This is an instructional guide designed to speak plain language to assist Consumers in navigating the muddy waters of shopping, applying for, and closing residential mortgage loans.

Why Are We Doing This?

Reason # 1 - Motivation, Inc. has provided specialized training and consulting services to public and private entities in the real estate world for over 16 years. Our Pre-Employment, Personal Social Adjustment, Construction and Data Entry Skills training programs for low- and very low-income people, persons with disabilities, veterans and residents in public housing bring us face to face with people trying to better their lives and overcome adversity. Many of our trainees have been affected by the mortgage crisis and have lost their homes.

Reason # 2 - Our firm also acts as real estate development intermediary for public housing authorities. We guide them in re-developing old housing stock to ensure they are not taken advantage of by developers seeking to make millions of dollars by involving them in bad financing deals.

Reason #3 - This crisis is a plague upon American citizens. Most everyone knows someone who has been negatively affected by it. That tells you that there are millions of families harmed by one weapon, Bad Mortgages! Therefore, Motivation, Inc. has decided to utilize our proven training methodology, the power of government, and the internet to help educate as many people as possible.

Anyone who currently owns a bad mortgage will need to refinance soon. Along with new homebuyers, they are prey waiting to be attacked by an industry that does not have their best interests in mind. This GUIDE (Understanding the Mortgage Process) and our Professional Mortgage Consulting Service (we’ll discuss at the end of this page) will show them how to protect themselves from bad mortgages.

If you have purchased a mortgage in the past and did okay, keep reading. You may learn something new that can help you in the future.

The Most Important Points You Need to Know About Shopping for Mortgage Loans

How to Figure the Monthly Payment

* PITI = Principle, Interest, Taxes, & Insurance

(Ex. 4% interest rate for 3 years interest only then it would adjust 5% points to 9% full principle, Interest, Taxes & Insurance (PITI). This is called an Adjustable Rate Mortgage or ARM).

Here is what that math would look like on that same $200,000 home:

EXAMPLE: $200,000 principle with 100% financing = loan of $200,000 with a 3-year fixed loan at 5.5% interest:

* ITI = Interest, Taxes, & Insurance

When the loan adjusts on the 37th month of the loan, here is the math:

* PITI = Principle, Interest, Taxes, & Insurance

THE REALITY CHECK

• Your principle remained the same because you were only making interest payments for 3 years.
• You have no equity in the home because you put no cash down at purchase.
• If the house was appraised higher than what it is really worth or if the area home values fall for any reason in the first 10 years of the loan, you will be upside down in the loan. Meaning you owe more than what the house will sell for in the market.

OUTCOMES

If you can’t make the mortgage payment and have to sell your house you will likely receive less money than you owe the lender. Your bank will not renegotiate your loan. Then your loan is foreclosed on and you STILL owe money to the bank. Therefore:

• Your credit is ruined for at least seven years
• You are now seriously in-debt

What You Really Need to Know About Shopping Mortgages

Before applying for a mortgage, ask yourself these questions:

1. Is it better for me to purchase or rent?
2. Is my lifestyle conducive to home maintenance and yard work or would I rather not have to bother with the upkeep?
3. Will I get a big refund on my income taxes or will I have to pay at the end of the year?
4. How will I pay to replace my roof if it starts leaking? How will I pay for a new furnace if the heat stops working in the middle of winter? Will I have enough money after my monthly bills to cover unexpected expenses such as these?
5. Why do I want to own a home? Do I want to provide stability for me and my family or am I just trying to impress others?

Assuming you are still reading, you must be convinced that homeownership is still worth pursuing. With that in mind, here are the items you need to get and review before proceeding:

1. Get copies of three credit reports and scores for yourself and anyone else whose name will be on the loan. You can get these free (once per year and in some states twice per year) off the internet by going to www.annualcreditreport.com.
2. You should purchase your FICO score or credit scores from all three credit agencies. The cost for each is generally under $15.

STOP!!!! If your average credit score (add all three scores and divide by 3 to get the average) is under 660 you have some credit challenges that may need to be corrected before proceeding.

The higher your credit score, the lower the interest rate you will pay for the money borrowed.

3. Your monthly budget with all income and expenses (including entertainment such as movie rentals, eating out, etc. as well purchases such as cigarettes, alcohol, etc.) Your current monthly expenses should not exceed more than 33% of your gross monthly income.

