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Explanation of Loan Documents PDF Print E-mail
Written by Linda Kassis   
Saturday, 07 July 2007 15:25

Explanation of Loan Documents

Get an idea of the documents you may see within a given loan package.

Mortgage

IA

MN

 

Also known as Deed of Trust depending on the state you are in. The DOT (Mortgage) is a security instrument whereby real property is pledged as security for a debt. A Mortgage differs from a deed of trust in the way that foreclosure proceedings are handled. In states that use the mortgage, foreclosure proceedings are governed by state law and handled through the state's legal system. A Mortgage involves two people (borrower and lender). A mortgage is actually the formal document proving the legal claim or lien on a piece of property that you give to the lender who holds it as security for the money you borrowed. The lien is recorded in public records. On a mortgage, you pledge the property as security for the repayment of your loan, but you do not transfer title to the lender.

 

States that use the mortgage include: Alabama, Connecticut, Delaware, Florida, Hawaii, Indiana, Iowa, Kansas, Louisiana, Maine, Massachusetts, Michigan, Minnesota, New Hampshire New Jersey, New York, North Dakota, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, South Dakota, Vermont, Wisconsin and Wyoming.

A Mortgage can vary in size from five (5) pages to sixteen (16) pages and usually requires initials in bottom right on each page including the page where notarized as well as signature/s on last two pages.

 

Initial Escrow Account Disclosure Statement Discloses the full payment and the break down of amount paid to principal and interest; and the amount paid to an escrow account each month. Shows the inflow and outflow of escrow items from the escrow account such as taxes paid out. It also keeps a running balance figure in the escrow account and shows the designated minimum cushion.
Escrow Waiver Informs borrower they are responsible for their own taxes, insurance and any other items regarding the property separate from the loan payment. Borrower is waiving the option to pay these monthly with their principal and interest payment.
Occupancy Affidavit and Financial Status Borrower declares they presently or intend to occupy the property as their primary residence. The affidavit also declares that the borrower's financial condition has not materially changed since submitting the loan application. This document is used as a condition to obtain the loan. The Affidavit is usually notarized, but depending upon the lender, the form may be notarized with an acknowledgment or a jurat. Some variations of the Occupancy Affidavit are not notarized.
Note/Security Agreement

A note is the security agreement or contract between the borrower and the lender, by which the borrower agrees to pay the loan back. The note will generally include

     1) loan amount

     2) interest rate

     3) terms of repayment

     4) monthly payment amount

     5) length of loan

     6) day of month each payment is due as well as date for first payment

     7) Late charges for late payments

     8) Prepayment penalty (if applicable)

Lines of credit will not have the same items as listed above.

A Line of Credit Loan will not state a specific monthly payment since the payment will be determined by the balance used at any given time.

Fixed Rate Note

(Multi-state)

 
Tax Information Disclosure  
Self-Employment Income Analysis  
Calculation of Rescission Period If you want to be certain you may want to carry a 'rescission calendar'. From the signing date, count three (3) business days after the signing date. The rescission period ends at midnight on the third business day following the signing. Most lenders consider only Sunday and Federal Holidays to be excluded from calculating the Rescission Period. There are a few who also exclude Saturday from the calculation of the rescission period. There are two places that have options for signatures on most RTC's. One is to be signed if the borrower wishes to cancel and usually at the very bottom is the signature line to acknowledge receipt of copies of the RTC. If the dates have to be entered at the appointment, the borrower's will need to initial beside each date written in.
Notice of Right to Cancel This is a federally mandated form which allows the borrower three (3) business days to exercise the option to cancel the loan. A Loan will have a rescission option if the transaction results in a mortgage or lien on the property. However, if the transaction is a purchase-where a grant deed, for example, is the title instrument used to convey the property-there is no rescission period. There are three (3) dates referred to on the RTC; a) Document Preparation date, b) Transaction Date: The date the document was signed, and c) End of rescission period date: The termination date of the borrower's right to cancel the loan. Some lenders will calculate and fill in the rescission period, while others will leave it to be filled in at the signing by an NSA.
Itemization of Amount Financed This form accompanies the Truth in Lending Disclosure, showing how they come to the Amount Finance figure. This figure differs from the actual principal borrowed amount. Amount Financed figure excludes prepaid finance charges. Prepaid Finance charges are itemized on this page. The fees listed on this form have corresponding HUD-1 reference numbers.
Federal Equal Credit Opportunity Act Prohibits creditors from discriminating against credit applicants on the basis of race, color, religion, national origin, sex, marital status, age (provided the applicant has the capacity to enter into a binding contract); because all or part of the applicant's income derives from any public assistance program; or because the applicant ahs in good faith exercised any right under the Consumer Credit Protection Act.

