Mortgage Loan Documents: Will I Go to Hell if I Don't Read Them?

By Gina Pogol
Mortgage Credit Problems Columnist

Kiel Asks:  Dear Gina, Every mortgage loan deal I look at comes with enough paper to take down a forest or two. And most of it looks the same for every loan. Do I really have to read all this junk or are some sheets more important than others?

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Gina Says:  Every mortgage loan--whether FHA refinance, bad credit home loan, super-jumbo funding, or standard conforming mortgage--comes with a pile of documents. And every loan advisor says something like "read all of your documents or you might as well break a dozen mirrors right now because you will be in for nothing but bad luck." Is this true? Will you really go to borrower hell if you don't read every bit of boiler-plate on every page? I'm going to commit sacrilege and say NO.

But there are some things to be aware of. In fact, not only do I advise that you read your initial documents when you apply for your loan, I'm going to say that you need to be twice as careful when signing the documents that actually close your loan.

First, there is your loan application. And if it is completely accurate, go buy a lottery ticket or something--no one gets that lucky. For example, your credit report may have some obligations that you no longer owe. And your income may be calculated differently by a loan processor (who has very specific rules to adhere to) than you expect. But be wary if the income stated is WAY more than you know you make. Make sure that your debts are correct and that your liquid assets such as bank accounts have correct balances.

Mortgage Disclosures: The Biggies

Now for the disclosures--the important ones are the Truth-in-Lending (TIL) and Good Faith Estimate (GFE). Your TIL form reflects the cost of your mortgage over the life of the loan (this is called your annual percentage rate [APR]). It is useful for comparing loans but only if the programs are identical (not a 30-year fixed against a 5/1 ARM, for example). Two loans may have the same APR but can be very different. One carries a higher rate but no fees, and the other carries a much lower rate and costs several points.

Your TIL should also tell you if your loan contains a prepayment penalty--in fact, if it states that you MAY have to pay a penalty, there IS in fact a penalty.

Loan fees are found on the GFE and you should compare estimates between lenders before signing anything. This includes lender charges, fees to third parties like appraisers and title companies, and costs of home ownership like property taxes and insurance.

Read Your Riders: Or Be Taken for a Ride Yourself

All adjustable rate mortgages (ARMs) and loans with prepayment penalties have "riders" or additions to the standard loan documents, which state how your rate or penalty is determined, what you pay, and when. Read and understand these before signing--misunderstanding these riders can cost you, and no one but you is responsible for what you sign.

Then Do It Again

Before you sign your final documents, get them a few days early and review them when you aren't under pressure from the Realtor, the loan agent, the title person, whomever. Have a friend help if it makes you more comfortable. Double check your final application. This is the time to make sure that the rate is what you expected, that there are no surprise penalties, adjustments, fees, insurance, or anything that makes you uncomfortable. And misunderstandings at this stage are common--not because lenders are rip-off artists, but because there are many people involved in what is a rather complicated transaction. So if you don't feel right about something, call your agent and don't sign anything until you are satisfied with an explanation or you have the terms you were expecting.

Loans come with piles of documents to read. The most important disclosures are the TIL form, the GFE, and any ARM or prepayment riders that show what your loan will do in the future. Read and understand these critical forms before agreeing to any traditional, FHA, or bad credit loan.

In addition to staying informed and educated throughout the process, you should also make sure you are comfortable working with your lender.  You can find a lender through our matching service where up to four different lenders will compete for offering you the best mortgage rates.


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