STOP!!!! If your expenses exceed 33% of your income you may need to wait until you can pay off some of your debt before proceeding with a mortgage loan application.

4. Social Security numbers of all loan applicants
5. Your complete addresses for the past 2 years (if renting the complete name and address of landlords for past 2 years)
6. Employer names, addresses, and gross income earned for all applicants over the previous 24 months (two years W2’s or 1099’s are preferred)

STOP!!!! If you don’t have or can’t get proof of your income for the past 24 months, you are going to be a prime candidate for a Sub-Prime Mortgage Loan.

That means you will pay:

• highest interest rates
• more in up front points
• higher fees
• higher pre-payment penalties

This doesn’t mean you will not get a loan, it simply means you REALLY need to read and understand this guide so you can get the best loan possible and not get into a bad, very costly loan.

7. Copies of previous two years tax return forms (have all forms and schedules available, and in order)
8. Copy of last two most recent year-to-date pay stub
9. Name, address, account number, monthly payment, and current balance for: installment loans, revolving charge accounts, student loans, mortgage loans, and auto loans (though the loan originator or broker will pull your credit, that information may not be current)
10. Name, address, account number, and balance of all bank and/or brokerage deposit accounts, including: checking, savings, stocks, bonds, 401K, 403B, etc.
11. Three months most recent statements for all bank and/or brokerage deposit accounts as listed in #7
12. If you choose to include income from Child Support or Alimony, you’ll need copies of the court orders. Make certain support shows up on the bank statements for verification if you receive it monthly.

Words and Meanings You Need to Know

1003 Loan Application – formal application you will need to sign before a lender will generally process your loan. The Broker/Originator will generally complete the application and send it to you for signature.

STOP!!! There are some declarations on the last page of the application you should complete personally, or answer for the Broker/Originator. It’s your responsibility to be certain that all information is true and accurate.

Good Faith Estimate – generally a one page document that must be provided by the mortgage lender/broker/originator to the consumer. This is a requirement by the Real Estate Settlement Procedures Act (RESPA). The GFE must include an itemized list of fees and costs associated with your loan and must be provided within three business days of applying for a loan.

These mortgage fees, also called settlement costs or closing costs, cover most every expense associated with a mortgage loan and will give an estimated monthly payment as well.

You should use the GFE to compare different loan offers and products from different lenders or brokers. (Ex. 30 year fixed rate vs. a 15 year fixed rate or loans of the same terms with and without down payment amounts, interest rates and/or fees)

The GFE is only an estimate and is rarely 100% accurate to what the final closing numbers are on the HUD-1 Settlement Statement.

Primary Residence - the home that you reside in more than any other owned residence.

Second Home - any home other than your primary residence, but not considered vacation, rental, or investment property.

Investment Property - real property held as rental or income producing. This is not owner occupied, unless it is multi-family such as a duplex or 4-plex and the owner occupies one unit and renting others.

First Mortgage Loan - loan that is in first lien position and takes priority over all other liens. This means that in case of a foreclosure, the first mortgage loan will be repaid before any other mortgages on the property is repaid to the lender. The first mortgage loan is generally used where a borrower is needing a second loan to pay the full purchase amount.

Second Mortgage Loan - lien in which you are given a lump sum amount that you pay off in installments over a specified period of time. In the case of a foreclosure, the lender who holds the second mortgage gets paid only after the lender holding the first mortgage is paid. In the event of foreclosure, where the home fails to sell for an amount sufficient enough to cover the first mortgage, the borrower will still be responsible for paying the second mortgage.

Conventional Loan - any type of mortgage that is not secured by a government entity such as the Federal Housing Administration (FHA) or the Veterans Administration (VA).

Non-Conforming or Sub-Prime Loan - loans made to borrowers with less than good credit (general credit scores under 660) and carry high fees and aggressive terms such as higher interest rates and multiple discount points.

FHA Insured Loan - fixed- or adjustable-rate loans insured by the U.S. Department of Housing and Urban Development. FHA loans are designed to make housing more affordable, particularly for first-time homebuyers. FHA loans typically permit borrowers to buy a home with a lower down payment than conventional loans.

Hard Money Loan - these are real estate loans made by aggressive lenders to borrowers that may not be able to qualify for conventional conforming or even non-conforming loans. These loans come with extremely high discount points, fees, and interest rates. These are generally short term loans not exceeding 36 months but with some pre-payment penalties if paid back early.

