Q: I am about to buy a home. I have heard that I should request a copy of my closing documents several days prior to my scheduled signing. What should I be looking for, and who can I hire to help me go over them?
A: Whoever told you that gave you sound advice; it’s good to ask your Realtor, mortgage pro and/or escrow holder to get you a copy of your closing documents in advance, ideally 72 hours or so before you sign. This isn’t always possible, especially if you have a hard closing deadline with a quick escrow leading up to it. If you let them know from the beginning of your transaction that you expect this, though, you should be able to get your paperwork — colloquially known as "docs" — a few days before signing.
Mindset Management
My average client signs her name around 100 times at the final signing! You’ll be presented with a set of papers around 6 inches thick. That bulky stack of documents is enough to press the normal person’s overwhelm button, causing them to check out, mentally speaking. It is no wonder that most buyers absolutely do not read these VIPs (Very Important Papers) at the escrow office. In fact, if you did read them in full at your signing, you’d easily be there several hours.
As such, the time to read them is in the comfort of your own home or office, with several days for you to ask all of your questions and have any necessary revisions made.
In my practice, my mortgage broker and I comb through the documents to spot errors or problems — the fact is, though, this is your home purchase, and it is a wholly appropriate kickoff to your tenure as a responsible homeowner for you to take charge and request and review these documents for yourself. Don’t rely on your professionals to do this for you! There are some things that only you can determine anyway, like how you want your name to appear on your mortgage and title documents.
Need-to-Knows
The closing table is not the place to do things like read your inspection reports or your good faith estimate for the first time — you will have already signed off on these items and, by so doing, rendered your deposit money nonrefundable. Nevertheless, you may be asked to re-sign and/or initial to acknowledge your receipt of these and many other documents at closing.
Despite the daunting heft of the papers you will be asked to sign, most of that heft is boilerplate legalese — that doesn’t render it unimportant, but much of it is material that is the same for every buyer/borrower using that lender, minimizing the chances that errors specific to your purchase will occur in those sections. As such, there are a fairly small number of critical documents that a savvy buyer absolutely must scrutinize.
The closing documents every buyer in every state must absolutely review in detail are:
Essential Details. You’ll need to review the entire package at a glance to ensure that your name (and that of any co-buyer/co-borrower) and the property’s address are correct and are reflected the way you would like them to show on the county records. Typos in these items are probably the most frequent errors I see and, fortunately, are the easiest and fastest items for the escrow holder and lender to fix.
The Note. This is essentially your IOU — your promise to repay. Importantly, this document lists the details of the terms of your loan, like the amount of the loan, the length or term of the loan in years, the interest rate, your monthly payment amount, due dates, late fees, and other critical terms. The things you’ll want to attend to are the interest rate; the amount of your monthly payments; whether the rate and/or payments are fixed or adjustable; whether there is a penalty for paying any or all of your mortgage off in advance; whether a balloon payment will ever become due (and, if so, when); whether your taxes, insurance and/or HOA dues will be collected in monthly prorations through an escrow account. Another critical item to note is what type of loan you have, in terms of whether your loan balance will go up (negatively amortize), down (amortize), or stay constant (as with an interest-only loan) every month.
None of these items should surprise you — you should have received a good faith estimate from your mortgage professional early in your escrow, that set forth all of these items, among other things. Have that good faith estimate handy when you review your closing documents; your job is to compare the above-listed loan terms with the ones you were quoted in your good faith estimate. Any discrepancies should be reported to the escrow holder and your mortgage broker, so they can be resolved and/or corrected before you sign.
The Mortgage or Deed of Trust. This is the document that secures your promise to repay the loan with the property — the piece of paper that empowers your lender to take the property through foreclosure if you default and stop paying. This document will list any "riders" that exist — often things like prepayment penalties and adjustable-rate details are provided in addenda to the note called "riders," rather than described in the note itself. You want to be sure that every rider referenced in your mortgage or deed of trust is actually also included in the package of loan documents, and that you read all your riders. The scariest mortgage fraud horror stories I have ever heard involved missing riders imposing gigantic prepayment penalties — papers the buyers never saw! These stories are very rare, but it still behooves you to pay attention to what riders, if any, should be in your package, and double check to make sure they actually are.
The Estimated HUD-1/Settlement Statement. This is a standardized, itemized list of all the closing costs you’ll pay in connection with this transaction. The format is prescribed by the federal Department of Housing and Urban Development, and is identical for every transaction nationwide — hence the nickname "HUD-1."
This document is formatted as a balance sheet of sorts, detailing the credits deposited to escrow in your favor (like your earnest money deposits, seller closing-cost credits, etc.), and the debits charged to escrow on your behalf (e.g., the purchase price, your loan origination fees and discount points, the costs of inspections or appraisals that you had billed to escrow, etc.). Review this on its own and against such documents as your purchase contract and your good faith estimate, checking to ensure that your earnest money deposits and closing-cost credits are accurately reflected and that your loan origination and other loan-related fees are no more than were quoted in the good faith estimate you received. Other things to check include that inspection and appraisal fees you’ve already paid are not charged again here.
Truth in Lending Disclosure. Another standardized form, this will be a double-check of all your loan terms. You will have received and signed a preliminary copy of this form early in the transaction for your mortgage representative. During your pre-closing review, read over the proposed final Truth in Lending disclosure, compare its terms against the estimated one, and get resolution or explanation on any conflicts or discrepancies.
Staffing Your Document Review. Most borrowers can review these on their own, or with the help of their Realtor and/or mortgage professional. Your Realtor can help explain the documents, but the mortgage professional will have to be involved in answering any questions or concerns about errors or discrepancies, so it may make sense for you to involve them in your document review in the first place. If you don’t have (or don’t trust) your Realtor or mortgage broker for any reason, a real estate attorney can help you understand these materials, for a fairly low fee (i.e., under a thousand bucks in the vast majority of situations).
Action Plan
1. Early in your transaction, let your Realtor, mortgage professional and escrow holder (whether it’s an escrow attorney or a escrow officer) know that you will require a copy of all your closing documents at least 72 hours in advance of signing.
2. Keep a neat file of your transaction during the escrow — hard copy or digital. This will make it easy to pull out your purchase contract, your preliminary good faith estimate and Truth in Lending disclosure for a comparison during your pre-signing review.
3. When you get your loan documents, sit down with a couple of shots of espresso (not required) and review them for the items listed above. Depending on how many and what types of questions or concerns your review creates, set an in-person meeting, have a phone call or send an e-mail to your mortgage professional and/or your Realtor to get your issues resolved and any revisions made well in advance of your signing appointment.
Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook," and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.
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