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The Closing Disclosure is a five-page form that describes the critical aspects of your mortgage loan, including purchase price, loan fees, interest rate, estimated real estate taxes, insurance, closing costs and other expenses. It’s important that you review it thoroughly – in fact, it’s one of the most important steps you can take while buying a house.
If you’re purchasing a new home or refinancing your current loan, it’s imperative that you understand all the terms of your loan before you sign on the dotted line. The reason for this is that once you sign, you’re committing to the conditions presented.
That means it’s crucial that you carefully read the Closing Disclosure your lender sends you once you're clear to close. As one of the final forms you receive before you close on your new loan, the Closing Disclosure allows you to compare your loan terms and costs to the terms listed in the Loan Estimate form you were given at the beginning of the process.
Like all mortgage forms, Closing Disclosures can be overwhelming to review, especially if you’re not sure what to look out for. Take the time to review everything the form covers so you’ll have no doubts when you’re asked to sign.
A good real estate agent can also help you review your Closing Disclosure and point out common errors. This is just one of the many reasons to always use a real estate agent when buying or selling a home.
Your lender is required by law to give you the standardized Closing Disclosure at least 3 business days before closing. This is what is known as the Closing Disclosure 3-day rule. This requirement is thanks to the TILA-RESPA Integrated Disclosures guidelines, which went into effect on October 3, 2015.
Prior to these rules, home buyers received two documents: the HUD-1 Settlement Statement and the Truth in Lending Disclosure Statement (instead of the Closing Disclosure). There were two problems with these previous documents: they were confusing, and they were only provided at closing – which offered home buyers very little opportunity to review and make sense of them.
The Closing Disclosure’s 3-day rule now gives you plenty of time to go over the final terms of your loan before you sign your closing documents.
Because of the 3-day rule, the sequence of events leading up to you receiving a Closing Disclosure should be relatively predictable. Lenders are generally careful to avoid issuing a Closing Disclosure before they are certain about what the closing costs and fees will be; they don’t want to have to change the agreement and wait another 3 business days.
This means that loan approval, home appraisal, insurance and the calculation of all third-party fees will be completed before the Closing Disclosure is issued to you. The timeline will therefore look like this:
We’ve broken down each component of the Closing Disclosure below.
This section of the disclosure statement lays out the terms of your mortgage. It provides an accurate snapshot of how much you’ll pay and for how long. It’s broken down into five parts:
This section of the Closing Disclosure breaks down the major components of your mortgage loan and displays how the payments change over the years. It gives you the best picture of what you owe on a month-to-month and year-to-year basis.
Not all mortgages have an escrow account, but if you’ve chosen to have one, your estimated monthly payments will show up here. If anything in this section is vastly different from what was stated in the Loan Estimate, ask your lender why. It's important to make sure that you can afford the estimated total monthly payments throughout the entire term of your mortgage.
Closing costs are broken down even further in this section of the document to give you a clear picture of what you’ll pay to your lender during closing. Closing costs will typically be about 3% – 6% of your loan amount.
Included at the bottom of the itemized costs, you’ll find the cash to close amount, which is the full amount of money you’ll need to have on hand at closing. The amount listed will be higher than the sum of your total closing costs because it includes your down payment amount.
This portion of the Closing Disclosure is a comprehensive overview of the fees involved in getting your mortgage.
There are other costs that could be wrapped up in your mortgage, including taxes and government fees, prepaids, initial escrow payment at closing and more.
At the end of this section, all other costs are added together, so you get a comprehensive overview.
Cash to close reflects the full amount you need to bring to closing and includes any deposits you’ve already paid to the seller. It will also include how much money, if any, the seller is planning to pay toward your closing costs – known as seller concessions. These are closing costs that you negotiate with the seller to pay.
This section is a side-by-side view of the borrower’s and seller’s costs at closing. You’ll be able to see adjustments for any items that are paid by the seller in advance, including fees that the seller has already paid, such as taxes, homeowners association fees and assessments. It also allows you to see what’s due from the seller at closing (such as payoff amounts of all mortgages, closing costs, seller credits and more).
