The first two parts of this series dealt with the relatively easy parts of the closing process: junk documents that require little attention, educational documents that can be read at leisure, and future-use documents that require only to be set aside.
The challenging part of the closing process is perusing the transactional documents that indicate whether or not you are getting the deal you believe you negotiated or were promised. That is the topic of this article.
This is the most challenging part of the process because the stakes are high, and the time pressures severe. The transactional documents that define the terms of the deal are subject to change as the transaction moves toward closing, but it is only the final set of documents that matter. In the typical case, the first disclosure is sent before the borrower's property is appraised, and before the loan terms (interest rate and points) are locked. This usually results in a second disclosure following receipt of the appraisal, a third disclosure when the loan is locked, and sometimes a fourth disclosure if the loan terms change for some other reason.
In theory, you should have access to final documents 24 hours before closing, but very frequently the lender can't comply except by delaying the closing by 24 hours, and that could violate either the rate lock agreement or the transfer date on a home purchase. You may have no alternative but to check the transaction documents at the closing table.
The focus of your examination should be three documents that contain the loan prices and other critical features of your loan. You want to assure yourself that the deal you are getting is the one you negotiated to receive. If you find something amiss, you can use the time pressure to your advantage by getting it fixed on the Settlement Statement (HUD-1): The deal you are getting is shown on the HUD-1 in your closing package. The deal to which you agreed is shown on the last version of the Good Faith Estimate (GFE) you received from the lender, which you should bring to the closing with you. Relevant items on the HUD-1 show the corresponding entry on the GFE for easy comparison. For example, total fees due the lender are shown as Item A on page 2 of the GFE, and as line 803 on the HUD 1. They should be exactly the same.
Truth in Lending (TIL): The TIL is replete with garbage disclosures that should be ignored, but it also has important disclosures about your loan:
–The "Interest Rate and Payment Summary" should correspond to "Summary of Your Loan" on the GFE.
–Note the "Late Charge."
–Under "Prepayment," if the first box is checked, you will pay a penalty if you pay off early.
–If "Demand" is checked, the loan probably has a balloon payment, meaning that the remaining loan balance must be paid in full at some date. The TIL does not indicate the date, but the GFE does – it is the last item under "Summary of Your Loan." If "Demand" is checked but there is no balloon shown on the GFE, you must find the entry in the note to see the conditions (if any) under which the lender can call the loan. If the right to call the loan is unconditional, demand that it be removed.
–Fixed/Adjustable Rate Note: This important document spells out the terms of your loan, which should correspond exactly with those in the HUD1, the TIL, and the last GFE. Check the Interest rate and initial payment, and if it is an ARM, check the period until the first rate adjustment.
If your loan carries private mortgage insurance, the premiums should be checked. On monthly premium plans, the premium is included in the monthly payment shown on page 1 of the GFE, and again in item 6 on page 2. Upfront premiums are shown either in item 6 or item 9. On the HUD1, monthly premiums are shown on line 802, and upfront premiums on line 1003.
Item 303 on page 1 of the HUD-1 shows the total cash you need to close. If there are no issues connected to the amount, you must provide a certified check for that.
Note that the difficulties involved in monitoring changes in the transactional documents would be substantially reduced if lenders reported the reasons for change whenever they issued a new set. In August 2015, the GFE and TIL will be replaced by a single Loan Estimate developed by the Consumer Financial Protection Bureau, but lenders will continue the practice of changing the deal and issuing a new disclosure without explaining why.
I have asked CFPB why they are not making the closing process significantly easier for borrowers by requiring lenders to explain why the terms of a deal have changed, but to date there has been no reply.
ABOUT THE WRITER
Jack Guttentag is professor emeritus of finance at the Wharton School of the University of Pennsylvania. Comments and questions can be left at http://www.mtgprofessor.com.
(c) 2014, Jack Guttentag
Distributed by MCT Information Services