Points - an up-front fee paid to the lender at the time that you get your loan. Each point equals one percent of your total loan amount. So, for example, 2 points on a $ 200,000 loan is $ 4,000, or 2% of the loan amount. Mortgage points and interest rates are inherently connected: in general, the more mortgage points you pay, the lower the interest rate you get. However, the more mortgage points you pay, the more cash you need up front since points are paid in cash at closing.

Interest Rate - cost the lender charges you, the borrower, for borrowing money. The amount of interest you owe the lender depends on the interest rate, the term of the loan, and the loan amount. The lower the interest rate, and the shorter the term, the less interest you pay over time.

Interest Only Loan - is one that gives you the option of paying just the interest with an option to also pay as much principal as you chose during an initial periond of time.

Truth-in-Lending - is a law requiring written disclosure of the terms of a mortgage (including the APR and other charges) by a lender to a borrower after application. The Truth-in-Lending Act is designed to protect consumers and to ensure clear disclosure of key terms of the loan as well as any costs or fees involved. The Truth-in-Lending Act also requires the right of rescission period.

Hazard Insurance - an insurance policy purchased by the borrower prior to closing the mortgage loan. The lender will be named as loss payee on the policy in case the home has an insured loss or is totally destroyed. In the event of a claim because of damage to the home, the insurance company will issue a check in the names of both the homeowner and the lender. In most cases, that check will have to be signed by the homeowner, sent to the lender, and the lender will make payment to the contractors after the repairs are completed.

Flood Insurance - insurance policy purchased separately from hazard insurance that only provides protection in the event the home is damaged by flooding. This policy is backed by the federal government-not private insurers. Depending on whether or not the home is located in a flood plain, you may or may not be required by the lender to provide this coverage.

Earthquake Insurance - a special insurance rider to the basic homeowners’ policy that covers damage to the premises caused specifically by an earthquake.

Escrow - special accounts that a lender uses to hold a borrower’s monthly payments towards property taxes, hazard insurance, and mortgage insurance. The lender will pay such expenses when they become due.

Loan Origination Fee - fee charged by lenders to cover administrative cots of processing a loan. This fee is generally 1% of the total loan amount.

Loan Discount Points - one or more percentage points of the loan amount paid by the borrower from the loan funds to the lender at closing. (Example: if the loan is $100,000 and the borrower is required to pay one discount point it would be $100,000 x .01=$1,000 in discount points)

Appraisal - written analysis of the estimated value of your property based on comparative sales of like type homes, construction replacement costs, or if an investment property, the income approach.

Credit Report - detailed summary of your borrowing history. Your credit report shows previous and current credit accounts along with your payment history for up to ten years. It is imperative that you pull all three of your credit reports from www.annualcreditreport.com. You also need to purchase your credit scores so you know what your credit looks like before applying for a mortgage.

Mortgage Broker Fee - monies paid to the broker or loan originator by the lender or from the borrower’s funds.

Processing Fee - fee charged to you to have your loan file packaged before it goes to the lender for review.

Underwriting Fee - covers the cost of evaluating your total loan application package, including your credit report, employment history, financial documents and appraisal, to determine if the loan can be approved.

Wire Transfer Fee - on occasion, money is transmitted via the inter-bank wire transfer system.

Attorney Closing Fee - fees charged by the closing attorney for services that must be performed to process and close your loan.

Title Insurance - protects lenders against any title dispute that may arise over a particular property. Home title insurance is a required fee paid at closing. It is recommended that you purchase owner’s title insurance which protects you as the homeowner.

Title Fees - fees charged by the closing attorney or title agent to make certain the title to the property is clear of liens and can be conveyed without any issues.

Recording Fees - money that is paid to a local government for entering the sale of a property into the public records.

City/County Tax Stamps - Property taxes (also known as real estate taxes) are assessed on the property by the local government (e.g. city, county, village, or township) for the various services provided to the property owner. When you pay property tax each year, you're paying for necessities that are provided by the city, such as police and fire department services, garbage pick up and snow removal. These stamps require an additional tax or stamp charge identical to the city/county tax stamp.

Typically, you will pay property taxes into an escrow account and your lender will forward the payment to your local government when it becomes due. Property taxes and the interest you pay on your mortgage are usually tax-deductible.

State Tax/Stamps - some states require an additional tax or stamp charge identical to the city/county tax/stamp. These stamp or tax charges are generally 1% of the selling price.

