Why understanding your mortgage documents matters before you buy
A mortgage is a secured loan used to purchase or conduct ongoing maintenance on real estate, which is also collateral. For most Americans, a home is the largest purchase they’ll make, so having a clear knowledge of these mortgage documents is essential for protecting against unexpected costs, bad terms, and potential home loss. Mortgage understanding helps homeowners with the financial, procedural, and legal components of the process.
With better mortgage document insights, you can reduce your chances of falling victim, as many people did during the 2008 financial crisis, when many lost homes due to subpar mortgages. If you’re unsure about what you’re reading or signing, don’t hesitate to bring in real estate legal specialists.
The key components of a mortgage and its documentation involve principal, down payment, private mortgage insurance, and knowing the difference between specific types of loans, such as fixed-rate or adjustable-rate ones. There is standard paperwork throughout specific processes: the preapproval, application/underwriting, and closing phases.
What Mortgage Documents Will I Handle?
When it is time to buy, sell, or refinance a home, get ready to handle several real estate documents. These include the application, things you’ll sign, proof of financial health, reports, and more.
Your extensive mortgage document list includes:
- Promissory note
- Closing disclosure
- Deed
- Declarations of financial truth
- Official application form
- Loan estimate
- Pre-approval letter
- W-2s and paystubs
- Tax returns
- Bank statements
- Purchase agreement
- Property survey
- Homeowners insurance
What Are Some Potentially Confusing Document Names?
Mortgage literacy involves understanding the difference between documents that may have similar names but completely different functions. For example, pre-qualification isn’t the same as pre-approval.
Early Documentation
Your pre-qualification is a quick but informal estimate of how much you MAY borrow. However, preapproval is a far more detailed process, where a lender dives into your assets, credit report, and income to present a formal letter with a conditional loan amount.
Ownership vs Collateral Document
What is a deed of trust in relation to a home purchase? First of all, your deed is a required document whenever you buy a home, as it legally transfers ownership from one party to another. It’s concrete proof of ownership and includes the names of the parties involved and a legal description of the property.
However, your deed of trust is a three-party agreement between a lender, a borrower, and a neutral third-party called the trustee. In this case, the borrower may convey the property’s title to the trustee to hold as security or collateral for a loan. If the borrower doesn’t make the required payments, then the lender can foreclose on the loan.
Don’t confuse your deed with the title. After all, your deed is the physical legal document that shows ownership or transfer of ownership, but the title represents your ownership rights to a property.
Loan Estimate Vs Closing Disclosure
A loan estimate is a three-page document detailing the:
- Loan terms
- Interest rates
- Escrow expenses
- Type
You’ll get this document within three business days after your loan application is received, and you should use it to compare other offers. You can receive this document from every lender you apply to, so you may have more than one on hand, and it’s not final.
However, your closing disclosure is a final document that you’ll sign for the mortgage lender you officially sign with.
Should I Hire a Real Estate Attorney?
A key aspect of any home purchasing decision guide is to hire a real estate attorney for complex transactions. If you live in states like New York, Massachusetts, North Carolina, and South Carolina, you may be required to have one during your closing process.
However, even when it’s optional, their legal expertise can be vital on:
- Short sales
- Homes in part of an estate/probate sale
- Purchasing a foreclosed property
- Unusual property issues like liens, boundary disputes, and zoning issues
Paying for their legal services upfront may spare far more potentially expensive and stressful legal battles later on. After all, while your real estate attorney isn’t an agent who helps you find a home or negotiate price, what they can do is review and adjust your documentation to protect your interests, such as assuring clear ownership. After doing a title search, your real estate attorney may find a lien or other issue that they can resolve so the sale goes on as planned.
Frequently Asked Questions
What Are the Most Common Mortgage Frauds?
Mortgage fraud can involve the actions of a borrower, lender, or other insider. It involves intentionally lying or omitting vital information regarding the decision-making in a mortgage loan.
Some of the most common mortgage fraud includes:
- Occupancy
- Straw buyer
- Home appraisal
- Income
- Asset rental
- Foreclosure scams
Under occupancy fraud, applicants may lie about residing in the home when they intend to use it for a rental investment instead. A Straw buyer is someone who buys property on behalf of someone else, and it’s often done because the straw buyer has better credit than the real home buyer. Home appraisal fraud is when a home is inflated beyond its true value, which often happens during property flipping.
Income fraud refers to the mortgage professional or borrower reporting inaccurate income information, who may go as far as falsifying documents to do so. Renting or borrowing assets from someone else to appear more qualified for a mortgage loan is asset rental fraud.
What Is the Golden Rule of Mortgage?
The golden rule of having a mortgage is to pay no more than 28% of your gross income to your overall housing expenses. Your total debts, including the housing expenses, shouldn’t exceed 36% of your gross income under what’s called the 28/36 rule. Your potential mortgage lender will evaluate the 28/36 rule for your loan approval.
Don’t Skim Over Mortgage Paperwork
As you can see, mortgage documents are extensive, are part of different phases, and may contain complex language, particularly for new homeowners. Getting more insight into what your documentation entails can help you avoid mixing up terms such as deed or deed of trust, and understanding which documents are conditional vs final.
If you’re unsure, there’s always a real estate attorney whose upfront costs can give you peace of mind about ownership.
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