When you obtain a mortgage to purchase or refinance a property, your lender will give you specific disclosures that explain the loan terms and requirements. It's important to understand these disclosures so you know exactly what you're signing for when you acquire a new mortgage.
New Mortgage Documents
The Truth in Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA) are federal laws set in place to protect consumers. These laws require that lenders disclose information about all the fees associated with your loan. These protections have been combined into a set of documents that are required by law to be given to everyone who applies for a mortgage.
Updated mortgage disclosure requirements went into effect in October of 2015, as mandated under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The disclosure forms were simplified to make them easier for consumers to read and understand as a way to help combat predatory lending practices.
The new combination of documents is known as the TILA-RESPA Integrated Disclosure (TRID).
TILA-RESPA Integrated Disclosure
The TRID consists of a Loan Estimate and a Closing Estimate. The Loan Estimate will be the first set of documents your lender sends to you.
Loan Estimate
This document is a combination of the disclosures formerly known as the Good Faith Estimate and the Truth-in-Lending statement. Once you complete a mortgage application, your lender will send you this estimate within three business days. Numbers will not be exact, but should be a close estimation.
Information provided for your new mortgage should include:
- Loan type and term
- Loan amount
- Rate lock expiration date
- Interest rate, annual percentage rate (APR), and how much interest you will pay over the life of the loan
- Whether there is a pre-payment penalty and how much (if applicable)
- Whether there will be a balloon payment at the end of the loan
- Estimated monthly payment, broken down into principal and interest
- Estimated closing costs with a breakdown of each cost
- Approximately how much money you will have to bring to the closing and where the money goes
- A list of services you can and cannot shop for
- Late payment information
Signing a Loan Estimate does not require you to close on the loan. It simply means that you would like to proceed with your application.
You can find an example of the Loan Estimate document on the website of the Consumer Financial Protection Bureau (CFPB).
Closing Estimate
The Closing Estimate, formerly known as the HUD-1 Settlement Statement and the final Truth-in-Lending disclosure, gives a full list of all the final terms of your loan.
These forms will look very similar to your Loan Estimate and should include all the same information, but this time with final numbers and a complete list of what you paid for prior to closing, as well as exactly what you will be paying for at the closing table.
Your lender must send you a Closing Estimate a minimum of three days prior to your closing so that you have ample time to review the information.
An example Closing Estimate can be found on the CFPB's website.
Notice of Right to Rescind
All lenders offering a refinance or home equity line of credit are required to provide a Notice of Right to Rescind, or Notice of Right to Cancel, at your closing. This "right of rescission" simply means that you have three business days after your closing to renege on your new mortgage. If you decide that you do not agree with the loan terms once reviewing them again or you simply get cold feet, this rule allows you to put a complete stop to the new loan. You are not required to disclose your reason for canceling. However, you may not be able to get back the money you have spent in the process of obtaining the mortgage.
This disclosure does not apply to purchases, as loan closing is final on all mortgages for purchasing property.
An example of this form can be found at NationalFairHousing.org.
Closing Contracts
In addition to your disclosures, you will be required to sign contractual documents at your closing. These will include:
- Promissory note, known as a "promise to pay"
- Mortgage or security instrument, which allows the lender to foreclose if payments are not made
- Lender documents, which will vary dependent on the mortgage lender you choose
- Local documents, which vary by state laws
Understand Before Signing
Mortgage disclosure documents are an important source of information that you should read over carefully. If there is ever something you don't understand on one of your mortgage disclosures, do not sign the document until it is explained to you by your mortgage lender or closing company. A mortgage is a large financial undertaking and should only be entered into with full understanding.
