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The Standard Loan Closing Documents signed by clients in residential closings vary little between Lenders, the more significant differences come with variations in Loan Programs (Conventional, FHA or VA) and the terms of the loan or property types being financed (Fixed Rate, Variable/ARM Rate, Owner Occupied, Investment, Condominium/PUD).  To follow is a list of some of the most important loan documents the clients will sign and a brief explanation thereof.

Standard Loan Closing Documents
and a Brief Explanation of Them

The Closing Statements

These documents, known as the Closing Disclosures (CD), for both the buyer and seller (each has their own separate CD), detail the accounting involved in the closing.  Here the buyer will find an itemized list of their charges, including their sales price, loan charges, title charges, governmental charges, interest, homeowner’s insurance, escrow account beginning balances, inspection fees and other contractual obligations totaled and then an itemized list of the credits they receive, including their earnest deposit, mortgage loan balance, seller closing costs concessions, and tax prorations are all totaled and these credits are subtracted from the gross amount due and reflect the amount the buyer will then owe.  The Seller’s Closing Disclosure works in reverse of the Buyer’s Closing Disclosure.  It begins with totaling the Seller’s Credits and then totaling the Seller’s charges, and then subtracts the charges from the credits and reflects the “net” sale proceeds to the Seller.

The Buyer receives a CD reflecting just their accounting but includes terms and conditions for the Loan Program selected and it not signed by or acknowledged by the seller, because of these loan terms.  The Seller independently signs a CD reflecting only their accounting.

The two CDs are then combined into a Closing Statement known as the ALTA closing disclosure which contains both the accounting of the buyer and seller in one document and it is signed by both the Buyer, Seller and Settlement Agent.

The Mortgage Note

This is the single most important document the Buyer will sign in a financed deal.  This is their personal obligation to repay to their Lender the amount borrowed.  It will contain the terms of this repayment and the conditions of default for non-performance on behalf of the Buyer.  The key factors to the Note to be reviewed and agreed to are 1) The Parties involved; 2) Loan Amount; 3) Rate of Interest; 4) Term or Length for the Loan’s repayment; 5) Payment due dates, including late fees; 6) Pre-Payment penalties; 7) Default terms and cures; 8) Personal Obligations 9) Due on Sale provisions and 10) The Payment Amount.

The Mortgage Deed

Notice it is called a “Deed” and in fact it is the most important feature of this document.  Together with the Mortgage Note, the Mortgage Deed and the Loan Application constitute the Security Instruments running to the benefit of the Lender.  The Mortgage Deed is the legal instrument where the Buyer conveys their ownership interest to the Lender in the property being purchased and encumbered.  Just as the Seller conveys their ownership interest in the property to the Buyer by signing a Deed, so now the Buyer conveys their newly acquired ownership interest in the property to their Lender, but with a caveat.

This ownership interest transfer is delayed.  It only takes effect if the Buyer defaults under the terms and conditions of the three primary Security Instruments (Mortgage Note, Mortgage Deed and Loan Application) and the Buyer does not cure the default.  The Lender, in the case of default, commences a Civil Action to enforce the terms and conditions of the Security Instruments and uses this delayed conveyance of ownership interest to acquire the authority to have the property sold and converted into “cash” as repayment to them of the unpaid amounts due.

The Mortgage Deed contains many conditions of performance upon the Buyer.  Chief among these are 1) Payment of the terms and conditions of the Mortgage Note, 2) Payments of Real Estate Taxes on the property; 3) Protection of the property with Hazard Insurance and Flood Insurance Policies and the continuation of the premium payments with the Lender as the loss payee; 4) Preservation of the Property in terms of condition and valuation; 5) Use restrictions including the limitation on changes to the use (Owner Occupied) and zoning of the property to a residential 1-4 family residential structure and 6) Payment  in full of all funds due upon the transfer by the Buyer of their ownership interest to a third party (Due on Sale).  Failure of the Buyer to perform these conditions are referred to as “Default”.  The Mortgage Deed stipulates the terms and conditions whereby a Buyer can reverse the default by curing the violations.