Pest Inspection Fee - this is the cost of having the property inspected for wood destroying insects and organisms like termite, ants, fungi, and mold.

Mortgage Insurance Premium (MIP/PMI) - insurance that protects the lender in case you default on your loan. A conventional loan for 80% or less of the total home value does not require mortgage insurance. For FHA and VA loans, mortgage insurance premium is required and will be added to your monthly payment.

Private mortgage insurance is generally included in your monthly mortgage payment and may be tax-deductible (please check with your tax advisor).

Homeowner Association Dues - the monthly or annual fees paid to the association of homeowners to cover the maintenance, insurance, and capital improvements. You are generally required to pay one year’s fees and an initiation fee up front when you close your new home loan. These fees range in amounts and frequency when due.

Settlement Charges - Also known as closing costs, these costs are for services that must be performed to process and close your loan application. Examples include title fees, recording fees, appraisal fee, credit report fee, pest inspection, attorney's fees, taxes, and surveying fees.

Yield Spread - this is the percentage of the total loan or dollar amount of money the broker is getting from the lender for getting you in the loan for a higher interest rate than the lender is actually charging. For example: based on your credit score and other financial conditions, the lender tells the broker they will offer you a loan at a 6% interest rate. The broker tells you that the best rate they can get you is 7%. The broker should then issue you a GFE showing the 1% ysp (yield spread) on that hard to find line under Total Settlement Charges. The broker will sometimes not put a dollar amount so you don’t ask what that dollar amount is all about.
For inexperienced borrowers, the Yield Spread can be as many as 3 points. Keep in mind the broker generally gets paid an Origination Fee of 1% of the total loan amount as a standard rule (Line number 801 on the GFE).

Here is an example of what that would mean in terms of real money:

You apply for a $100,000 loan and the lender agrees to loan you the entire amount at 6% interest. The broker gets you to pay 9% because you don’t know your credit score and true buying power.
Broker Loan Origination Fee is: $100,000 x .01 = $1,000
Brokers Yield Spread or extra money from the lender is: $100,000 x .03 = $3,000

The total amount paid to the broker at closing is: $1,000 (Orig. Fee) + $3,000 (ysp) = $4,000

The fact that you agree to buy the loan at a higher rate could be a problem. That’s why we recommend you always ask your broker to if there are any other incentives to them or from the lender that could be applied to the deal to make it better for you.

Affiliated Business Arrangement Disclosure Statement - this is another disclosure which conveys to you in writing which companies associated with the processing or approval of your loan are also affiliate companies (partially owned by) the lender

Interest Rate Acknowledgment - this document requires you to sign that you are aware and agree to the interest rate you are accepting

Interest Rate and Discount Fee "Float Agreement" - this document is also known as a Rate Lock Agreement. It states the interest rate you have locked in for your loan as of a certain day. Keep in mind interest rates can actually change multiple times in one day. The actual time and date you lock a loan will be recorded by the broker/loan originator

Appraisal Disclosure - this statement makes clear who did your appraisal and notifies you of your right to a copy of the document. Get it and keep it with your paperwork. You paid for it in most cases.

RESPA (Real Estate Settlement Procedures Act) Servicing Disclosure - this is a governmental requirement. This explains all the rights you have in understanding the full servicing of your loan and how often this particular lender sells their loans to other servicers.

Truth-in-Lending Disclosure Statement - this explains in great detail the cost of the money you are borrowing and the terms and meanings of the words used in the disclosure.

Disclosure Notices - the various disclosures required by law from the lender to the borrower. These may include but are not limited to the Affidavit of Occupancy, Fair Credit Reporting Act, Equal Credit Opportunity Act, FHA and Governmental Loans disclosures, Employment Certification, Anti-Coercion Statement, etc.

Provider of Service Addendum - This is a simple disclosure from the lender of affiliated loan service companies they employ in servicing their loans.

Privacy Statement - by law every company has to provide borrowers with a statement on how they will use or share your personal information. Generally, it will be shared with affiliates of the lender on a regular basis.

Patriot Act Data Collection - this may be a one or two page document that lists your personal identifying and account information with the lender. That information is required as part of the anti-terrorism legislation and must be submitted to the government.

