Note: This article refers to a form that is in use until October 3, 2015. For those who submit a mortgage application on or after this date, two new forms, called a "Loan Estimate" and a "Closing Disclosure," replace the HUD-1 Settlement Statement, the Good Faith Estimate, and the Truth-in-Lending disclosure form that were formerly required in mortgage loan closings. If you applied for your mortgage loan prior to October 3, 2015, this article will help you better understand your Truth-in-Lending disclosure form.
Although a loan may help you finance your home purchase, it also comes with various costs. These are connected with taking out, closing, and carrying the loan. A document called the Truth-In-Lending Disclosure, or TILA, will help you figure out exactly what to expect in the way of immediate and long-term loan costs.
When you apply for a loan, you will receive several disclosure documents from your lender. Two of these documents, the Good Faith Estimate (“GFE”) and the Truth-In-Lending Disclosure (“TILA”), should have been given to you no later than three days from the date of your initial loan application. By explaining the loan costs, the combination of the GFE and TILA were designed to help you shop for loans.
The GFE is the primary source of information for you: It discloses an estimate of the fees that you will incur by taking out the loan, including loan application and origination fees, points, and document preparation fees, together with third-party fees for credit reports, appraisals, inspections, and title insurance, and estimated government fees such as transfer taxes and recording charges.
The TILA discloses calculations using the estimates from the GFE, together with estimated interest assuming that you keep the loan for its stated term. While the GFE will help you understand what you will be spending at or before the closing to receive the loan, the TILA is supposed to help you understand the full economic effect of your loan.
Although they are standard forms, the format of both the GFE and the TILA can vary from lender to lender, or depending on the loan programs such as mortgages with balloon payments, or adjustable rates.
This article will explain what you can learn from the TILA. For more information on the GFE, see Nolo’s article: “Home Buyers: How to Read Your HUD-1 Statement”.
Key information you’ll find within the TILA includes:
The TILA will disclose other terms and requirements of your loan, such as whether you must furnish hazard, flood, or private mortgage insurance (often referred to as “PMI”), or whether you will be charged fees for late payments.
In addition to the key disclosures described above for all loans, the TILA discloses different features of your particular loan.
If you applied for a variable rate loan, the TILA will disclose that the rate can change, and that a rate change will change the APR. This section will refer you to a separate disclosure of the terms of the variable rate.
The payment schedule will disclose your balloon payment, if your loan will require a final balloon payment.
The TILA will disclose whether your loan has a demand feature, meaning an acceleration clause requiring you to pay up early, but it will not characterize or describe it. Some common demand features include acceleration due to a violation of the terms of the note or mortgage, or a due on sale clause. You should read your loan commitment, the note, and mortgage to determine when your loan may become due earlier than the loan term end date.
Some loans require additional security (collateral) beyond the house itself. The TILA will disclose if you are giving a security interest in personal property or goods.
Due to the issues described above concerning APR, finance charges, and the amount financed disclosed in the TILA, the information within it may be of limited help in understanding your loan all by itself. Since the APR and finance charges tend to exclude loan fees you will pay at or before the closing, review the TILA along with your GFE, which will include many of the fees missing from the TILA disclosures.
Borrowers are typically given an updated version of the TILA at the closing. You can compare that TILA with the one you were given when you first applied for the loan to make sure that they are similar, and that any increases are within the amounts of tolerance shown in your GFE and in the HUD-1 prepared for the closing. For more information on the HUD-1, see Nolo’s article: “Home Buyers: How to Read Your HUD-1 Statement.”
The TILA disclosures should not be contrary to any of the terms of your note and mortgage, nor to any advertisements you were given to interest you in the loan that you purchased.