Application Disclosures

When you apply for a new home loan, it is very important to ensure you recevie all of the following documents, many of them are required by law.  Once you receive them, get them to your Mortgage Pilot™ for review as quickly as possible for their review.  For more information about each, there is a brief description below.

  1. Good Faith Estimate of Settlement Costs (aka GFE)
  2. Truth-in-Lending Disclosure (TIL)
  3. Servicing Disclosure Statement
  4. Affiliated Business Arrangements
  5. Escrow Account Disclosure
  6. Special Information Booklet(s)
  7. HUD-1 Settlement Statement

Good Faith Estimate of Settlement Costs (GFE)

The Good Faith Estimate, or GFE, is one of the most important documents you will receive when you apply for a mortgage, and it is one that is required by the Real Estate Settlement and Procedures Act (RESPA) to be delivered to you within three (3) business days of your application.  While your mortgage originator has up to 3 business days to deliver it to you, there is very little reason a GFE cannot be delivered to you within moments of your application. 

The GFE is designed to allow you to review all charges and fees associated with acquiring your new home loan.  This document can be used to assist you in finding the best mortgage deal available.  However, any delays in delivering the document, even the required 3 days, can hamper your ability to “compare apples to apples” due to constantly changing mortgage rates.  Additionally, statistics show that only about 25% of all mortgage applicants actually receive this document even though it is required by law.

While this document is important to receive, especially if using it to shop for the best mortgage deal, it is also important to note that it is exactly what its name implies, an estimate.  As such, you can expect some of the charges and fees to change slightly during the loan process, especially if you chose to float your interest rate.  Current laws do not reuire the lender to actually deliver on the terms they are disclosing to you, however there are many mortgage priginators out there that will go as far as to guarantee them.  Also, the US Department of Housing and Urban Development (HUD) announced a reform of RESPA to offer some relief for mortgage seekers which lenders must comply with by the beginning of January 2010.  For more information on RESPA reform, read this.

Truth-in-Lending Disclosure (TIL)

This is another document which is required to be delivered to you within three (3) business days according to law.  It’s design is also to aide you in finding the best mortgage deal, however it too has flaws and is but an estimate as well.  There are some important aspects to review, such as monthly payments after adjustments on Adjustable Rate Mortgages (ARMs).  Here is a breakdown of the five key parts of the disclosure.

  1. Annual Percentage Rate (APR)
  2. Finance Charges
  3. Amount Financed
  4. Total of Payments
  5. Payment Schedule

This document will help you review the loan terms, including the duration, monthly payments and if the loan is adjustable or not.  Do not be alarmed by the total payment amounts nor allow yourself to be confused by the APR or other items.  If you should have any questions about this document, it is important to get answer from your Mortgage Pilot™.

Servicing Disclosure Statement

This is another disclosure that is required by law, namely RESPA, to be delivered to you within three (3) business days.  RESPA requires that the lender or mortgage broker tell you in writing, when you apply for a loan, or within the next three business days, whether it expects that someone else will be servicing your loan, or collecting payments.  In the case of mortgage brokers, they do not service any of their loans so you will closing the loan in the name of the lender.  However, that lender may not be the one whom ultimately is servicing your loan and you will receive additional disclosures from the lender you close the loan with, which is normal.  If you are using a mortgage banker, they will close the loan in their name, but will also sell the loan to another lender, so you should ask which lender that will be. 

Affiliated Business Arrangements Disclosure

In most cases, you will receive this document along with your application package, or when you receive the other required disclosures within three (3) business days.  However, the law does not require this document to be delivered until at least one (1) day prior to your closing.  This disclosure is requied anytime a real estate broker, lender, or other participant refers you to an affiliate for a settlement service, such as real estate agent referring you to an affiliated mortgage broker.  The disclosure is a reminder that you are not obligated, with few exceptions, to use the affilate and are free to shop around for another provider.  While the parties you are working with prefer to use these affiliates, you have complete freedom to choose any provider to be your lender, real estate agent, mortgage originator, title, insuarance agent, or appraiser.

Settlement Statement (HUD-1)

This is another very important document that is required during the loan process, this one should be recevied no later than 24 hours prior to closing to provide adeqaute time to review its accuracy.  Unfortunately, much like the GFE, the vast majority of applicants report having never received this document. 

The HUD-1 is importnant because it covers the final costs associated with your new home loan and your costs should not differ greatly from your GFE.  The document is completed by the settlement agent, aka closing agent, usually a title agent or attorney.  Almost every mortgage applicant has the right to review this document for one (1) business day prior to closing and you should insist on receiving at least that much time as the initial documents likely will contain errors.  In cases where there is no closing meeting, you will not have the right to review this document prior to closing and it will  be mailed to you.

Escrow Account Disclosures

This is another document that you should recevie no later than one (1) day prior to your closing.  Your lender will likely require you to set up an escrow, aka impound, account to ensure that all real estate taxes and homeowners insurance is paid on time.  There are times when this is not required by the lender, but if you are reuired to set up an escrow account, there will be an initial amount required to be paid at the closing and a monthly amount added to your monthly mortgage payment.  Additionally, your lender will likely set up a “cushion” amount to ensure there is adequate funds available should taxes or insurance increase, but RESPA limits this amount to a maximum of two escrow payments. 

Every year, usually in January, you will receive an escrow statement which covers the deposits and withdrawals for the prior year and will explain your new monthly escrow requirement which may go up or down depending on the costs associated with your taxes and insurance.  Most lenders will refund excess funds, though it is a good idea to review this statement to ensure accuracy and that your account is being handled properly.

Special Information Booklet(s)

Certain mortgages require additional material to be delivered to the mortgage applicant, typically within the same three (3) business days for all residential properties.  An example of required material would be the “CHARM” booklet (Consumers Handbook on Adjustable Rate Mortgages) for every adjustable rate mortgage applied for.  Generally speaking, if the home loan applied for is not a “standard” fixed rate loan, it will require additional material to be delivered, though not always.

Exceptions to the Rules:

As with almost everything in life, there are exceptions to the requirements.  An example is that when a lender turns you down for a mortgage within three (3) business days, none of the documents above are required, not even by RESPA.

One problem with all of the regulations, especially RESPA, is that there is no set penalty for the failure to provide a Good Faith Estimate, Mortgage Servicing Statement, or any other required documents.  That being said, some banking regulators may choose to impose a penalty on lenders whom fail to comply with any federal law.  The best defense you have will likely be utilizing your Mortgage Pilot™ to review and interpret these documents, not to mention to ensure you receive them in a timely fashion.