"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
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
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,
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
After being signed, witnessed and
notarized, the mortgage is recorded as public record at the county
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
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
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
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.
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
Be sure to consult both
your Realtor and loan officer's expertise in preparing for your
Authored by Christina Cartwright. Taken from
the Dayton Daily News' Real Estate Plus section, Sunday, April