Sifting through the mortgage document deluge

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

In first two parts of this series, I explained how the large number of documents involved in a mortgage closing can be divided into four groups that should be viewed differently by borrowers. In this installment, I review the categories I refer to as the Educational Documents and Future Use Documents.

Educational documents can be read at any time before closing, the earlier the better.

Borrower's closing affidavit: This document requires the borrower to acknowledge in writing some critical pieces of information upon which the lender depended in approving and pricing the loan. This includes the borrower's intentions regarding occupancy of the property, the financial and employment information included in the application, and the condition of the property. (In some document packages, the borrower's commitment regarding occupancy is broken out into a separate Occupancy Affidavit.) On a purchase transaction, the borrower must assume full responsibility for any contractual loose ends involving the seller. Borrowers are also required to declare that they have not taken on any new debt since they applied, and their employment status has not changed.

If the borrower has been 100 percent forthright in providing information on the application and other documents submitted to the lender, if the borrower's financial status has not changed and if all issues connected to the sale transaction have been resolved, the borrower can sign this document without hesitation.

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. You 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.

Borrowers sometimes write 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 at closing but had not absorbed the content, probably because it was one of 30 or more documents they had to sign that day. Borrowers need to understand, as early in process as possible, that they cannot rely on anything that loan officers tell them unless it is written down.

Notice of right to cancel: If you are refinancing, you have three business days from closing to cancel the deal and get all your money 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. You can learn what you need to know from my online article Rescinding a Mortgage Refinance.

ARM program disclosure: This document has important information about the adjustable rate mortgage (ARM) that is not in the note or the ARM rider to the note. This includes the recent value of the ARM index, the maximum payment over the life of the loan, and the month in which the maximum payment is reached. It is only relevant, of course, if you have selected an ARM.

This was a critically important disclosure prior to the financial crisis because of the proliferation of what were called "option ARMs" that were very complicated and carried heavy risks for borrowers. Those types of ARMs are no longer being written.

Amortization schedule: Some document packages include a schedule showing the payment and loan balance every month over the life of your loan. It is based on the assumption that the borrower never makes an extra payment or fails to make the scheduled payment. Online calculators including mine allow you to update this type of schedule as needed.

Future Use Documents

Some documents instruct on borrower responsibilities after closing, and on what is expected to happen during the first year. They require little attention before closing beyond recognizing them for what they are. You should keep them in a separate file folder for easy retrieval.

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.

Escrow account statement: This document describes the responsibilities of the borrower in connection with the escrow account established for the payment of taxes and insurance.

Initial escrow account disclosure statement: This document shows expected inflows to and outflows from the escrow account during the first year of the loan.

Tax and hazard insurance record: This document provides information on your property taxes and homeowners insurance. It is filled out by the settlement agent, not you, but you should retain it in your loan folder.

Correction agreement: This document obliges you to assist the lender in recovering any lost documents, pay any fees the lender failed to collect at closing, and be available for a quality control audit after closing. For good reason, these provisions stick in the craw of many borrowers, but bite your lip and sign it.

Binding arbitration agreement: This document obliges you to accept binding arbitration to settle any future disputes between you and the lender, and between you and any third parties involved in the loan process. This agreement remains in force even after the loan is paid off.

Future flood insurance authorization: This document obliges you to purchase flood insurance if the government places your house on a flood plain after the closing. You must comply or the lender will buy it at an inflated price for which you will be billed.

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, but that will take at least two years.

Having identified the junk documents that do not require your attention, educational documents that can be read at your leisure, and future use documents that require only to be set aside, you have completed the easy part of the closing process. The difficult part is the transactional documents that indicate whether or not you are actually getting the deal you negotiated or were promised. These are the subject next week's installment of this series.

• Contact Jack Guttentag via his website at mtgprofessor.com.

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