Introduction
Buying a home is one of the most significant financial decisions a person makes. Once a mortgage closes, most borrowers assume that the process is complete. However, errors in mortgage documents, miscalculations, and compliance violations can occur, making a post-closing mortgage audit a necessary safeguard. I will break down what a mortgage audit entails after closing, why it matters, how to conduct one, and what borrowers should do if discrepancies arise.
Table of Contents
What is a Mortgage Audit After Closing?
A mortgage audit after closing, also called a forensic mortgage audit or post-closing mortgage review, examines the final loan documents to identify errors, misrepresentations, or legal violations. Unlike a pre-closing audit, which ensures compliance before the loan is finalized, a post-closing audit reviews executed loan agreements, ensuring accuracy and legal compliance.
Why is a Mortgage Audit Important?
Errors in mortgage documents can have serious financial consequences. A small miscalculation in loan terms, interest rates, or escrow amounts can cost thousands over time. Audits ensure:
- Accuracy in loan terms: Interest rates, loan balances, and fees should match what was disclosed pre-closing.
- Compliance with lending laws: Lenders must comply with Truth in Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA) regulations.
- Proper crediting of payments: Ensuring no unauthorized charges or incorrect payments were added.
- Fair lending practices: Identifying any signs of discriminatory lending practices.
Common Errors Found in Mortgage Audits
| Type of Error | Description | Potential Impact |
|---|---|---|
| Interest Rate Errors | The rate in closing documents differs from initial disclosures | Borrower overpays over the loan term |
| APR Miscalculations | Incorrect annual percentage rate disclosed | Can indicate compliance violations |
| Fee Overcharges | Higher origination fees, appraisal fees, or hidden charges | Borrower pays more than expected |
| Payment Misallocations | Payments applied incorrectly to principal or interest | Leads to inaccurate amortization schedule |
| Incorrect Escrow Calculation | Under or overestimation of property tax and insurance | Can result in escrow shortages or overages |
| Unrecorded Loan Modifications | Missing lender-approved changes | May cause confusion or disputes |
How to Conduct a Mortgage Audit After Closing
Step 1: Gather All Relevant Documents
To start an audit, I review the following documents:
- Final Closing Disclosure (CD)
- Loan Estimate (LE)
- Promissory Note
- Mortgage Agreement
- Escrow Statements
- Payment Records
- Correspondence with the lender
Step 2: Compare the Loan Estimate with the Closing Disclosure
The Loan Estimate (LE) and Closing Disclosure (CD) should match closely. Any significant discrepancies may signal errors or compliance violations.
Example of APR Discrepancy Calculation:
Suppose a borrower was quoted an APR of 4.5% on the Loan Estimate but sees 4.75% on the Closing Disclosure.
To verify the APR: APR=(Total Loan CostsLoan Amount)×100\text{APR} = \left(\frac{\text{Total Loan Costs}}{\text{Loan Amount}} \right) \times 100
If the loan amount is $250,000 and total loan costs are $12,000: APR=(12,000250,000)×100=4.8%\text{APR} = \left(\frac{12,000}{250,000} \right) \times 100 = 4.8\%
This discrepancy suggests an error or misrepresentation.
Step 3: Verify Interest Rate and Loan Terms
Check that the interest rate, loan term, and monthly payments align with what was agreed upon before closing. Any deviations can impact the total cost of the loan.
Step 4: Review Escrow Calculations
Escrow accounts manage property taxes and insurance payments. If the lender underestimates these costs, the borrower may face escrow shortages later.
Example: Escrow Shortage Calculation
If annual property taxes are $3,600, and homeowner’s insurance is $1,200, the monthly escrow payment should be: 3,600+1,20012=400\frac{3,600 + 1,200}{12} = 400
If the lender only collects $300/month, the borrower will owe an additional $1,200 at the end of the year.
Step 5: Check for Unauthorized Charges
Hidden fees can increase borrowing costs. Common unauthorized charges include:
- Unexplained origination fees
- Duplicate processing fees
- Incorrect prepayment penalties
Step 6: Verify Payment Allocations
Some lenders apply extra payments to interest instead of the principal, extending the loan term. Borrowers should confirm that payments are allocated correctly.
What to Do If You Find Errors in a Mortgage Audit
Step 1: Contact the Lender
If discrepancies appear, I contact the lender with documented proof. Under TILA and RESPA, lenders must respond to inquiries within 30 days.
Step 2: File a Complaint
If the lender does not correct the issue, borrowers can file complaints with:
- Consumer Financial Protection Bureau (CFPB)
- State Attorney General’s Office
- Federal Trade Commission (FTC)
Step 3: Seek Legal Assistance
For serious violations, such as predatory lending or fraudulent misrepresentations, hiring a real estate attorney may be necessary.
How Lenders Conduct Internal Post-Closing Audits
Lenders also conduct audits to ensure compliance with secondary market requirements and federal regulations. Their audits check:
- Adherence to underwriting guidelines
- Proper disclosures and signatures
- Loan default risk assessments
Preventing Mortgage Errors Before Closing
While post-closing audits are essential, preventing errors is better. I recommend:
- Carefully reviewing Loan Estimates before closing
- Comparing lender quotes
- Consulting with a mortgage professional
Conclusion
A mortgage audit after closing ensures financial accuracy and legal compliance. By reviewing loan documents and identifying errors, borrowers can protect themselves from unnecessary costs and potential legal issues. Conducting a thorough audit can uncover discrepancies that could otherwise go unnoticed, ensuring a fair and transparent lending process.
By taking a proactive approach, borrowers can ensure that their mortgage terms remain fair, accurate, and legally compliant.