 

The appraisal disclosure explains the borrower's right to a copy of their appraisal and how to obtain it.
IRS Form 8821 This form may be used in place of IRS Form 4506. The 8821 authorizes lender to obtain multiple years tax return.
IRS Form 4506-T
Request for Transcript of Tax Return - Loans are periodically and randomly chosen for audit to ensure a borrower did not commit fraud by falsifying tax information in obtaining the loan.

 

IRS Form 4506 Request for Copy of Tax Return - Loans are periodically and randomly chosen for audit to ensure a borrower did not commit fraud by falsifying tax information in obtaining the loan.
IRS Form W-9

 

Request for Taxpayer Identification Number and Certification - Each year the mortgage company will report to the IRS the interest the borrower paid on the mortgage during the previous tax year. This form verifies the borrower's social security number.

Borrowers Identification/

 

To help the government fight the funding of terrorism and money laundering activities, federal law requires all financial institutions to obtain, verify and record information that identifies each person who opens an account. Sometimes titled: Patriot Act Disclosure, sometimes it is just titled as an Identification affidavit or Identity certification. These all have the same purpose; to prove and document the identity of the borrower.
Payoff Authorization Letter Authorized the payoff of a loan. Borrower also signs to verify they have taken no further advances and will take no further advances against this loan.
Survey Affidavit Signed by borrower to warrant that they are not aware of any easements, encroachments, liens or any other right of interest by anyone else in regard to the subject property. An easement is a formal right to travel through someone else’ property. An encroachment is a formal right of someone other than the primary property owner, this is usually established if someone’s garage, fence, driveway was built or installed across a property line. If a property owner does not have a formal survey when they build but rather thinks they know where the property line is, this sometimes occurs. This type of mistake is not found until an up to date survey is done. This use of the word ‘survey’ does not refer to a survey as in a questionnaire. It refers to the surveying of property. This is done by hiring a professional surveyor to come in and locate property lines through very detailed measurements.
Assignment of Mortgage (not for the notary at a loan signing) You may find this document in one of your loan packages. It has a notarial certificate. This is not for the borrower to sign and not for you to notarize. This is something that will be used if and when the loan is sold.

Errors & Omissions/Compliance
Agreement

Borrower agrees to cooperate to correct any typographical errors or clerical mistakes within the documents. Borrower also agrees that they will comply with all correction requests within the noted time period.
Mortgagor's Affidavit General purpose is for borrower to state that there have not been any significant changes to their financial situation, ownership status or condition of the property.
Hardship Letter The purpose of this form is for the borrower to acknowledge that taking this loan will not create a hardship for them. These are generally used on second mortgages and debt consolidation loans.
Affiliated Business Arrangement Disclosure This document discloses who the lender/broker is affiliated with that may have an interest or have fees due from this loan such as the Title Company.
Correction Agreement/Limited Power of Attorney Unlike the compliance agreement in which the borrower pledges to cooperate in correction errors in the documents, in the Correction Agreement - Limited Power of Attorney the borrower authorizes an agent of the lender to make the correction to the document.
Document Correction Agreement If any document is lost, misplaced, misstated, inaccurately reflects the true and correct terms and conditions of the loan, the borrower will comply to execute, acknowledge, initial and deliver corrected documents to lender within the necessary time frame.
Identification Affidavit

An identification form in which two forms of ID are required listing 1) Type of ID used and 2) ID number. This is then signed by the notary in the upper portion attesting to personally viewing and validating the ID information filled in.

