This document contains all of the fees and costs associated with the purchase and sale, or the refinance, of your property. Click here to see a PDF sample settlement statement with explanations.
The note is the document you will sign that lays out the terms of the loan. In the note you will find your loan amount, interest rate, length of loan, first and last payment dates, and late payment penalty. If your loan is an adjustable rate loan, you will also find the adjustment dates and calculations, including maximum and minimum rates over the life of the loan
The deed of trust is the document that secures the loan with your property. The document explains how a deed of trust works under state law. It explains the rights and obligations of the borrower, the lender, and the trustee. In basic terms, the trustee is an individual or company that the lender chooses to represent their interests should it become necessary to foreclose on the property. The trustee’s name and address will be listed in the document. The deed of trust will be recorded in the land records in the county or city courthouse. Once you pay off your loan, a certificate of satisfaction or release must be recorded in the land records as evidence that the property is now free of that obligation.
The deed transfers the property from one party to another and will be recorded in the county or city land records. Generally, the deed that will be signed at your purchase will contain the names of both the buyers and the sellers, the description of the property, and the type of tenancy under which the purchasers will hold the property. Most purchasers will take the property as a sole tenant, as tenants-in-common, as joint tenants with the right of survivorship, or as tenants by the entirety. A sole tenancy is simply property owned by one person. Tenants by the entirety and joint tenants with the right of survivorship are similar in that should one of the owners die, the other owner automatically assumes all interest in the property. The difference between the two is that only a husband and wife can hold property as tenants by the entirety, whereas most people can hold property as joint tenants with the right of survivorship. Tenants-in-common also own the property together; however, upon the death of one of the owners, the other owner(s) does not assume the deceased person’s rights in the property. The deceased owner’s share of the property becomes part of his/her estate and will pass onto his/her heirs. It is important to specify how you wish to hold the property. Also, on occasion, one person gets a loan to purchase the property, yet would like to have an additional person on the deed. If that is the case, let us know that in advance. You should also inform your lender that you plan on having a second person on the deed, since the lender will have to add the additional person to some of the loan documents for him or her to sign.
There are a few affidavits that are normally required to be signed at settlement. The lender usually asks for a name affidavit to be signed. The name affidavit shows any other names that you may have been known as and asks you to state that you are one and the same person as those other names. For example, a married woman might have her maiden name included or borrowers might have their names listed with and without middle initials or middle names.
You may also be asked to sign an affidavit that states that you haven’t gone bankrupt, that you are still employed, that your financial status or marital status hasn’t changed, that there are no liens on the property, and so on.
When refinancing your personal residence, federal law gives you a three-day period to cancel the transaction after you have signed all of the papers. This is your right of rescission. That means that you have three days to read through the documents, think about the loan, and then cancel the transaction if you so choose. At the settlement, you will sign a statement that says that you have received two copies of the right of rescission notice. The right of rescission notice will describe the right of rescission and it will also show the date by which you must rescind. The notice will provide instructions on how to rescind as well. If you wish to keep the loan, some banks will ask you to sign an acknowledgment that states that three days have passed and that you still want the loan. Other lenders will not require that acknowledgement.
The Truth-In-Lending statement is required by federal law and is designed to show a borrower the true cost of the loan as well as other key terms of the loan. You may have already received a copy of this during the loan process itself. In the Truth-In-Lending, you will find the A.P.R. or the annual percentage rate. The A.P.R. is often different from your actual interest rate because the A.P.R. includes any points or loan fees, as well as your interest rate. This is what the money actually costs you to borrow. This document also states, among other things, the total finance charge in dollars, the total amount you will pay back over the full term of the loan, and whether your loan is assumable or not.
The first payment letter shows the total monthly payment as well as the first payment due date. It will also break down the total payment into principal and interest plus any escrows that are being collected. Many lenders also include the mailing address to which you will send your payments. Some lenders will include a starter payment coupon or two as part of the first payment letter. Other lenders may provide a separate sheet with starter payment coupons.