At the bottom of this section, there is a full breakdown of the amount due from the seller and the amount due to the seller at closing. Additionally, it displays what you owe and what you’ve already paid prior to closing.
The loan disclosure section will show more detailed information about the conditions of your loan. These disclosures include the following:
This section tells you how much your loan will cost you over the loan term. In other words, it’ll summarize all the payments you’ll make over the life of the loan, including finance charges, the amount financed and the annual percentage rate (APR).
In this section, you’ll find general information about the appraisal (if applicable), contract details, refinance information and tax deductions. All of this is just general information, though it will indicate in your loan whether the laws in your state will specifically protect you from liability for the unpaid balance after foreclosure.
Finally, the last section includes the Contact Information and Signature lines. You’ll see the following: “By signing, you are only confirming that you have received this form. You do not have to accept this loan because you have signed or received this form.” In other words, signing the form does not require you to take the loan.
The Loan Estimate is a three-page document you receive 3 business days after applying for a mortgage. It provides a summary of the loan terms, the costs associated with the mortgage, the loan size, interest rate and payments.
It lays out whether there are any balloon payments, prepayment penalties or more. The document also includes a schedule of your payments and the estimated taxes and insurance payments. Closing costs are outlined in the Loan Estimate as well.
The Closing Disclosure includes all the same information, but you can’t make any changes after you sign it. It’s important to compare your Closing Disclosure with your initial Loan Estimate to identify any discrepancies. If you notice any differences, including an increase in the mortgage interest rate or borrowing costs, you need to talk to your lender before you sign.
If you find a discrepancy between the Loan Estimate and the Closing Disclosure that you don’t understand, the first step is to contact your lender or real estate agent immediately to verify if there are errors. These mistakes can be as minor as misspelled names or as serious as a change in the interest rate.
Alerting your lender to the errors may delay closing, but it’s vital to get any discrepancies cleared up before signing. If changes need to be made, you have 3 additional business days prior to closing to review the revised Closing Disclosure. Once they’ve been fixed, compare the Loan Estimate and Closing Disclosure again to ensure that they match up.
To learn more about Closing Disclosures, review the following frequently asked questions:
The loan is approved prior to a lender issuing a Closing Disclosure. However, you’ll want to make sure your credit, income and debt are in check during this timeframe until the transaction is finalized.
Typically, buyers and lenders will receive a copy of the Closing Disclosure. It’s recommended that buyers share a copy of their Closing Disclosure with their real estate agent to review before signing.
After you sign the Closing Disclosure, you and your lender are not allowed to make any changes to the mortgage information.
No, signing the Closing Disclosure only signifies that you’ve reviewed the mortgage information sent by your lender. If you change your mind about purchasing a property after signing the Closing Disclosure, you can still opt out.
It’s important to note that there are likely to be financial and credit consequences to backing out at the last second. With any loan, you’ll have to pay for things like application fees and the appraisal to compensate the lender for services already performed. If it’s a purchase, you’re very likely to lose your earnest money deposit.
There’s also a minor negative credit impact associated with applying for any loan on the logic that if you need a loan, it may be a sign that you’re not in great financial shape. Typically, this bounces back within a few months if you make on-time payments. However, in this case, you would be hurting your credit score without actually getting the benefit of the loan by backing out.
Your mortgage lender is required to send you a Closing Disclosure. If you haven’t received the document, reach out to your lender immediately.
The Closing Disclosure lists your final costs in a comprehensive overview – so you know what you’re responsible for paying at closing and throughout your loan term. The Closing Disclosure walks you through important aspects of your mortgage loan, including the purchase price, loan fees, interest rate, real estate taxes, closing costs and other expenses.
Take the time to look over both your Loan Estimate and Closing Disclosure in detail to make sure everything you see makes sense. Are you ready to get started with the home loan process? Apply for a mortgage with our team today. You can also speak with one of our Home Loan Experts by phone at (855) 504-1755.