The size and number of documents needed to close a loan can seem overwhelming, especially if you have never seen them before. These documents are often lengthy and comprised of unfamiliar legal jargon. Their purpose is to protect the lender in the event of default, but that doesn't make them less intimidating. Knowing each document will let you know exactly what you are signing and how that obligates you to the lender.
The promissory note, sometimes referred to as just the “Note” is the primary document in a loan closing. It is your promise to repay the loan in accordance with the terms set by the lender. It outlines the principal amount of the loan, the interest rate, the term of the loan and the payment. Additionally, it will list any special conditions such as events of default, prepayment penalty, rate reset, floor or ceiling. Typical notes run about two pages to four pages. You or, better yet, your attorney, should review this document carefully prior to closing.
The mortgage, applicable only in real estate transactions, is the instrument the lender uses to encumber your property. It references and ties directly to the promissory note, meaning that for as long as the note is in effect, the lender holds a lien on your property. You will sign several copies of the mortgage document at closing. At least one is retained in file, while the other is sent to the appropriate county recording office.
The HUD-1, also known as the “Settlement Statement,” is an outline of all the costs associated with the closing. This document is primarily used in real estate transactions, although variations can be used in other types. The first page is broken into two columns: “Summary of Borrower’s Transaction” and “Summary of Seller’s Transaction.” These columns are tallied resulting in the “Cash from Borrower” and the “Cash to Seller” due at closing. The second page lists settlement charges due to the lender, title company and municipality and whether said charges come from the proceeds of the loan or your own funds.
A loan agreement, more common in commercial closings, is anywhere from 10 pages to 30 pages. It outlines your responsibility during the term of the loan. Typical clauses include affirmative and negative covenants, financial reporting requirements and compensating balance requirements. The document requires the you or your borrowing entity to stay current on all business licenses and registrations and specifies that you only use the funds for the approved purpose.
The guaranty is another commercial loan document. The principals of a company personally guarantee that they will pay the loan, in the event that the company cannot. There are two types: An unlimited (the most common) guaranty pledges that the guarantor will back up 100 percent of the loan and a limited guaranty pledges that they will back up a predetermined percentage less than 100. The terms are similar to that of a loan agreement, notably in the financial reporting requirements.
There are other documents that you might come across. These vary based on the size and type of loan. An environmental indemnification agreement indicates that you are not aware of any hazardous materials on the property. An assignment of leases and rents allows the lender to collect any rent from tenants in the event you do not pay. A UCC-1 encumbers business assets and equipment. A servicing certification acknowledges that the loan may be transferred to another lender under the same terms. An automatic payment authorization allows the lender to debit your deposit account for the monthly payment. A landlord’s waiver allows the bank access to their collateral in a leased property. Finally, the right of rescission gives you three days to cancel a residential mortgage before the loan is funded.