Notice of Credit Reporting Sources - This disclosure is a requirement of law the lender must provide the borrower identifying the credit retrieval systems they relied on in making their decisions to loan you money, those companies contact information and the credit scores those agencies gave the lender for your file. Keep in mind, that the cost of money increases the lower your credit score.

HUD-1 Settlement Statement - this is the 2-sheet, legal page document that spells out all the sources and uses of the funds at closing. Of all the documents you will see during the mortgage process, none is more important than this one. Very few folks understand and can actually read a HUD-1 including real estate agents so don’t feel bad if this looks like Greek to you. Now is the perfect time to slow down, take a deep breathe, and listen to the closing attorney as he/she walks you through the statement line-by-line.

Let's Go Shopping for a Loan Now

It is recommended that you have an attorney represent you in the entire real estate transaction and closing.

Step One: Make a list of your financial resources for borrowing money

• Bank where you have your money
• Credit Union where you are a member
• Mortgage broker you may know or get referred to by trusted source
• National lender you may have heard about and want to investigate

Step Two: Calling for cash and the GFE

• Contact each of these sources and see what type of loan products they have for someone with your credit scores, employment type (meaning self-employment or a W-2 employee)
• Do not give any of them your social security number, just your credit scores
• Explain that you are seeking the best deal that fits your plans. For instance, you may want a long term fixed rate if you are going to be in your home a long time or a shorter term like 15 year loan if you want to pay off your loan quickly but still at a fixed rate. Your situation may be short-term due to planned relocation, enlarging your family, or down-sizing. In that case, you may want a 3, 5, or 7 year Adjustable Rate Mortgage (ARM) with an interest only payment.
• If you aren’t certain which is best, ask them all to send you a GFE on multiple types of loan products.
• Be certain to keep the comparisons apples to apples.
• Make separate folders for each type of loan product and place the GFE’s in side for clear comparison.
• Don’t respond to short term offers or specials. They can often make the broker or loan originator extra money in Yield Spread and cost you more money.

Step Three: Reviewing the GFE

• We recommend that you make a list of each category so at a glance you can see the highlights quickly. See example.

Step Four: Applying for the Loan- The 1003 Loan Application

• Once you have selected your best option, contact that loan officer /broker and start the loan application (The 1003)
• Keep in mind you will need the list of information from above in the “Before you apply section”
• Once the loan officer/broker processes your application, pulls your credit, and confirms the loan program with the actual lender (if using a broker) have them send you a new GFE and finalize the numbers they sent you previously.

Step Five: The Truth-in-Lending Disclosure Statement (The TIL)

• Within three (3) days of your completing the loan application (The 1003) the loan officer/broker is to send you the Truth-in-Lending Disclosure Statement otherwise known as the TIL. Don’t freak out when you see the actual amounts in the Finance Charge and Total of Payments boxes
• The one area that confuses borrowers the most is the Annual Percentage Rate (APR). This number will be higher than the interest rate on the upper right hand side of the statement. The reason for this is the APR takes into account the lenders cost of servicing your loan annually, adds that cost into the total, calculates it as a percentage rate, and adds it to your fixed or adjustable rate for that year. That servicing cost is not normally disclosed.
• If you look under the Interest rate on the right side of the statement, you will possibly see the words Index Used. If you read the example above about how rates can adjust above, you will see how an adjustable rate mortgage (ARM) can rise dramatically in a short time. That’s because the rate is fixed to market index like the US Prime Lending Rate or the London Inter Bank Offered Rate (LIBOR). That spot should indicate one of these or another index in the world.
• The challenge with an ARM based on another country’s economy, is that you have no control over the events in London, Japan, or China and very little to none here at home in the US. When you bet on one of these ARM loans you have to know you can and will refinance before it adjust.

Step Six:

• Check the interest rate, the payments listed in the payment schedule and all other information like late fees and due dates.
• Most importantly on the TIL, check the section on the bottom that specifies if the loan has a pre-payment penalty or not. If so, how long is it in place? The norm would be no more then three (3) years. If there is a pre-payment penalty, what is it? For that, you will need to get the broker/loan officer to confirm that for you in advance. That information should have been on the GFE in the top right hand corner with the rate and term. If you didn’t see it on the final GFE tell the broker/loan officer that you will not do a loan with such a penalty.
• It is a serious issue to fail to disclose so you may want to rethink doing business with that individual at that point.
• If the pre-payment is not an issue you should be able to sign and return all documents required to keep your loan moving forward.

