Let's begin with the loan application process.

Transition Statement: It is important to be prepared for these initial meetings, should you choose to complete a loan application.

Question: What are some important things to bring with you?

Instructor Note: Create a list of ideas on the board. Refer to the work sheet for examples of items needed.

Question: The closing cost also may include a fee for a survey. What would this fee cover?

Explain: The survey (Line 1300) determines the precise legal boundary lines of a property, location of improvements, easements, rights of way, encroachments and other physical features. The seller may incur this expense if he/she is requested to do so.

Explain: The closing cost listed in the Good Faith Estimate also may include Prepaid Property Taxes (Line 1004). At the time of closing, the lender often will require the buyer to deposit 1 to 6 months’ property taxes in an escrow account.

An escrow account is an account that a lender establishes on behalf of a borrower to pay taxes, insurance premiums or other charges when they are due. We will discuss escrow accounts in more detail later in this lesson.

Explain: Finally, you also may have some Unpaid Special Assessments listed in the Good Faith Estimate. These assessments vary greatly. There are none listed on this sample, however, examples include any assessments for streets, sidewalks or sewers that are levied or pending against the property. These usually must be paid before closing if mortgage financing is obtained.

If the buyer obtains FHA or VA financing, the seller is required to pay these assessments. When the buyer assumes the seller’s mortgage or obtains conventional financing, the buyer and seller may negotiate these payments.

Explain: Keep in mind, your Good Faith Estimate is an "estimate" of all the expenses you will incur by accepting the loan. It should be very comparable to your final costs, but some charges may vary slightly. By obtaining several Good Faith Estimates from different lenders with different loan products, you can compare your options line by line.

When you close on your house, you will receive an itemized list of the exact expenses you incurred. This second list is called your HUD-1.

Although the Good Faith Estimate is an "estimate" of your expenses, it should be very comparable to the final closing costs listed on your HUD-1. If, at closing, the fees are not comparable, ask questions. If you do not feel comfortable with how the questions are answered, the best option is to walk away and close at a later date.

Transition Statement: The HUD-1 form and the closing process will be discussed in more detail in the next lesson, "Closing." For now, let’s continue discussing the three items your lender will provide you within three days of applying for a loan.

Question: Before we move on, do you have any questions about the Good Faith Estimate Sample?

Explain: In addition to the Good Faith Estimate, you will receive the Truth-in-Lending Document.

Explain: The Truth-in-Lending Disclosure requires lenders to fully disclose to the consumer all the terms and conditions of the loan.

This document is the MOST important document in the Home Buying Process. The Truth-in-Lending Disclosure in used in all forms of loan transactions (auto loans, school loans, personal loans, etc.)

Explain: The terms and conditions in your Truth-in-Lending Document include the Annual Percentage Rate. This is the largest single determinant of the cost of your loan.

There may be variances of % or more in some areas. Such a small percentage seems insignificant, but over the term of the loan (which could be up to 30 years), it can amount to a sizable sum of money.

Explain: Consider these two loan options.

Example: One is offered at 6.0% APR and the other at 6.25% APR. The difference after 30 years of payments is $5,821.

Do not be misled, however, if a lender should promise a lower-than-market interest rate, because the difference may be made up through other financing charges (points, application fees, processing fees, etc.).

Explain:Your Annual Percentage Rate is very important! The APR is a measure of the cost of your loan expressed as a yearly percentage rate, such as 6% or 8%.

In the Truth-in-Lending Disclosure, you will notice the APR may differ from what your loan officer disclosed to you. This is because the APR includes all fees and costs associated with the loan.

It is normal to see a slight difference between the interest rate and the APR because of the normal costs of the loan.

This is an area in which some lenders may take advantage of people. They may offer you a competitive "interest rate" but add extra fees. This increases the disclosed APR of the loan. If the APR is extremely different from the original quoted interest rate, do not hesitate to question it.

Explain: The second item listed on the Truth-in-Lending Document is a finance charge.

The finance charge is the total dollar amount the credit will cost you. Like the APR, this includes all fees and costs associated with the loan.

Notice in this sample that the credit will cost the buyer $111,530.82, which is more than the amount being financed ($90,867.77).

This is why the Truth-in-Lending Document is so important. It states the exact amount you are financing and how much it will cost you to obtain this loan product.

Explain: The third box on the Truth-in-Lending Statement lists the amount of credit provided to you. This is the amount of the loan before interest or fees.

Explain: The final box on the Truth-in-Lending Statement is very important!!!

This box states the total dollar amount you will pay for the house after making all payments as scheduled.

This amount can be lowered by making additional payments; however, this is the best indication of how much your home will cost! When reading this document, pay special attention to this figure.

As you can see in the example, this buyer will pay $202,398.59 for a house he financed at $90,867.77.

Explain: Information about your payments also will be included on the Truth-in-Lending Disclosure statement.

This section of the document will tell you the exact date of your first and last payments. It will state when the payment is considered late. This document also states the number of monthly payments (e.g., 180 or 360 payments) you will be making throughout the life of the loan.

You can see this information on the sample, below the four boxes.

Explain You also will find penalties for late payments. Many lenders offer a "grace period" of about 10 days before a late fee is charged. The amount of the late fee varies with the lender; however, from 2 to 5% of the monthly payment is a common penalty.

For example, if your monthly payment of $700 is late, you would owe an additional $14 (2%) to $35 (5%).

In this sample, the document states that if the payment is more than 15 days late, you will be charged 4% of the payment, which is approximately $24.

Explain Finally, you also will find prepayment penalties in your Truth-in-Lending Document. In this sample, you can see that there is no penalty if you pay off early. However, some mortgages charge a fee if the loan is paid off early.

Although this type of penalty is not customary in special, government-insured or conventional loans, it may be more common with companies that do sub-prime lending. Sub-prime lending is a type of lending that relies on risk-based pricing to serve borrowers who cannot obtain credit in the prime market. Prepayment penalties are an important fee to consider. If the interest rates fall a couple of years after you close on the loan and you want to take advantage of a lower rate by refinancing your mortgage loan, you could be assessed a penalty of several thousand dollars, making it financially impractical to refinance your current home loan.

Explain: The Truth-in-Lending Disclosure is a very important document that you need to review closely. Regardless of why you are borrowing money, never let a lender rush you through this document.

Take your time when signing the document. If you do not feel comfortable with the loan terms, do not sign this form. Remember that you can always walk away and sign at a later date if you so choose.

Transition Statement: There is one other item you will receive from the lender after applying for a loan.

Explain: This item is a "Buying Your Home" Booklet. This booklet can serve as a pocket guide to assist you in the home buying process. It provides unbiased information on topics such as how to choose the best mortgage and advice on how to negotiate during the home buying process. This booklet also is available at the HUD website.

Transition Statement: Once you receive these three documents from several lenders, you can begin comparing your loan options as discussed in the next lesson.

Lesson Summary: Congratulations! You have completed The Mortgage Process Part I in this Home Buying Process series of classes.

Today we have explained the loan application process and identified the items listed on the Good Faith Estimate and Truth-in-Lending document.

Question: Are there any questions?