Making Sense of Loan Documents and Homebuying Paperwork
It’s no secret that the homebuying and mortgage process is a long journey that can last weeks or even months. Each step can be filled with a number of considerations like: In what kind of community do you want to live? What style of home do you like? Do the homes you’re looking at need work, or are they ready for move-in? And of course, what’s your budget?
In addition to all those questions, you’ll face a variety of documentation before, during and after closing — they’re listed below. You may need additional documentation in certain scenarios. But for most conventional mortgage loans, this list is a good place to start.
And yes, it may seem overwhelming at first. So to get some clarity, start by grouping them based on where you are in the mortgage process:
Applying for your loan | During negotiation | At closing | After closing
Applying for your loan
Your credit report details your credit history, including your record of making payments on time and current debts owed. A mortgage lender uses your credit report to determine your overall creditworthiness and decide what interest rate and other terms to offer. Before applying for a mortgage, check your credit report to ensure no inaccuracies could impact your application. You can get a free copy of your credit reports from the three nationwide credit reporting companies once every 12 months, according to the Federal Trade Commission (FTC).
The loan application is a form you submit to the lender that includes your personal information, income details, Social Security Number, and more. The lender then uses it to assess your fitness as a potential borrower. This form is standardized — you may see it referred to as the Universal Residential Loan Application, or Form 1003. The mortgage lender will require you to support your loan application with documentation to verify your income.
In a prequalification letter, the lender offers an estimate of how much money it’ll loan you for a mortgage. It bases this estimate on basic information about your finances and a credit check. Knowing how much you can borrow is an essential tool for finding a home within your budget.
A step beyond prequalification is preapproval. In a preapproval letter, the mortgage lender gives you an offer (short of a firm commitment) to lend you a specific amount of money. This preapproval requires the completion of a loan application (see above). The lender will perform a credit check — a ”hard inquiry” that will show up on your credit report — and underwriting to understand your fitness as a borrower. The preapproval letter is valid for a set period, usually 90 days.
It’s important to get preapproved for a mortgage. A preapproval letter indicates to sellers that you’re serious about buying a home and gives them confidence in your offer.
If a seller accepts your offer on a home, you’ll both sign a purchase agreement. It’s a sales contract that states the terms and conditions of the sale. These include the selling price, any improvements that need to be made before closing, whether any items (such as appliances) should remain in the house after closing, and when the buyer will take possession. If the seller requires a good faith deposit (also known as earnest money), the amount will be noted in the sales contract.
Home appraisal report
An appraisal determines the home’s actual value and must be performed by a qualified third party. Appraisers use a standardized form, the Uniform Residential Appraisal Report, to describe and analyze the property and provide a conclusion about its value.
Closing disclosure statement
The closing disclosure explains the final details of your mortgage. This includes loan terms, monthly payments, and a breakdown of your closing costs. Your mortgage lender is required to give you this statement at least three days before closing.
Loan application (again)
Remember the loan application you filled out to get preapproved for a mortgage? It reappears during the closing process. The lender now needs you to review the information you provided earlier and sign the application again. You need to note any changes to your financial situation since you originally submitted it.
The loan estimate provides essential information about your mortgage, including the interest rate, monthly payment, and an estimate of your closing costs. To create this estimate, the lender must know information about the property, including its street address and appraised value.
The Consumer Finance Protection Bureau (CFPB) offers samples of loan estimates.
Proof of homeowners insurance
Mortgage lenders will require you to have homeowners insurance before closing (and will expect you to maintain coverage throughout the life of the loan). The lender should let you know what it needs for proof; these options typically include a copy of the full policy, a copy of the policy’s declarations page, or a letter from the insurer certifying coverage.
Preliminary title report
The preliminary title report, issued by the title company, establishes legal ownership of the property. It’s based on the title company’s review of county records. The report includes a detailed description of the property, any liens or outstanding debts or taxes, and any restrictions on how the property can be used.
Abstract of title
An abstract of title is a record of a property’s legal history. It lists all the legal documents associated with the property, including deeds, easements, surveys, litigation tax sales, and more. This documentation helps assure a clear title.
Certificate of occupancy
The certificate of occupancy is issued by the local government, and ensures that the home is safe. It also spells out the legal use of the property, verifies that the property meets local zoning and housing codes, and confirms that the property is suitable for occupancy.
A mortgage note is a legal document that sets out the loan terms, including the amount, down payment, interest rate, how you’ll repay, and more.
The promissory note may accompany the mortgage note. This is a written, legal agreement between you and the lender outlining the mortgage terms in full detail.
The closing statement is a detailed list of every expense the buyer and seller must pay to complete the transaction. It may include realtor commissions, mortgage insurance, property taxes, loan fees, appraisal and inspection fees, and more.
Escrow account statement
Your mortgage lender will set up an escrow account to pay expenses such as taxes and insurance included with your monthly mortgage payment. The initial escrow statement details these expenses, including their amounts and due dates. It also shows whether the escrow account has a shortage or a surplus of funds (if there’s a shortage, contact the lender to understand your options for making additional payments). Your mortgage lender must provide an escrow account statement annually.
Form 1098 comes into play with your tax return. It’s an Internal Revenue Service (IRS) form that mortgage lenders use to report interest paid on a loan. The lender will send you the form if you pay at least $600 in interest for a tax year. You (or your tax preparer) can use the completed Form 1098 to figure your IRS mortgage interest deduction for the year. You can find more ways to save on taxes with our guide to common tax deductions for homeowners.
Tips for closing on your mortgage
Traditionally, a mortgage closing is held at the office of either the title company, the mortgage lender, or the escrow company. However, with the widespread adoption of virtual meetings (along with digital documents and signatures), closings are increasingly held virtually. But whether you meet in person or through a computer screen, keep a few things in mind:
• Come prepared. When you meet with the closing agent, remember to have your closing disclosure statement, a photo ID, a certified or cashier’s check for the closing costs, proof of homeowners insurance, and anything else that the agent requires.
• Double-check the essentials. Make sure the mortgage amount, type, term, interest rate, monthly payment, points and credits, and other vital details match what the lender communicated in their earlier estimates.
• Ask a lot of questions. Yes, it can be tempting just to sign whatever is put in front of you to keep the process moving. But you owe it to yourself to pump the brakes when you’re unsure, or if something doesn’t seem right.
• Don’t go it alone. Consider having your real estate agent or an attorney assist with the closing. While it may be an added expense, they can help you avoid — or successfully navigate — any issues that arise during the process. And having a professional on your side can give you added confidence as you close.
While you probably don’t have to know the ins and outs of these documents in detail, a general understanding of what they do can help you become a more confident buyer. With a little knowledge in hand, you can have greater peace of mind on your homebuying journey.
Find out more ways AmeriSave makes it easier for you to buy a home.