Whether it’s your first or fifth mortgage, you may be surprised by the amount of paperwork you will encounter in the mortgage process. These documents are not intended to confuse you, but are provided to make sure you’re a fully informed borrower.
Use the below information to help familiarize yourself with the paperwork you may come across from application to closing. With this information — and help from your lender — you can navigate the home buying process more confidently.
Here are some essential terms to understand:
Application: A form that prospective borrowers submit to a bank to assess their creditworthiness.
Credit Report: A report provided by an independent credit rating agency that provides information on an individual’s credit history, including their payment history and debts owed to other lenders. It is used by lenders to help assess a borrower’s creditworthiness and determine the terms of a mortgage loan.
Preapproval Letter: A letter that provides documentation of how much an individual is preliminarily approved to borrow. The preapproval is based on financial information provided by an individual and his or her credit score. Even with this letter, additional documentation is typically required before a loan is officially approved.
Prequalification Letter: Different from a preapproval letter, this letter is a less formal document that tells a potential borrower how much money they could likely borrow.
When you’re negotiating:
Purchase Agreement or Sales Contract: The agreement between a buyer and seller of a piece of real estate. It describes the terms and conditions (such as the price) under which a buyer agrees to purchase the property from a seller, and may also be called an Offer or Agreement.
Form 1003 or Uniform Residential Loan Application: A document required for nearly all mortgage loan applications that includes the borrower’s income and assets as well as a description of the home for which the mortgage is being applied.
Commitment Letter: A formal letter provided by a lender to a borrower stating he or she has been approved for a mortgage loan (also referred to as an Approval Letter). It outlines the specific terms and conditions of the approved loan.
Closing Disclosure: A form that outlines the details of an approved mortgage loan, including the loan terms, projected monthly payments, and how much a borrower will pay in fees and other costs to obtain the mortgage. The lender must give the Closing Disclosure to a borrower at least three business days before they close on the loan.
Loan Estimate: A form that tells a borrower important details about a requested mortgage, including the estimated interest rate, money payment, and total closing costs for the loan. It also provides estimated costs of taxes and insurance, and how the interest rate and payments may change in the future, as well as any other special features of the loan. A lender must provide an applicant a Loan Estimate within three business days of receiving his or her application.
Appraisal: A report done by an appraiser that estimates the value of the property. This helps tell borrowers and lenders that the value of the property being used to secure the mortgage supports the amount of the loan. Appraisals are carried out by qualified professionals; usually, the borrower or lender must pay a fee to conduct the appraisal.
When you’re closing:
Preliminary Title Report: A report that tells the borrower and lender whether there are liens or claims on a piece of property that would need to be resolved to complete a purchase. The report is usually the result of a title search conducted by a title company.
Abstract of Title: The written history of ownership of a specific piece of real estate. It
covers the time from when ownership of that property first originated through the present. It lists owners over the history of the property as well as documents that have been recorded against that area, such as liens and mortgages. It may also be called a Deed or Title.
Addendum: A list or agreement added to a contract, typically imposing conditions on the sales contract that aren’t covered in the standard contract language. For example, sometimes the purchaser or seller might want to make the sale of a property contingent on the approval of financing. Additionally, some government-backed mortgage programs require an addendum be added to the sales contract in certain circumstances.
Affidavits and Declarations: Affidavits are written documents where someone affirms, under oath, that a statement is true. Declarations are statements made by someone. Typically, these spell out legal obligations a borrower agrees to when they take out a mortgage, and are usually signed during the mortgage closing.
Certificate of Occupancy: A permit issued by a local government agency that certifies a home is safe to live in, whether a new home or one that’s undergone significant renovations. Houses that can’t be occupied are worth less money because they may require repairs before people can move in, and that makes the mortgage riskier for the lender.
Note or Mortgage Note: The contract a borrower signs agreeing to repay a sum of money at a specific interest rate over a particular time. When a note is secured by real estate, as in a home purchase, it’s called a mortgage note.
Closing Statement: A statement used at the closing to account for all funds received and paid during the home purchase. It can include the sales price, closing costs, escrow deposits for taxes and insurance, and down payments.
Escrow Statement: An escrow account is a separate account that a borrower funds and a lender uses to make property tax, homeowners insurance, and mortgage insurance payments (if applicable) on the borrower’s behalf. An annual escrow statement details any changes to the account, including any shortages or overages and other account activity. Take a tour of an example escrow statement to learn more about what’s in this annual document.
Form 1098: Each year, lenders are required to provide borrowers with an IRS Form 1098. If your mortgage is with Wells Fargo, you can access your Form 1098 here. For most homeowners, mortgage interest is tax-deductible, and the 1098 form tells a borrower how much interest was paid last year. This document may also include what a borrower has paid toward points to get the loan and escrow disbursements for property taxes (which may be deductible) and hazard insurance (usually not deductible).
It’s important to point out that some mortgages may not include all the documents listed above. And some documents are referred to by different names, depending on the state where the property is located or differences in preferred terminology among professionals in the industry. If you have any questions, reach out to your lender or a home mortgage consultant.