Once the Buyer has satisfied the terms and conditions of the Security Instruments, including the payment in full of all the funds due to the Lender, the Lender files with the County Recorder a Release of its Mortgage Deed reflecting the completion of the terms of the Buyer’s obligations to the Lender and terminating the Lender’s right to force an involuntary sale of the property.

The term Open-End Mortgage is commonly misunderstood by the public.  It is NOT a reference to time, but instead a reference to money.  The Open-End feature of the Mortgage Deed advises the Buyer that regardless of the stated amount of the debt listed in the Mortgage Deed, the Buyer could end up owing more than the stated amount depending on whether a default occurs and the Lender’s expenditure of funds to address the default add to the Buyer’s obligations to the Lender.  Funds for taxes, insurances, legal fees and property preservation can add to the amount of debt the Buyer would owe the Lender.  It also concerns itself with the manner of disbursement of the Lender’s funds, whether at one initial disbursement or over time, such as a revolving line of credit, which would be a Closed-End Mortgage.

Like the Seller’s Warranty Deed to the Buyer, where the Seller warrants to the Buyer that when they sold them the property it was free and clear of all liens and adverse encumbrances, the Buyer warrants to the Lender that the title to the lands being encumbered by the lender are free of such matters and that the Buyer will protect and defend the Lender against adverse title claims and objections.

Riders to the Mortgage Deed

The Mortgage Deed used in residential loan closings is virtually the same regardless of whether the Loan Program is Conventional, FHA or VA Financing.  But certain loan programs or property characteristics do require the modification of the standard “boiler-plate” language in the traditional Mortgage Deed, so the Mortgage Deed is amended using the following Riders.

Adjustable Rate Rider:
  Here the terms of the adjustable rate feature of the Mortgage Note are again detailed and acknowledged by the Buyer, and include when and how the rate will adjust over time, the index and margins used in the calculations of future interest rates, the effective dates of these interest rate changes, and in some cases, the terms and conditions of conversion of the adjustable rate to a fixed rate of interest.

Balloon Rider:  Here the stated Maturity Date of the debt referenced in the original Mortgage Note and Mortgage Deed are modified subject to the terms of the loan program and the details of the remaining loan balance and amortization of debt are acknowledged.

One to Four (1-4) Family Rider:  Here the characteristics of a property with more than one habitable unit (but no more than 4) are acknowledged and permitted and the Buyer is giving the Lender an “Assignment of Rents and Leases” where under conditions of default, the Lender can look to the tenant(s) for collection of the rental payments towards the amounts due under the Mortgage Note.

Condominium and PUD Riders:  Here again, the property characteristics cause a modification to the general terms of the Mortgage Deed.  These properties have unique Insurance requirements and these differences are detailed as to the Buyer’s obligations for those purposes.  Also, these properties tend to be governed by and subject to By-Laws, Community Regulations and Restrictions which violation by the Buyer of these items is defined as an additional matter of Default.  The Homeowner Associations tend to have “dues” obligations and the failure by the Buyer to make said payments also are additional terms of Default.

VA Assumption Rider:  As previously indicated, Mortgage Notes and Mortgage Deeds have “Due on Sale” provisions.  This means that the underlying obligations of the Buyer to the Lender are due upon the Buyer conveying their ownership or beneficial interest to a third party.  VA financing has a conditional modification of the Due on Sale provision of its security instruments.  The Buyer can apply to the Lender to consent to a waiver of the Due on Sale provision upon submission of required credit information of a new Buyer, who will undertake the original Buyer’s obligations for the loan and its remaining term.  If the Lender accepts and agrees to this Assumption by the new Buyer, the old Buyer is released from their liability to the Lender.  The original Veteran’s entitlement is not restored, unless the new Buyer is also a Veteran with eligibility entitlements and substitutes their entitlement for that of the original Veteran.

The Residential Loan Application (FNMA 1003)

The FNMA 1003 is prepared and executed twice during the Buyer’s loan process.  The first time (known as the Initial 1003) is upon loan application with the Lender where the Buyer supplies the required information concerning their application.  The second time is at closing and is known as the Final 1003.