Disclosure Statement: Most lenders require that you establish an escrow account through which the lender will pay your property taxes and your property or hazard insurance. If PMI (private mortgage insurance) is required for your loan, money for this will be escrowed as well. The escrow disclosure statement will show the amount of money that you are paying into the escrow account and it will show when and for what the lender is making payments on your behalf. This statement will also show how much money is in your escrow account from month to month, as well as the cushion selected by the lender. If, for example, taxes or insurance costs increase, the lender will ask you to put more money into your escrow account so that there are adequate reserves (the cushion) in the escrow account.
Generally, the lender will order a flood certificate which will show whether or not your property is located in a flood zone. Most likely the property will not be located in a flood zone. If that is the case, the lender will ask you to sign a form that states that if, in the future, your property is found to be in a flood zone, you authorize the lender to purchase flood insurance on your behalf for which you will reimburse the lender. If the property is located in a flood zone, the lender will most likely require that the property be covered by flood insurance as a requirement for obtaining the loan.
Sometimes there are mistakes in the paperwork that a lender sends to be signed. By signing the compliance agreement, you are agreeing to assist the lender in correcting those mistakes. An example of your assistance may include being asked to sign a document that wasn’t sent to the closing or you being asked to re-sign a document that needed to be corrected. You may also be agreeing to cooperate with the lender if they need your assistance in response to their being audited by a regulatory agency.
Lenders often sell or assign their loans to investors or other lenders. One of the documents that you will sign is a disclosure regarding this fact. The lender will disclose that they may assign your loan. They may also disclose how often they have assigned other loans over the past three years. By signing this form, you are simply stating that you’ve received it and that you understand that your loan may be assigned. If your loan is assigned to another lender, your rates or fees will not be affected. The end result to you is that you will be sending your payment to a new place. You will receive something in writing if your loan is assigned.
You may be asked to sign an original loan application at the settlement, even if you have already signed one during the loan application process.
Although you will go over the documents at the closing, occasionally some typos or other clerical errors slip by. By signing this document, you will allow the title company to correct any such mistakes on your behalf. The bank may also ask you to sign a similar form which gives them the right to make such corrections on your behalf.
There are two types of title insurance: lenders title insurance, also called a loan policy, and owner’s title insurance. Most lenders require a loan policy when they issue you a loan. The loan policy is usually based on the dollar amount of your loan. It protects the lender’s interests in the property should a problem with the title arise. Owner’s title insurance is usually issued in the amount of the real estate purchase. It is purchased for a one-time fee at closing and lasts as long as you or your heirs have an interest in the property. Only owner’s title insurance fully protects the buyer should a problem arise with the title that was not uncovered during the title search. Owner’s title insurance also pays for any legal fees involved in defending a claim to your title.
In order to issue title insurance, the title company must search public land records for matters affecting that title. Some examples of items that can cause a problem are: deeds, wills and trust that contain improper information; outstanding judgments or tax liens against the property; and easements.
Occasionally, in spite of an exhaustive title search, hidden hazards can emerge after closing. Things such as mistakes in the public record, previously undisclosed heirs claming to own the property, or forged deeds could cloud the title. Owner’s title insurance offers financial protection against these by negotiating with third-parties and paying claims and the legal fees involved in defending the title.
When you refinance you are obtaining a new loan, even if you stay with your original lender. Your lender will require lender’s title insurance to protect their investment in the property. You will not need to purchase a new owner’s title policy; the one you bought at closing is good for as long as you and your heirs have an interest in the property.
Even if you recently purchased or refinanced your home, there are some problems that could arise with the title. For instance, you might have incurred a mechanics lien from a contractor who claims he/she has not been paid. Or you might have a judgment placed on your house due to unpaid taxes, homeowner dues, or child support for instance. The lender needs reassurance that the title to the property they are financing is clear.
If it has been no more than 10 years since you bought your house or refinanced, ask for a reissue or discount rate. They are not available in every state, and you might have to meet some criteria to be eligible, so be sure to ask.
Construction of a new home raises special title problems for the lender and owner. You may think you are the first owner when constructing a home on a purchased lot. However, there were most likely many prior owners of the unimproved land. A title search will uncover any existing liens and a survey will determine the boundaries of the property being purchased. In addition, builders routinely fail to pay subcontractors and suppliers. This could result in the subcontractor or supplier placing a lien on your property. Again, lenders want to be sure the property has clear title, and they are insuring the correct property. Purchasing owner’s title insurance will protect you against these potential problems and pay for any legal fees involved in defending a claim.