Waiting to Close

With the GFE, 1003, and TIL all signed sealed and delivered, you will simply provide the required documentation to the loan officer/broker (copies only) to complete their loan package. The days to follow are waiting to close and making certain the details of getting ready for your new home are progressing. You and the loan officer or broker will agree on how soon you will be able to or want to close the loan.

If the lender requires additional information or if there is a problem with the appraisal, you will get a call very quickly.

Some loans can close in as little as a week from start to closing on existing or new homes, while others may take up to 45 days for new construction loan projects.

Loan-to-Value (LTV)

Another major factor in the cost of borrowing money is the loan-to-value (LTV) from the appraisal. You calculate the LTV by dividing the loan amount by the appraised amount. Assuming the loan being sought is $70,000 and the home appraised for $100,000 the math looks like this: $70,000 div. by $100,000 = 70% LTV.

The lower the LTV, the lower the lenders risk in the loan, and the lower your interest rate.

If your LTV is 80% or less, you do not have to have mortgage insurance for your loan. That will keep your monthly payment amount lower. FHA loans are the same as conventional loans in this regard. Lenders rate the total deal on the LTV.

If your loan is conventional, the insurance is called Private Mortgage Insurance or PMI
If your loan is an FHA/VA, the insurance is called Mortgage Insurance Premium or MIP

Some lenders will suggest you do two loans to avoid the PMI by doing a 1st mortgage for 80% of the value of the home. Then they’ll secure you a second mortgage for the entire 20% of the balance. The 2nd mortgage will come at a higher interest rate because that lender is second in line to get paid and if you default on your 1st mortgage the group holding the 2nd mortgage losses his money as well. In fact, there is a rule in real estate that states 1st in time, 1st in rights. Meaning, who ever records their lien first they get first rights of ownership if there is any dispute as to who is entitled to the property.

Look carefully at any 80/20% loans closed and you will always see the time stamped in by the Clerk of the court or the Registrar of Deeds is later for the 2nd mortgage if only by seconds.

Closing the Loan

Let me first of explain what a closing actually is and why it is called a “Closing”

Picture in your mind a box that you have placed all the most important memories of your life that you wish to share with the special people in your life. The last thing you would do is what…close the box securely to protect your valuables, right? That in so many words is a loan closing.

You should have a copy of all the paperwork you have received to this point with you in case you have to reference something. All agreements in the Sales Contract are very important to have at this time. All discounts, fees being paid by seller, credits by the broker, etc. should match the HUD exactly.

You will need to provide a copy of your drivers’ license at closing so be sure to have it with you.

Once all the terms of the home purchase have been agreed upon by buyer and seller, you have done your due-diligence and shopped the best loan rate and terms with multiple lenders, it is now time to close the deal. You will begin signing a small mountain of documents agreeing to repay the money borrowed, certifying that the information you provided the lender is true, you understand and agree to the terms and conditions of the loan, and that you are pledging your home as collateral for the loan.

The most important items for you to understand at this point are:

1. Where all the money actually goes on the HUD-1
2. How much you owe at this point to close the loan
3. If there is a right of rescission with the loan, meaning if you get buyers remorse, can you change your mind and get out of the loan within a certain period?
4. If you later discover there is a problem with the closing statement, who do you call?

Please understand that the closing attorney does not work for you in most cases. The attorney or closing agent is representing the lender and only drafts the documents as provided by the lender. The attorney can generally correct name spellings or minor grammatical errors, but can not re-write the documents or terms.

THE HUD-1 SHOULD NEVER HAVE WHITE-OUT, CORRECTIONS, OR CROSS-OUTS ON IT - EVER! ALL CORRECTIONS REQUIRE THE ATTORNEY TO PREPARE AN UNALTERED DOCUMENT BEFORE YOU SIGN. NO EXCEPTIONS!

STOP!!! The HUD-1 is your friend and is generally prepared for all loan closings, though some attorneys do a closing statement that is simple and easier to read. If you are closing a government insured loan such as a FHA (Federal Housing Administration) or VA (Veterans Administration), you are required to have a HUD-1 settlement statement at closing. If there is a financial item or agreement within the transaction, the HUD will usually spell it out. The HUD only shows monies that come out of your loan or that you or the seller agreed to pay. If you are bringing money to closing for down payment or closing costs, that will show on line 303 and the box from borrower is checked. The Yield Spread money from the lender to the broker doesn’t show up on the HUD.