The Loan Application’s first page details the terms of the Buyer’s proposed loan with the Lender and addresses the property being purchased with the loan.  The Buyer’s name and personal information regarding marital status and dependents, residence, and employment information are also contained here.  The second page addresses the Buyer’s income and present and proposed housing expenses, together with a listing of the Buyer’s assets and liabilities as verified through the loan approval process.  These are not intended to be the existing balances as of the closing date but are intended to reflect all the assets and debts required to be disclosed to the Lender.  The remaining pages detail real estate owned by the Buyer and contain an estimate of the amount expected to be owned by the Buyer at the time of the closing.  A series of questions are asked of and answered by the Buyer.  Finally, Governmental Census information is obtained on the Buyer to assure the Lender’s compliance with various fair housing requirements and for other statistical purposes.

The Loan Application is the final Security Instrument the Buyer signs at closing (the others being the Mortgage Note and Mortgage Deed).  It is this document, where knowingly falsifying information or supplying materially misleading information on a Federally Insured Mortgage Loan will subject one to potential Federal prosecution, whether by the Buyer or the Lender.

The Housing Payment Documents

The Notice of First Payment and the amount due are disclosed to the Buyer, inclusive of the breakdown of Principal and Interest payments and required Escrow Account payments for future real estate taxes and various insurance premiums.  These documents contain temporary billing statements to assure the Buyer knows where to send their mortgage payments, until such time, as they receive notice of a change in the Servicer of their Mortgage Loan.

The Notice of Servicing Disclosure details for the Buyer that the Lender intends, after the closing, to transfer or sale the handling and processing of their mortgage payments to a different Lender.  This may or may not include the transfer of the mortgage debt or just the “payment” processing or servicing of the payments and its future escrow account disbursements.

The Initial Escrow Account Disclosure:  Loan Programs and Lenders that require the Buyer to deposit with the Lender at closing amounts to pay for the future disbursements of real estate taxes, hazard insurance premiums, flood insurance premiums and mortgage insurance premiums are required to disclose to the Buyer the initial balance collection of these amounts at closing and how they were calculated.  This form details these closing and future collections and the next 12 monthly collections and disbursements for these matters and the monthly escrow balance remaining in the Lender’s possession after these collections and disbursements.  This form also discloses to the Buyer that these collection amounts have been padded or cushioned as a protection from the increase of future tax and insurance hikes since the calculations at closing where based on then known amounts.  These items will likely increase in the future when the actual disbursements occur.  Escrow Accounts are evaluated annually to assure the lender is collecting sufficient funds monthly from the Buyer to pay for the escrowed items.  It is common for Buyer’s future payments to increase for escrow items for taxes and insurance premiums over the term of the loan.

Lenders traditionally chose to cushion the escrow account by collecting at closing a 2 month addition for each escrowed item.  So, here is a closing example of escrow collection:

Closing occurs in October.  The next hazard insurance bill isn’t due until October the following year.  The Buyer will make payments to the Lender beginning in December and the Hazard Insurance Company will bill the escrow account a 12 month invoice in October of the following year.  In order for the Lender to have 12 months of insurance premium in the escrow account, they would have had to collect from the Buyer, at closing, 1 month of insurance, so that when the Buyer’s payments begin in December, the Buyer will have made to the Lender 11 payment come October of the next year.  The Lender now has 12 months of insurance on hand in October of the following year and pays the Insurer, but now they are out of money for insurance.  That is where the cushion comes in.  Instead of collecting 1 month at closing and having just enough money come next October, the Lender collects 1 month + 2 month cushion, for a total of 3 months collected at closing.

This calculation then applies applies to each escrowed item.  The Aggregate Adjustment credit on the closing disclosure is a mathematically limitation of the closing collection based on due dates of the future escrowed disbursements and the actual closing date.

The IRS Forms

There are a series of IRS forms signed at application and again at time of closing and can include:

IRS Form W-9:  This form is where the Buyer provides the Lender their Social Security Number for the purposes of the Lender to generate a Form-1098 annually to the Buyer disclosing the amount of Interest, Real Estate Taxes and Mortgage Insurance Premiums paid by the Buyer to the Lender.

