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.
Before you make an offer:
Application: A set of data a prospective borrower provides a bank to help the lender assess how credit-worthy the borrower is and the terms, such as the interest rate, under which a mortgage may be approved.
Credit Report: A report provided by an independent credit rating agency that provides information on an individual’s credit history, including their record of on-time or late payments and debts owed to other lenders. Used by the lender to help assess a borrower’s credit worthiness and help determine the terms of a mortgage loan.
Preapproval Letter: A letter that shows a buyer has preliminary approval to borrow a certain amount of money based on basic financial information and a credit score. Even with this letter, borrowing money to purchase a property usually requires additional documents, including information about the property being purchased.
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. This is sometimes 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 from a bank or other lender that states the terms and conditions, such as the interest rate and repayment period, under which the mortgage lender will lend money to a specific borrower.
Truth in Lending Act Statement or Closing Disclosure: A document that shows the actual terms of the loan and the costs, including principal payments, interest, escrow deposits for property taxes and insurance, and closing costs. It’s provided to borrowers at least three business days before the closing.
Loan Estimate or Good Faith Estimate: A document provided to potential borrowers within three days after applying for a mortgage loan. It estimates closing costs, fees, and loan terms.
Appraisal: A report done by an appraiser that estimates the value of the property. This helps tell borrowers and lenders that the property being used to secure the mortgage is worth enough to cover the value 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: The result of a title search, conducted by a title company, 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.
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 time. 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. Also 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. Sometimes, for example, the purchaser or seller might want to make the sale of a property contingent on approval of financing. 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 you take on as a borrower when you take out a mortgage. You’ll usually sign these during the mortgage closing.
Certificate of Occupancy: A permit issued by a local government agency that certifies a new home or a house that’s undergone major renovations is safe to live in. Houses that can’t be lived in are worth less money because typically they will require repairs before they can be occupied; that makes a mortgage to purchase such a house 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 specific 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.
Settlement Sheet: A document that computes the costs that are paid at closing, including the net proceeds paid to the seller of a property and the net payment from the buyer.
Escrow Statement: Escrow is a separate account that you fund and your lender uses to make property tax, homeowners insurance, and mortgage insurance payments (if applicable) on your behalf. Your annual escrow statement details any changes to your account, any shortages or overages you may have, and your account activity. Take a tour of an example escrow statement to learn more about what’s in this annual document.
Form 1098: Each year, your lender will provide IRS Form 1098 — if your mortgage is with Wells Fargo, you can access yours online. For most homeowners, mortgage interest is tax-deductible, and the 1098 form tells you how much interest you paid last year — and can therefore deduct. Other information that is commonly included in this document includes what you’ve paid toward points to get the loan and escrow disbursements for property taxes (also deductible) and hazard insurance (not deductible).
Finally, know that some mortgages may not involve all the documents listed above. And some documents are referred to by different names, depending on the state 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.