It’s no secret that there’s a lot of paperwork involved in buying a home. After you select a mortgage lender to pre-approve you, you’ll be asked to provide all your most private financial documents, detail your income and residence history, and sign a stack of disclosures to get your loan approved. Then you’ll sign yet another stack of documents at closing.
The process can be confusing, but it helps if you go into it with a full understanding of the three most important closing documents you’ll be signing.
The settlement statement (aka “the HUD”)
Your settlement statement shows you the final versions of all line items you’re paying on your financed home purchase.
This document goes by many names, including estimated settlement statement, U.S. Department of Housing & Urban Development settlement statement, the “HUD,” or “HUD-1.”
Early in the loan process, you’ll see fees in disclosures lenders are required by law to give you, such as the Good Faith Estimate (GFE). However, the GFE doesn’t provide line-item detail.
Conversely, the HUD shows each individual fee clearly, starting with your total transaction summary on the left side of page one, then line-item fees on page two. These fees are broken down into the following categories:
- Real estate agent fees, which are commissions you might pay to the real estate agent as the buyer.
- Lender fees, including origination fees or “points;” any fees or credits for the rate you chose; and appraisal, credit report and other loan processing fees.
- Prorated items like loan interest from the loan funding day to the end of that funding month, prepaying one year of homeowners insurance (which is required by lenders), and any required prepaid mortgage insurance.
- Reserves deposited with the lender, which are only required if you’re setting up an “escrow” or “impound” account from which your lender will pay your insurance and property taxes. This is optional, and if you decline it, you won’t have to prepay these reserves at closing.
- Title fees, which are assessed by the title/escrow company serving as settlement agent for your transaction. This section also includes the title insurance you’re required to purchase to protect yourself and your lender from any unwarranted third-party claims on your property.
- Additional fees like contractors or pest inspections, or homeowners association move-in/move-out fees.
Critically, page three of your HUD shows how close or far your initial Good Faith Estimate was from your HUD, so you know if your closing terms match what your lender originally quoted to you.
The promissory note (aka “the note”)
It’s a common misconception to think your “mortgage” is the document that spells out your loan repayment terms, but the document that does this is actually called a promissory note, or “note” for short.
The note is your loan contract. It contains the terms of your loan (such as 30-year fixed or 5-year ARM); specifies the rate, payment intervals and payment changes along the way; and states whether you’ll incur a prepayment penalty if you pay off the loan early.
The note also contains a provision stating that the lender will require the home you’re buying to serve as security for your loan, so the lender will have a claim to the property if you don’t repay according to the note’s terms. This note provision will refer to a separate accompanying document called a mortgage or a deed of trust.
The security instrument (aka “the mortgage” or “the deed of trust”)
Both a mortgage and a deed of trust pledge the property as security for the note. Fannie Mae provides a list that specifies which states require mortgages vs. deeds of trust so you know which one you’ll sign along with your note.
Based on the loan you choose, you’ll need to comply with one of these three occupancy provisions contained in all mortgages and deeds of trust:
- Owner-occupied. You must move into the property within 60 days of closing and live there as your primary residence for at least one year. Then you’re allowed to use it as a rental or a second home.
- Second home. You can only use the property as a second home and aren’t allowed to rent the home.
- Non-owner-occupied. You’re paying a higher rate for this loan, so you’re free to convert occupancy to owner-occupied or second home if and when you see fit.