It’s an 18 page legal document you sign at closing that is nearly impossible for the consumer to understand (and for even me to read!). Basically it spells out the lender and borrowers responsibilities. Here is a summary:
What the Borrower Needs to Do:
- Make Loan Payments: You promise to pay back the loan amount plus interest through regular monthly payments. Payments must be in U.S. dollars.
- Pay Property-Related Costs (Possibly): You might need to pay money into an “escrow” account each month to cover property taxes, homeowner’s insurance, and association fees, unless the lender says otherwise in writing.
- Keep the Property in Good Shape: You must maintain and protect the property and avoid damaging it. If it gets damaged, you need to repair it unless the lender decides it’s not worth it.
- Have Homeowner’s Insurance: You’re required to have insurance against loss like fire and other hazards that the lender requires.
- Live in the Property (Usually): You generally need to live in the property as your main home within 60 days of signing and for at least a year after moving in, unless the lender agrees to something different.
- Handle Other Property Charges: You are responsible for paying all taxes, assessments, and any legal claims (“liens”) that could take priority over the lender’s rights.
- Be Truthful in Your Loan Application: The information you gave when you applied for the loan must be accurate and not misleading.
What the Lender Needs to Do:
- Provide the Loan: The lender has given you the loan to buy real estate.
- Manage Your Payments: The lender will handle your monthly loan payments.
- Manage Escrow (If Applicable): If you have an escrow account, the lender will hold those funds and use them to pay your property bills. They’ll also give you a yearly summary of this account.
- Handle Insurance: The lender can set insurance requirements and might buy insurance for the property if you don’t. They also manage insurance money if there’s damage.
- Check the Property (Sometimes): The lender has the right to inspect the property.
- Protect Their Interest: If you don’t follow the agreement, the lender can take steps to protect their investment in the property, and you might have to pay for these actions.
- Give You Notices: If there’s a problem with your payments or other terms, the lender will send you a notice explaining the issue and how to fix it. If they need to take more serious action like foreclosure (selling the property), they will also send you a notice.
- Release Their Claim After You Pay Off the Loan: Once you’ve paid back the entire loan, the lender will arrange to remove their legal claim on the property.
