Deciphering the Settlement Documents

For most homebuyers the day of settlement can be one of the most frustrating events. Having to mortgage your life away to the bank just doesn't seem like a fun thing to do. To make the day of settlement a more memorable and pleasant experience here are some things that I suggest every homebuyer do.

Understand what you are signing. It is crucial for every homebuyer to completely understand what they are signing at settlement. Remember that this is a binding contract between you and the bank and will be registered at the court house.

Many homebuyers are only interested in the interest rate and monthly mortgage payment. This probably will suffice if you got a 30 year fixed mortgage, if you didn't keep reading. If you got an adjustable rate mortgage (ARM) then it is crucial that you understand what is in the note. The note basically explains the terms under which you obtained the loan from the bank. It explains the initial interest rate, how this rate will change (index plus margin), how often it will change (6 mos or 1 year), what the CAPS are, and if there is a pre-payment penalty.

The second document you should understand is the HUD-1 or settlement statement. This document discloses all the fees charged to you in connection with the loan (lines 800-811), items required by the lender to be paid in advance (lines 900-905), reserves required by the lender (lines 1000-1009), title charges (lines 1100-1113), government recording and transfer charges (lines 1200-1205), and any additional settlement charges such as a home warranty, survey, pest inspection, etc. A great website that describes the HUD-1 line by line is http://www.titlepros.com/settleproc/hudPages.php.

And the third most important document that you need to understand is the deed. The deed is the instrument that conveys the property to the borrower. Make sure that your name is spelled correctly and that the people that need to be on the deed are actually there. Many errors found in the deed could have been avoided from the very beginning if the homebuyer had caught it in time.