Understanding Your Closing Mortgage Paperwork
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If you've decided to take the leap and become a homeowner, then odds are that you'll need to apply for a mortgage to make this dream come true. Applying for a mortgage often seems more complicated than it should beóby the end of it all, it may seem like you are drowning in a sea of paperwork. Besides all of the forms that you'll have to fill out and the documents you'll need to sign to submit an official application, you'll also have to sign three mortgage documents on the day of the closing. The following is a closer look at those documents.
The settlement statement, which is also referred to as the Closing Disclosure, is a final laundry list of everything you are paying for regarding your home purchase (i.e., fees). This shouldn't be the first time you see these fees, though. Mortgage lenders are required by law to provide you with a Loan Estimate early on in the loan process. Although a Loan Estimate doesn't break down your fees into a line-item list the way a Closing Disclosure does, it does let you compare your final closing costs and terms with your initial estimate. Once you receive your Closing Disclosure there is a required waiting period of three days to review the terms before closing. The following are some of the fees that a settlement statement will detail:
Real Estate Agent Fees - These are the commissions paid by the seller.
Mortgage Lender Fees - These fees typically include the appraisal fee, the credit report fee, and any origination fees for the mortgage rate you chose, as well as other potential loan processing fees.
Title Fees - The title fees include the title insurance that you must buy to protect both yourself and your mortgage lender in the event that any third party makes unwarranted claims on your new property. These are charged by the title company that is serving as your settlement agent.
Prorated Items - These items can include prepaid mortgage insurance, homeowners insurance (most mortgage lenders require a year's worth), and more.
HOA Fees - The community's homeowner association may charge you a move-in fee.
The promissory note, which is often simply referred to as the note, is the document that outlines the terms of your mortgage loan including whether you've taken out a 15-year adjustable-rate mortgage or a 30-year fixed-rate mortgage, your mortgage interest rate, your payment intervals, and whether or not you'll be required to pay a penalty if you pay your loan off early. The promissory note also states that the property you are buying will be used as security by the mortgage lender in case you default on the loan.
Deed of Trust
This document, which is referred to by several different names, including the security instrument and the mortgage, is an agreement that states that you pledge your property as security for the promissory note. The deed of trust consists of three occupancy provisions. You must comply with one of them based on the loan you've chosen. These three occupancy provisions are as follows:
Owner occupied provision - If the property is your main residency, then you need to move into the home within 60 days of the closing date. You'll also be required to live there for a minimum of one year before you can use it as a secondary home or as a rental property.
Second home provision - If you've purchased the property as a second home, such as a vacation home, then you are not allowed to rent the property out.
Non-owner occupied provision - Mortgages for non-owner occupied homes tend to require you to pay a higher mortgage interest rate, which means that you can convert the property to an owner-occupied home or a second home if and whenever you want to.
These are the mortgage documents that you'll need to sign on the date of your closing. It's a good idea to be prepared for the closing by knowing what it is that you'll be signing. This way you'll save time and reduce the amount of confusion you might experience regarding the terms you are agreeing to.