by the loan officer at time of application. It will reflect current and previous employment, addresses, income, as well as balances of the borrower's liabilities and assets. 

     Both real and personal property schedules may be attached, and this form will be essential to an underwriter who issues the actual approval of the borrowers for the loan.

     Some of the other documents signed at the closing include the W-9 to be completed with the borrower's Social Security Number to report the interest paid to the IRS and to allow the lender to issue a Form 1098 for tax purposes. 

    The name affidavit simply asks the buyers to affirm and/or sign all the variations of their name as they appear. A flood zone certification will verify whether  the property is located in a 100-year flood area and required flood insurance.

     The initial escrow account statement depicts anticipated cash flow of the escrow account (taxes, insurance, mortgage or flood insurance) on a monthly basis for the upcoming 12-month period. New regulations require this disbursement schedule to disclose the maximum allowed cushion maintained in the borrower's escrow account.

     Various other certifications, disclosures and affidavits are included in in the closing packages, such as income/employment verifications, hazard substance/toxic material certifications, compliance or errors and omission agreements that stipulate the buyer's and seller's cooperation in the event any documents contained simple clerical errors that necessitate resigning. 

     If the loan program is either an FHA or VA program, there will be several additional papers to sign, such as a lead-based paint disclosure, the collection policies of a VA-guaranteed loan, and written assurances that the buyer has not borrowed any additional funds as a source of down payment.

     Your closing officer will also review the mortgage location survey as a sketch of the property boundaries, how the house and improvements are situated on the lot, as well as any easements, right-of-ways, side yards and building setback lines of record.

     Additionally, a brochure of disclaimer will be presented regarding the importance of owner's title insurance, giving the purchaser an option to acquire his or her own coverage at the closing table for any title defects unbeknownst of public record.

     The sellers involved in a real estate transaction, though a very integral part of the proceedings, will have fewer documents to sign than their purchasers. 

     In addition to the HUD-1 settlement statement, they will be presented various affidavits stating that they have not placed any additional mortgages or encumbrances against the property, nor have they incurred any work done by contractors or material suppliers that could potentially go unpaid and cause a mechanic's lien to be filed and attached to the real estate.

     Additionally, they will be asked to sign either a Form 1099 or certification for purposes of reporting the sale of real estate to the IRS, dependent upon whether or not they have resided in the property as their principal residence for a specified period of time.

     Ultimately and most importantly, the sellers will execute a deed of conveyance which will transfer their ownership interest to the purchaser and be recorded of public record.

     Keep in mind that your title officer will review these and other documents with you at the closing table, which should take, on the average, 30 to 45 minutes allotted in his or her schedule. 

     You may request a copy package in advance when available for perusal, and you will traditionally be provided a copy of your documents to take home for your records.

     Title professionals strive to make your closing as smooth and pleasurable as possible while executing these instruments, and at the same time, be attentive to the important requirements of the lender involved in the transaction.

     Be sure to consult both your Realtor and loan officer's expertise in preparing for your closing.

Authored by Christina Cartwright. Taken from the Dayton Daily News' Real Estate Plus section, Sunday, April 18, 1999.


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