Mortgage Professor: Don't sign these loan docs blindly

Posted9/24/2011 12:01 AM

Editor's note: This is the final column in a two-part series appearing in HomesSaturday.

As discussed last week, step one in preparing for the mortgage deluge that borrowers face at the closing is to identify the junk documents that can be signed quickly and set aside. That cuts the document pile roughly in half.

Educational documents

Step two is to read the "educational documents" that contain information that borrowers should know before starting the mortgage process. In doing the research for these articles, I was pleasantly surprised to find that some documents, while clearly designed to comply with the law and/or limit lender liability, also contained answers to many questions that I continually receive from borrowers. These documents should be read well in advance of closing.

I will comment on only two educational documents; the others will be found on the Web version of this article at

• Notice of no oral agreements: This document requires the borrower to acknowledge that the deal with the lender is wholly governed by the written agreements. The borrower cannot come back later and claim that "The loan officer told me " If what the loan officer said is not in the documents, it has no force.

Signing this agreement at closing has not prevented borrowers from writing me after closing (sometimes years after closing) to complain the loan they had was not the one their loan officer had told them they had. They had signed the notice but had not absorbed the content, probably because it was one of 30 or more documents they had to sign that day. That is why educational documents should be read well before the closing. Indeed, this one ought to be digested before dealing with a loan officer.

• Notice of right to cancel: If you are refinancing, you have three business days from closing to cancel the deal and get all your monies back. This is a very important right that protects you against any skulduggery by the lender, but only if you are aware of it beforehand and are prepared to use it if necessary. Borrowers who do not become aware of this right until the closing rarely exercise it or use it to their advantage.

Note: If you do cancel, make sure your letter is registered and that you also inform the closing agent orally. This eliminates the possibility that the loan funds are disbursed before your letter arrives, which would be a nightmare for you.

Documents you may need after closing

Some documents instruct on borrower responsibilities after closing, and on what is expected to happen during the first year. You should keep them in a separate file folder for easy retrieval. Again, l will illustrate with two of the eight discussed on my website.

• First payment letter: This document sets out the amount and composition of the initial monthly payment, where and how to send it, when it must be received, and so on. But be aware that before the first payment is due, you may receive another instruction that replaces the one you received at closing. This will happen if your loan is sold before the first payment is due, which often happens.

• Private mortgage insurance (PMI) disclosure: If PMI is required on your loan and you pay a monthly premium, federal law grants you the right to terminate the policy under certain conditions. The conditions are spelled out in this document. You will want to terminate your PMI as soon as you meet the requirements.

Checking the deal in transactional documents day before closing

A major priority ought to be assuring yourself that the deal you are getting is the one you were promised. To do that, you need three "transactional documents" that contain the loan prices and other critical features of your loan. These are the Settlement Statement (HUD-1), Truth in Lending (TIL), and Fixed/Adjustable Rate Note. You should also bring the last version of the Good Faith Estimate (GFE) that you received because there may or may not be a copy of it in the closing package.

The lender is legally obliged to provide all your documents no less than 24 hours before the closing. Be sure to let the lender know that you expect that obligation to be met. If you find something amiss, you can either call the closing agent or loan officer immediately to get the issue clarified, or you can flag it for clarification the following day.

The exact details of what you should check are too boring and tedious to show here, but they are all spelled out on my site. As an illustration, total fees due the lender shown as Item A on page 2 of the GFE should be exactly the same as line 803 on the HUD-1.

If you do the homework on loan documents outlined in this and the previous article, the actual closing should be a quick and tension-free ceremony.

• Contact Jack Guttentag via his website at