Secondly, the borrower signs any variations of their name.

Lastly, the Notary will complete the acknowledgement of the borrowers signature.

To help the government fight the funding of terrorism and money laundering activities, federal law requires all financial institutions to obtain, verify and record information that identifies each person who opens an account. Sometimes titled: Patriot Act Disclosure, sometimes it is just titled as an Identification affidavit or Identity certification. These all have the same purpose; to prove and document the identity of the borrower.

Compliance Agreement By signing this the borrower agrees to cooperate with the lender in adjusting loan documentation for clerical errors after the property closes. If an error is discovered in one of the forms after the closing, the borrower agrees to assist in rectifying the error. Accurate information in the loan package is crucial to closing the loan or selling it later. the Compliance Agreement is executed in consideration of the lender disbursing funds for the closing of the property and to enable the lender to sell, convey or market the loan in the secondary market. Both acknowledgements and jurat formats exist as well as versions that do not require notarization. There are a number of variations to the standard Compliance Agreement including the following: a) Errors and Omissions/Compliance b) Document Correction Agreement c) Correction Agreement - Limited Power of Attorney. Unlike the compliance agreement in which the borrower pledges to cooperate in correction errors in the documents, in the Correction Agreement - Limited Power of Attorney the borrower authorizes an agent of the lender to make the correction to the document.
Signature Affidavit and AKA Statement In this the borrower discloses any other names under which he or she is known and writes signatures for each name.. The Signature Affidavit and AKA Statement ensure signature verification and uniformity on all documentation. If a document requires the borrower to sign in a different name, the Signature Affidavit and AKA Statement validates that name and corresponding signature. This document is routinely notarized. Both acknowledgement and jurat formats exist. However, variations of the Signature Affidavit exist which are simply signed without the need for notarization despite the fact that its title "Affidavit" suggests that it should be notarized.
Borrower's Certification & Authorization This is found in most loan packages and states that the information in the loan application is true and complete, without misrepresentation or omission of important facts. It also authorizes the lender to release loan-specific information to an investor looking to purchase the loan in the secondary market. Information provided to the investor could include the borrower's employment history and income, Bank account balances, credit history and copies of income tax returns.
Hazard Insurance Authorization & Requirements This outlines the lender's policies and minimum requirements for hazard insurance that is required to cover the subject property. After the Authorization is signed and returned, the document will be sent to the borrower's insurance agent who will provide the necessary coverage.
Impound Authorization The borrower authorizes the lender to collect and manage the portion of a borrower's monthly payment that is for taxes, insurance and other items.
HUD-1 Settlement Statement HUD-1 itemizes all closing services and fees charge to the borrower. The most important line for a Signing Agent is line 303 'Cash From/To Borrower'. This is where the SA would see if borrower needs to send a check back with the documents.
Title/Escrow Disbursement This is sent to the title and escrow company along with the funds for disbursement. This document contains much the same information as the Instructions to Escrow. This generally does not require a borrower's signature.
Instructions to Escrow A Summary of the terms and conditions of the loan. It may also be called 'Closing Instructions'. This document often shows the terms of the loan as well as some of the fees. This item is used by the Closing Agent to fund the loan and set up the escrow account, if any. This item may require borrower's signature but not all do.
Borrower's First Payment Letter The borrower (s) First Payment Letter informs them what their monthly payment for the loan will be. The payment is broken down into Principle and Interest, Property Taxes, Hazard Insurance, PMI (Private Mortgage Insurance), and Flood Insurance (when applicable). This document also acts as a first payment coupon in the event borrower does not get their statement before the first payment is due.
Residential Loan Application (1003)

This is a version of the loan application which contains all the information the borrower provided to initiate the loan. There is a new section at the top of the first page that needs signed by borrowers if they are applying for joint credit. There is confusion of late with this new item, whether this item needs signed if there is only one borrower. It is best to check with whoever hired you to find out what they are requiring. Generally, each page has a spot to be initialed at the bottom right, page 3 & 4 gets a signature. Page 4 is for additional information that would not fit into the body of the application.

