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Truth in Lending Statement
Last Upated: May 26, 2011
A Truth in Lending disclosure statement is one of the more important documents in the mortgage process. It is designed to help borrowers understand their borrowing costs in their entirety. Federal law requires that lenders provide a Truth in Lending (TIL) document to all loan applicants within three business days of receiving a loan application, disclosing all costs associated with making and closing the loan.
The Real Estate Settlement Procedures Act requires lenders to give you an information booklet, Settlement Costs and You, written by the U.S. Department of Housing and Urban Development, which discusses how to negotiate a sales contract, how to work with various professionals (attorneys, real estate agents, lenders), and your rights and responsibilities as a home buyer.
Truth in Lending Statement - What Does it Contain?
A truth in lending (TIL) statement contains information regarding the annual percentage rate, the finance charge, the amount financed, and the total payments required. Your lender is required to provide you with a "good faith estimate of settlement costs," or TIL, within three days of the time you apply for the mortgage. This estimate should give you a good idea of how much cash you will need at closing to cover pro-rated taxes, first month's interest, and other settlement costs.
The TIL statement may also contain information on security interest, late charges, prepayment provisions, and whether the mortgage is assumable. If you have an adjustable rate loan, it may outline the limits on the adjustments (annual and lifetime caps) and give an example of what your next year's payment might be, depending on interest rates.
What a TIL Statement is Not
You should note a couple of things about this document. It is the most misunderstood of all the paperwork and generates the most panic calls to the loan officer.
- The APR listed on the paperwork is not the rate you applied for. The APR calculates the interest rate in some complicated formula which takes into account your closing costs and fees, and is generally much higher than the agreed upon interest. Ignore this number. The actual loan interest rate should also be listed on the TIL, clearly marked. Most people don't get this far because the APR is the first number they see.
- This TIL doesn't mean a thing. It is not an agreement between you and the broker. The bank can change the interest rate and terms at any time. The TIL just indicates the initial estimate by the loan officer. If you want to guarantee your interest rate, lock your loan.
Buying a home is a huge decision. If you have any questions about your Truth in Lending disclosure statement, be sure to ask your lender for clarification on any items you do not understand.
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