Editor's note: This is the first column in a two-part series on the mortgage document deluge. The series concludes next week in HomesSaturday.
At the end of a mortgage loan process that takes weeks and sometimes months, all the pieces come together at a "closing." The major objective of a closing is to sign contracts and disburse the loan funds.
1) Junk Of no value to borrowers Identify in order to sign quickly
2) Educational Digest this information Read carefully well before closing
3) Transactional Contains critical loan information Requires detailed check the day before closing
4) Future Use Borrower may need this Place in folder for easy retrieval information later after closing
But that objective in itself would require only a few documents, not the 30 or more that borrowers must deal with in a typical closing. The barrage of documents often makes the closing process a frightening ordeal for borrowers.
Most of the additional documents are either required by the federal or a state government, or by lenders protecting themselves against legal liabilities imposed on them by government. Disclosures mandated by government often lead to new lender disclosures where the borrower acknowledges that the mandated disclosure was received.
If a borrower at closing read every document and raised questions about everything she didn't understand, the process would take days to complete. In practice, everybody involved, usually including the borrower, wants to be out within one or two hours and wants to view the closing as largely ceremonial.
That works for the lender, but very often it doesn't work for the borrower. My colleague Jack Pritchard, who has managed many hundreds of closings and provided advice and counsel on these articles, tells me that very few borrowers are adequately prepared for the closing. While they have the legal right to receive all the documents no less than 24 hours before the closing, few do. Without guidance on what to look for, it wouldn't do them much good in any case. The purpose of these articles is to provide such guidance.
The document package
A document package is a set of documents applicable to an individual transaction. Document packages differ for conforming, nonconforming, Federal Housing Administration and Department of Veterans Affairs loans. Different types of mortgages require different documents, and the same is true of different types of property. Individual states have their own document requirements, and the same is true of many individual lenders. This means that the number of different document packages number in the millions.
To meet the need to generate the right package of documents for every transaction, an industry of mortgage document specialists has arisen. I used one such firm in researching these articles, paying it $25 for every document package I downloaded.
While no one document package is likely to contain exactly the same documents as any other, many documents -- including those required by the federal government -- appear in all packages, and others appear in many. The closing documents described below appear in all or most document packages.
Documents can be placed in four groups based on their usefulness to the borrower, and on when the borrower should consult the documents, as summarized in the above table:
Weeding out junk documents
About half of the documents you receive can be signed quickly and pushed aside because they impart no useful information to you. Most are merely acknowledgments that a disclosure that the law requires lenders to provide has in fact been provided.
For example, the federal government mandates that borrowers must receive a Good Faith Estimate (GFE) disclosure within three days of submission of a loan application. At the closing the lender may require that the borrower sign another document acknowledging that the GFE was received within the required period.
Other documents acknowledge that the borrower has been told that the lender who made the loan may not service it, that the borrower has received the appraisal report, that payment delinquencies will be reported to a credit bureau, that the borrower has the right to have an attorney at the closing, and so on. A more complete list of junk disclosures will be included in the Web version of this article at www.mtgprofessor.com.
Next week: educational documents that borrowers should read well before closing.
• Contact Jack Guttentag via his website at mtgprofessor.com.
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