The HUD-1 is prepared by the closing attorney and is generally sent to the lender for approval before you see it. Depending on the schedule of your closing, you should be given the opportunity to review the final statement hours before closing. In many cases, especially when you are closing at the end of the month (the busiest time for closings) the HUD, as it is known, is not perfected until moments before closing.

As the closing attorney reviews the HUD with you, please pay careful attention; ask as many questions as needed to so you can understand the total financial transaction. It is almost impossible to explain the entire HUD in this document but we will endeavor to hit the most important points.

Section B Type of Loan

Make certain the type of loan you agreed to on the top right hand corner of the Good Faith Estimate (GFE) is the one that is checked. If not ask why and make certain the terms of your loan are what you previously agreed to up front.

If not, STOP!!! Do not close until you are certain of all the terms of the loan, the amounts, and costs. Ask the broker or lender if there are new terms that need to be disclosed to you prior to your closing the loan. Items such as broker incentives could make a huge difference in the loan you end up with versus the one you were told you had in advance. If the broker has switched you to a new loan program or product such as from conventional to FHA or VA (if you are a veteran) it could be because the broker can make extra money on the loan that you know nothing about or has not been explained to you. When a loan product changes, you are entitled to a new GFE and Truth-in-Lending or TIL. The GFE discloses all the fees associated with the loan the TIL exposes the true cost of borrowing the money. Some behind the scenes incentives to lenders may not, and generally do not, have to be disclosed. All fees and incentives to the Broker have to be disclosed.

On a shaded line below the 1000 line item of the GFE there is a line that reads: Compensation to Broker (Not Paid Out of Loan Proceeds) and under that, you will see a percentage number and disclosure like this example: 2% ysp (meaning yield spread) to broker – broker’s name

Section D, E, & G Borrow, Seller and Subject Property Information

Make certain all information is accurate and spellings are correct. If the seller is not the same as on the purchase agreement, ask why. Watch out for fraud!

Section J Summary of Borrower’s Transaction

Lines 100-113 total to line 120. Make certain these numbers are explained to you thoroughly. Line 103 brings the totals from the second page of the HUD, which breaks down all your expenses from lines 703–1308. The total from line 1400 on the left column titled “Paid from Borrowers Funds at Settlement” is where all your expenses related to the closing will be found. The attorney alone should explain every number to you if asked. Do not allow the broker or agent (if present) steer you or speak for you or the attorney.

A bad agent or broker could present a forged document to the closing attorney without your knowledge authorizing them to pay a fee to them or someone else. If it looks like your signature, they will pay it without question.

Line 1110 Title Insurance Owners Coverage

It is recommended that you arrange with the closing attorney or Broker to purchase a title insurance policy for you. The lender will purchase their title policy and you’ll pay for it out of your closing costs. The purpose of having the policy in your name is to protect your interest if someone files a claim against you for something related to the boundary lines, ownership issues or a host of other title related concerns. The most common are property line disputes therefore, having a survey completed in advance of closing is recommended.

Line 201 Make certain your full earnest money deposit is credited to you.

Line 210-214 deals with property taxes. Because taxes are dealt with differently in every city or county, it’s impossible to tell you exactly what the numbers are going to look like. For instance in some places taxes are paid in advance so you may be crediting the seller money for what they have already paid for the year and other municipalities pay taxes in arrears, so you may be getting credited money from the seller.

Line 303 is where you see the amount of money you get at closing or the amount of money you should have brought with you in the form of a cashiers check.

Section K Summary of Seller’s Transaction

The seller is responsible for reviewing their side of the transaction and ensuring the deal is what they agreed to in advance.

Closing Package

The closing attorney will prepare a package of all the documents you signed (generally without your signature) for you at closing or they will mail them shortly thereafter. I recommend you get a copy of the HUD-1 if no other document at closing. The new title will be sent to you by the attorney in a matter of weeks. Some municipalities can take up to six months to get the title back from the County, so don’t panic if you don’t see it quickly. You can always call the attorney to confirm it was filed immediately.

Store the entire closing package, the warrantee deed, and all other purchase and financing related information in a safe, fire proof place for ever. Never destroy any of your purchase contract, loan, or closing documents. It is not uncommon for claims to arise against a property years after you purchase or sell.

For wisdom will enter your heart and knowledge will be pleasant to your soul.  
Proverbs 2:10