Truth in Lending statements
The Real Estate Settlement Procedures Act (RESPA) contains information on the settlement or closing costs you are likely to face.
The act also 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.
The actual statement - Truth in Lending
Mortgage lenders are required to give you a truth in lending (TIL) statement containing information on the annual percentage rate, the finance charge, the amount financed, and the total payments required. Within 3 days of the time you apply for the mortgage, your lender is required to provide you with a "good faith estimate of settlement costs," or TIL, based on his or her understanding of your purchase contract. 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.
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.
The Uniform Settlement Statement
The document that does accurately reflect your true interest rates and costs is the final settlement statement. Unfortunately, and of necessity, this statement is not available for your review until one business day before you close. You are entitled to see a copy of the Uniform Settlement Statement with your figures on it so you will know just how much the final costs will be.
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