Legal-Ease

Legal-Ease: Making Sense of Your Legal Document

You will receive a series of forms at different times as you shop for a mortgage loan. The information is critical to understanding your loan, but can be confusing. This section explains some of the most important information.

Good Faith Estimate  •  HUD Special Info Booklet  •  Truth in Lending
Broker Agreement  •  Loan Approval/Commitment  •  Settlement Statement

Good Faith Estimate

What Is This?

This document lists the estimated costs you will have to pay at or before loan closing. It also identifies some of the companies who are expected to provide services in connection with your loan, like credit bureaus, appraisers, and closing agents.

The fees listed in the Good Faith Estimate are estimates. The actual charges you will pay in connection with your loan may be more or less. The actual charges you pay will be shown on the settlement sheet presented at loan closing (that is, when you sign all the final loan documents).

The name of the lender or broker will be at the top of the Good Faith Estimate. In addition, if the Good Faith Estimate is being given by a mortgage broker, the documents should say so and tell you that no lender has yet been identified. Once the lender has been identified, you may receive a second Good Faith Estimate, directly from the lender.

Always ask your lender or broker about the fees listed in the Good Faith Estimate.

Ask: what is this fee for?
Why is it being charged?
Who will receive the fee?
Can it be eliminated or reduced?

What should I look for?

The costs charged by one lender or broker will not be the same as the costs charged by others. You can use this document to shop for lower costs.

When you review a sample Good Faith Estimate form, you should see numbered lines. These numbered lines will be the same as the numbered lines on the HUD-1 settlement sheet that will be presented to you at loan closing.

Some of the estimated fees disclosed in the Good Faith Estimate are outside the lender's or broker's control, such as Government Recording and Transfer Charges (Lines 1200s) and Items required by Lender to be Paid in Advance (Lines 900s).

However, the lender or broker may decide on (and control) many of the other fees disclosed in the Good Faith Estimate. It is these fees, primarily in the Items Payable in connection with the Loan (Lines 800s) and Title Charges (Lines 1100) on which you should focus.

Fees in Lines 800s are the most important for shopping. They may be very different from lender to lender both in amount and in what the fees are called. Because of this, you should add up all the fees in Lines 800s and compare the total fees in this group with another lender's or broker's fees to decide which mortgage lender/broker is estimating the lowest total fees.

Fees in Lines 1100s actually are charged by the closing agent (that is the company/attorney that will assist in loan closing). These fees may be negotiable either with the lender, broker or closing agent. In addition, in some states, you may choose the closing agent and you may be able to shop around for a closing agent that will better serve your interests and charge less.

When will I first see this disclosure?

The lender or broker must deliver a copy of the Good Faith Estimate to you when you first make a loan application or within 3 business days after the lender or broker receives your loan application.

HUD Special Information Booklet

What Is This?

You will received this booklet if you are purchasing a home. It describes important terms and provides you information about the home buying process.

What should I look for?

You should read the booklet in its entirety. If you do not understand any part of the booklet, you should ask your mortgage broker or lender to explain it to you.

When will I first see this booklet?

The lender or broker must give you this booklet when you first apply for the loan or within 3 business days. 

Truth in Lending Act Disclosure Statement (TILA)

What Is This?

This is the disclosure that gives you information about the cost of your credit. It describes the key features of your loan such as:

  • the annual percentage rate
  • the finance charge
  • he amount financed
  • the payment schedule
  • the total of payments
  • credit insurance
  • late fee charges
  • and prepayment penalties

This disclosure provides you with a lot of information about the loan that is being offered. You should review it carefully and ask questions if it contains information you don't understand.

What should I look for?

This disclosure provides you with a lot of information about the loan that is being offered. You should review it carefully and ask questions if it contains information you don't understand.

Annual Percentage Rate ("APR"): This is the cost of your credit shown as a percentage. It is the most accurate indicator of how expensive this loan will be. It may be higher than the interest rate on your loan because of up front charges. If the APR is much higher than the interest rate on your loan, you are paying high fees.

Finance Charge: This is the dollar amount of most of the charges plus all the interest you will pay if you pay the loan on time throughout the loan term. This number assumes you will not pay your loan off early.

Amount Financed: This is the full dollar amount of your loan (called "principal amount") minus most of the charges you are paying out of the loan proceeds. This number is intended to show how much you are really receiving in cash and in benefits (for example, to pay off other loans and debts).

Compare the number for the amount financed to the principal amount of the loan. If the principal amount is much larger than the amount financed, you are paying high fees.

If you don't know the full dollar amount of your loan, ask the lender or broker to write it down for you.

Payment Schedule: This shows the:

  • date and dollar amount of your first payment,
  • the dollar amount of your regular payment,
  • how frequently payments are due (usually monthly)
  • the dollar amount of your final payment,
  • and when all those payments are due.

It may show a final payment which is a large dollar amount, called a balloon payment. If your disclosure shows a balloon payment, you will have to come up with that money by the end of your loan term either in cash or with a new loan. 

TIP

Even if you expect an ARM loan you will need to look at the Note, Mortgage or Riders to confirm that the ARM is the type you were promised.

If you have any doubts about being able to get a new loan when the balloon payment is due, ask your lender for a different loan where payments will pay off the loan in full by the end of the loan term.

