A closing disclosure is one of the most important documents you’ll receive during your homebuying journey. The form reveals all the details of your home loan. Understanding your closing disclosure can help you avoid surprises on the closing day.
In this article, we’ll cover
- What is a Closing Disclosure?
- Definitions Of Terms Included in The Closing Disclosure
- Closing Disclosure 3-Day Rule and What Happens Next
- Why It Matters to Understand Your Closing Disclosure
What Is a Closing Disclosure?
A closing disclosure is a five-page form that federal law requires lenders to complete and give to borrowers three business days before closing. The document provides borrowers with more detailed information about the mortgage loan, including the loan type, interest rate, loan terms, estimated monthly installment payments, and closing costs. In short, a mortgage closing disclosure is a final summary of what you owe for buying a property.
What Is Included in the Closing Disclosure?
Once the underwriter approves your mortgage application, you’ll receive a closing disclosure. Your closing disclosure will contain a lot of information about your loan that you’ll need to review. Here’s what you’ll find on each of your mortgage closing disclosure pages and what to look out for.
Page 1: The Big Picture
What to look out for: Confirm that your name is spelled correctly and the interest rate is what you locked in with your lender. If you have decided to use an escrow account for tax and insurance purposes, make sure the information is reflected on page one.
Typically, you will find the following on page 1 of your loan closing disclosure:
- The names of all parties involved in the transaction
- Basic loan terms like loan amount, interest rate, monthly principal and interest, whether your lender would charge a prepayment penalty, and if there’d be a balloon payment.
- Project payments: payment calculation based on the number of years, your estimated monthly mortgage payment, broken into principal, interest, taxes, and insurance (also known as “PITI”).
- Closing costs: this is how much you agree to pay on closing day. The “Cash to Close” number represents total closing costs, your down payment, a return of your earnest money, and other credits.
Page 2: Closing Cost Breakdown
What to look out for: Track if the ‘services borrower did not shop for’ is similar to the information listed in your loan estimate. If the seller agreed to handle the payment of some services (such as HOA or inspection), check and make sure they are reflected in the disclosure.
Typically, you will find the following on page 2 of your loan closing disclosure:
- Origination charges, including points, application fee, and underwriting fee, which are paid to your lender
- “Services borrower did not shop for” could stand for various items. Your lender most likely selected these services for you. “Services borrower did shop for” are third-party services you selected and paid for.
- “Taxes and other government fees” cover the cost of transferring the property to you in public records. You will find items like recording fees and state and city taxes under this section.
- Prepaids and “initial escrow payment at closing” are expenses you’re paying ahead of time. It is common to see items like homeowner’s insurance, mortgage insurance, interest, and property taxes listed under other costs.
- The “other” category also indicates non-mandatory expenses. It may include the home warranty fee, real estate commissions, and title insurance.
Page 3: Transaction Summaries
What to look out for: Check the seller credits between the closing disclosure and loan estimate to see if they are accurate. You should also check if your deposit and dues correctly reflect what you have paid to the seller and what is expected of you.
Typically, you will find the following on page 3 of your loan closing disclosure:
- “Calculating cash to close” shows the final closing cost amount. It also reflects the total amount you need to bring to closing and includes any deposits you’ve already paid to the seller.
- The “summaries of transactions” show the final amounts of money owed from and to both the borrower and seller. The final figure reflects any adjustments, credits, plus outstanding costs.
Page 4: Loan Disclosure
What to look out for: Find if your lender accepts late payments and the fees that come with it. You should also check to see how your lender will handle partial payment if you cannot make full payment.
Typically, you will find the following on page 4 of your loan closing disclosure:
- The “assumption” tells you whether or not you’re allowed to transfer the loan to someone else. Government-backed mortgages, including the USDA, VA, and FHA loans are assumable. In contrast, conventional loans are typically non-assumable.
- The “demand feature” indicates whether or not your lender can require an early repayment.
- The “late payment” section details how much of a fee your lender will charge if you’re late on your payment past a certain amount of days. Most lenders will charge a 5% late fee on principal and interest if your payment is 15 days late.
- “Negative amortization” is when the loan payment becomes less than the interest charged. It’s uncommon with standard purchase loans.
- “Partial payments” explain how your lender handles a monthly payment less than the full amount you owe. If they accept them into a separate account, it won’t be applied to your loan amount until you pay the rest of the payment.
- The “escrow waiver fee” is how much your lender will charge you for choosing not to use an escrow account.
Page 5: Lifetime Loan Calculations and Contact Information
What to look out for: Confirm that the information listed within the sections is correct and gives you a clear picture of the cost of getting the loan. Also, confirm that the contact information of all parties involved in the loan process is listed.
Typically, you will find the following on page 5 of your loan closing disclosure:
- The “loan calculations” section explains the expenses involved over the life of the loan – assuming you take the entire loan term (15 or 30 years) to pay off what you owe. Unless your lender places a prepayment penalty, you are always free to make extra payments at no additional cost.
- “Liability after foreclosure” explains if you will still be in debt to the lender in the event that your home is foreclosed on and obtained by the mortgage company.
- Contact information should contain everything you need to get in touch with your lender if you have questions.
- Confirm receipt: this confirms that you’ve received the closing disclosure. You’ll most likely receive an email link to eSign.
What Is The 3-Day Rule?
On August 15, 2015, the Consumer Financial Protection Bureau (CFPB) instituted a regulation that requires mortgage lenders to provide homebuyers with a Closing Disclosure form at least three business days before their closing.
Referred to as the Know Before You Owe rule, the 3-day closing disclosure timeline gives borrowers time to review, ask questions, and understand the mortgage they are offered before closing on it.
Additionally, borrowers are given an extra 3 days if there are changes to one or all of the following areas:
- An increase in the stipulated annual percentage rate (ARM) of more than ⅛ of a percentage point for a fixed-rate loan or ¼ of a percentage point for an adjustable-rate mortgage (ARM) loan
- Inclusion of a prepayment penalty
- Changes in the loan product, such as a change from fixed-rate to an adjustable-rate mortgage or from an FHA loan to a conventional loan
Please note that a decrease in the stipulated ARM or fees will not cause any delay in the delivery of your closing disclosure.
In addition, after the receipt of the closing disclosure, you’ll need to issue a cashier check or wire check to the settlement company for any money you are required to present on the closing day, such as your down payment and closing costs.
Why Understanding Your Closing Disclosure Matters?
Taking out a mortgage involves several steps and requires a proper understanding of all the terms and fees associated with the loan. The closing disclosure breaks down the steps and fees. You could potentially avoid costly financial mistakes by thoroughly reading through the form.
Like with any other financial document, when you sign the closing disclosure, you’re committing yourself to the terms of the loans regardless of whether you understand it. This is why you must understand your closing disclosure, ask the right questions, and compare your closing disclosure to your loan estimate for differences.
Remember to consult with your lender if you have any questions or concerns about your closing disclosure.
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Elijah O. Agor, CFP
Elijah O. Agor is a real estate, 1031 exchange, and mortgage writer. He is a certified financial planner, former loan originator, and chief realtor for Dsquared Realty. In the past, Elijah advised first-time and seasoned home buyers on real estate and mortgage decisions in the Greater Atlanta area. Since hanging up (burning) his suits and ties, Elijah now works to make mortgage and real estate topics understandable and jargon-free.