The Shape-Shifting 1003 The Uniform Residential Loan Application ...
Statement of Owner Occupancy Borrower signs to say they occupy the property, that it is their primary residence.
Notice of Special Flood Hazards Informs borrower that if their area is deemed a flood zone they will be required to have flood insurance.
Good Faith Estimate a) Discloses the estimated loan closing costs. RESPA requires that when a borrower applies for a loan, the lender or mortgage broker give the borrower an estimate of settlement service charges he/she will likely have to pay. If the borrower does not receive this estimate when applying for the loan, the lender or mortgage broker must mail or deliver it to the borrower within three (3) business days. Ideally, the borrower would have the Good Faith Estimate in advance of the closing to compare to the HUD-1 Settlement Statement at closing. b) Typically this form requires the signature of the borrower prior to proceeding with the drawing of loan documents. Since loans turn around quicker than in the days before RESPA was enacted, the Good Faith Estimate often will be signed at the signing appointment.
Fair Lending Notice Discloses state and federal laws prohibiting financial institutions from discriminating in their lending policies and practices. One form or another of this document are usually found in a loan package.
Truth in Lending This form is required by the Federal Truth in Lending Act (TILA). TILA requires seller's and lenders to disclose credit terms and interest rates in an identical manner so borrowers can shop around to compare loans. There are different disclosures required by the TILA. For example, the TILA requires the RTC form and the Itemization of Amount Financed/Prepaid Finance Charges form. TILA requires lenders to make certain disclosures on loans subject to the Real Estate Settlement Procedures Act (RESPA) within three (3) business days after receipt of a written application. This early disclosure statement is partially based on the initial information provided by the borrower. A final disclosure statement is provided at the time of loan closing. The disclosure is required to be in a specific format and include the following: a) the Annual Percentage Rate (APR) is the cost of the loan in percentage terms and includes private mortgage insurance and prepaid finance charges (loan discount, origination fees, prepaid interest and other credit costs). The APR is calculated by spreading these charges over the life of the loan, resulting in a higher rate than the interest rate shown on the note. Some TIL's come with a page of Terms. b) Finance Charges, c) The amount financed, d) Total Payments and payment schedule, e) Prepayment penalties, if any and f) Assumption option, if allowed.
Statement of Information Borrower Information Sheet to include last 10 years of employment and residence.

Condominium Rider

(Multi-state)


Adjustable Rate Rider
(Multi-state)

 

Balloon Rider

(Multi-state)


Adjustable Rate Note

(Multi-state)


Deed of Trust (DOT)
CA

MO

NE

A deed of trust involves three people - the borrower (or trustor), the lender (the beneficiary) and a trustee, a neutral third party, such as an attorney or a title agent. The deed of trust is also recorded in public records.

In a deed of trust transaction, the borrower transfers the legal title for the property to the trustee who holds the property in trust as security for the payment of the loan to the lender. The deed of trust is cancelled when the debt is paid. However, if you default on your payment of the loan, the trustee may sell the property at the request of the lender without a court proceeding.

States that use the deed of trust include: Arizona, Alaska, California, Colorado, Georgia, Idaho, Illinois, Mississippi, Missouri, Montana, Nebraska, Nevada, New Mexico, North Carolina, Oregon, Tennessee, Texas, Utah, Washington and West Virginia.

A deed of trust can also vary in number of pages and usually require initials on each page including the notarized page as well as signature/s.

Last Updated on Wednesday, 30 March 2011 18:30
 

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