If this is an adjustable rate mortgage (ARM), you should know that the future payments listed are only an estimate.

Total of Payments: This is the amount of money that you will have paid at the end of the loan term if you make every payment on time until the end.

Credit Insurance: Credit Insurance (such as credit life or credit disability insurance) is usually disclosed as an optional product. You must be told the cost, the length of insurance, and the dollar amount of the coverage. If you choose to buy credit insurance, you must separately sign or initial a request for the insurance. Many lenders profit from the sale of this insurance.

When you are asked to sign or initial documents, BE CAREFUL or you may find that you have purchased credit insurance that you do not want.

Late Charge: This tells you how many days after the due date a payment is considered late ("grace period") and how much money you will be have to pay if you do not make your mortgage payment on time.

Even if you make your payment during the "grace period," you may owe daily interest for each day between the due date and date you actually pay. For example, many mortgage payments are due on the 1st of the month, but not late until the 15th of the month. If you pay on the 10th, you will not owe a late charge, but you may owe 9 days of daily interest that you will have to pay at some point.

Prepayment Charge: This shows whether you will have to pay a penalty (possibly expensive) if you want to pay the loan before it is due. This can be a very important disclosure if you plan to pay the loan off early or if you believe you might refinance your loan if interest rates in the market decrease in the future.

TIP

Ask questions to be sure you fully understand your loan BEFORE you sign any documents.

Variable rate feature: If this box is checked you have some type of ARM loan. Do not believe any statements that say otherwise.

When will I first see the disclosure?

The time when a lender must give you a Truth in Lending Act Disclosure differs depending on the type of loan.

For a purchase money loan, the lender must give you an estimated disclosure when you first apply for the loan or within 3 business days.

For a refinancing or home equity loan, the lender is not required to give you this disclosure until loan closing, which is late in the process. However, many lenders will provide an estimated disclosure when you first apply for the loan so that you may consider whether you like the loan terms.

If the lender does not provide this estimated disclosure when you first apply for the loan, ask for it. This estimated disclosure will be helpful to you in understanding the terms of the loan being offered.

A final disclosure statement with information reflecting the actual (not estimated) terms of your loan is provided at loan closing. It must be given to you before you are asked to sign final loan documents, and you should review this disclosure before you agree to sign any other documents.

General TILA Tips:

Your final Truth in Lending Act disclosure can be different from the estimated disclosure. Be careful to compare the final disclosure with the estimated one. If terms have changed and you do not like them, DON'T SIGN the mortgage documents. 

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Never sign the loan documents if you were promised a fixed rate loan and the variable rate box is checked.

Never sign mortgage documents until after you have received and reviewed the final Truth in Lending Act disclosure. 

Broker Agreement

What Is This?

A mortgage broker agreement is a contract between you and the broker. It describes what the broker will do for you and what you agree to do for the broker, including how much you agree to pay the broker for helping you find a loan. The broker fee may be a dollar amount or a percentage of the loan amount.

What should I look for?

You should review this contract before you make any other agreements with the broker and before you pay any money to the broker or to a third party (such as an appraiser or credit bureau).

Do not let the broker start looking for a loan for you until you have read and agreed to this contract. Be sure you get a copy. You should look for:

  • the amount of the "broker fee" (that is, the amount the broker expects to be paid for assisting you in finding a loan);
  • who the broker says she or he is working for (that is, is the broker working exclusively for you or is the broker working for both you and the lender); and
  • whether the broker is getting money from the lender as well as from you. Remember that the broker's fee (what the broker is asking you to pay) is completely negotiable. You can and should shop around for a fee that is appropriate for your loan.

Ask the broker how much money she or he will be receiving from the lender. You have a right to know this information.

Never sign a broker agreement that contains blanks.

When will I first see this document?

You should be provided with a copy of the broker agreement as one of the very first documents you receive from the broker and before the broker starts looking for a loan for you. If no broker is involved and you are working directly with the lender, you will not get a broker agreement.

Settlement Statement (AKA HUD-1)

What Is This?

This is a standard form used at nearly all home loan closings. It lists all of the closing costs and charges and shows how the loan proceeds are paid out and who will receive them.

What should I look for?

You should compare the fees listed in Lines 800s and Lines 1100s with the estimates of these fees disclosed in the Good Faith Estimate. If there are significant differences (particularly if you are being asked to pay more), you should question these fees.

You should review all the proposed loan payoffs and other payments being made from the loan proceeds to be sure that the existing credit being paid off is what you expected, is what you owe and what you agreed to.

Also be sure that all debts you want paid off are paid off and that the money you expect to receive will be paid to you.

When will I first see this document?

The final settlement statement is presented at loan closing. By law, you have a right to see a copy of the filled-in settlement statement during the business day immediately before the day of the loan closing. 

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If you feel that something is not right, ask that it be corrected or resolved BEFORE you sign the final loan documents. Do not accept verbal promises from the lender or mortgage broker to correct the problem after closing.

You should ask to see a copy of the completed HUD-1 settlement statement one business day before the loan closing. This will give you time to ask the lender or broker questions about charges and fees and about disbursement of loan proceeds, to be sure you are not overcharged.