IRS Form 4506 or 4506T:  This form is the Buyer authorizing the Lender to obtain from the IRS copies of the Buyer’s filed tax returns for specified years.  These are the same tax returns Buyers provide the Lender as part of their loan approval process, but they come directly from the IRS as opposed to the copies provided to the Lender by the Buyer.  The Lender will request these forms only in the case of default or internal or regulatory audit purposes.  The Form 4506-T is used in self-employed Buyer situations.

Government Loan Closing Documents

FHA and VA Loans have additional closing documents that are not contained in Conventional Loan closing packages, and some of these are:

Settlement Statement/Real Estate Certification acknowledgement that the Buyer is not indebted to the Seller for any balance of the purchase price and that the Settlement Statement contains the entire monetary agreement between the parties and that the terms and conditions of their Purchase Agreement have been satisfied.

FHA Assumption and Pre-Payment Information:  Forms detailing these conditions are provided to the Buyer.

Amendatory Clause is acknowledged by the Buyer, Seller and Real Estate Agents for each that the property will be appraised by an approved Appraiser and if the value returned is less than the asking price in the purchase agreement, and if the parties can not subsequently come to agreement on adjusted terms, than the Buyer can be released from the purchase agreement without threat or loss of any earnest money deposit.

VA Form 1820:  This is a form where the Lender certifies to the VA that they have complied with the VA loan guidelines in approving the Buyer and that the loan has closed and the Lender has disbursed its Loan Funds and requests the VA’s guarantee.  The Buyer joins in this disclosure stating their intention to occupy the property, attesting to their current active duty status, and acknowledging they were aware of the appraised value of the property.

Termite Report:  VA requires the Seller to provide and pay for a pest/termite inspection. 

VA Forms:  Multiple VA forms are contained in the Loan Closing documents, most are informational in nature and advise the Veteran of use of their VA benefits and eligibility entitlement and the penalties associated with default as it relates to credit worthiness and future VA entitlement programs.

Closing Affidavits

There are a variety of Affidavits signed by the Buyer acknowledging the following matters:

Name Affidavit:  Here the Buyer is asked to acknowledge variations in their names that appear in the lender’s loan file, including middle initials, maiden names, and suffixes (Sr, Jr, II).  This is NOT a document that states the Buyer is known in these variations outside of the closing, in the real world, and is ONLY in connection with the loan documents being signed.

Occupancy Affidavit:  The Buyer acknowledges that their intention is to occupy the property as their principal residence and failure of this intention to do so could be considered a condition of default.

Employment and Financial Affidavit:  While it may seem it would go without saying, the Buyer tells the Lender there has not been a material change in their financial condition that is unknown to the Lender and might cause the Lender to consider the Buyer no longer qualified to repay the loan.  They also certify that their employment listed on the FNMA 1003 has not changed.

Errors and Omissions Agreement:  We all make mistakes, and this form attempts to correct errors or omissions in closing documents and the Buyer acknowledges that the Lender has the authority to require them to re-execute a document that contained an error needing correction or that was omitted for their signature at the time of closing.

Flood Certification:  All Federally Insured residential mortgages must have a Flood Zone Determination made on the property being encumbered and if determined to be within a Flood Zone requiring the purchase of Flood Insurance, the Buyer must purchase a Flood Policy and escrow for the renewal of its premiums.  This requirement lasts the term of the loan and if in the future the property is determined to lie within a designed Flood Zone, the Buyer must comply with obtaining Flood Insurance.

Miscellaneous Documents:  Varies with each Lender, but in general, these documents are designed to obtain contact information of the Buyer and are of no material interest or purpose other than completing information or disclosures the Lender feels might be informational or important to the Buyer.

Title Company Documents:  Each Title Company will have a series of documents for the Buyer to acknowledge receipt of information or acceptance of or declining of the services and policies of protections they provide, and may include:

Owners Title Insurance Offer

Closing Protection Coverage Offer

Patriot Act Compliance