A Beginner’s Guide To Closing Disclosures
Carey Chesney7-minute read
July 27, 2022
Buying or selling a home is an exciting journey. Usually, it’s the start of a new stage of life … or at least a change of scenery. It can also feel pretty complicated – with a number of tasks, forms and other responsibilities to stay on top of.
One of the most involved parts comes at the end of your journey, during the closing process. To prepare for this process, you need to understand what a Closing Disclosure is and what it means for the purchase or selling of your home.
What Is A Closing Disclosure?
A Closing Disclosure is a five-page document that outlines the final terms and costs of the mortgage you have chosen to use when buying a house. The form contains finalized loan terms, disclosures, closing costs and projected monthly payments.
How A Closing Disclosure Works
The primary function of a Closing Disclosure is to state how much money a buyer will need to bring to closing and the lender’s preferred payment method. Federal law requires that you receive your Closing Disclosure at least 3 business days prior to your scheduled closing date.
The 3-Day Rule For Closing Disclosures
You may be wondering why there’s a 3-day rule for Closing Disclosures? Instituted and enforced by the consumer financial protection bureau, the 3-day rule ensures that you’re given ample time to review the loan terms while comparing them to the loan estimate from your lender so that you’re comfortable with the mortgage you’re getting before you close the deal.
What Information Is On The Closing Disclosure Form?
As previously mentioned, it’ll include finalized loan terms, disclosures and closing costs. To see how this might look when the ink hits the paper, check out this sample Closing Disclosure.
Each real estate transaction is unique, so the information may vary. That said, here are a few of the key items you can expect to see on a Closing Disclosure form.
This section in the top left corner of your statement will go over when the Closing Disclosure was issued as well as your closing date and when any applicable funds will be disbursed. The property address is next and, if applicable, the sale price of the home. The name of the person or entity handling the closing will also be included.
This section will include your name and address as the clients for the mortgage along with the name of the lender. In a home purchase, the seller’s information would also be included.
The important items here are the loan term, the purpose of the loan (purchase/refi), the product type (fixed, adjustable, interest-only, etc.), and the loan type (conventional, FHA, VA, etc.). These are critical to know because they’ll tell you if your payment can change and how long you can expect to be paying off the loan. The loan type is also important because each mortgage investor has different policies regarding things like insurance and future refinancing options.
This will tell you what the loan amount is, as well as the interest rate and what your monthly payment will be. If you’re getting an adjustable-rate mortgage , it’ll be disclosed here that your payment can go up after closing. If there is a penalty for paying off your loan early, it’ll be mentioned in this section as well.
FYI, Rocket Mortgage® doesn’t charge a penalty for this.
This section will show a breakout of your monthly principal and interest payments along with other costs that may be included. These could include any applicable payments for mortgage insurance as well as estimated costs for your property taxes and homeowners insurance if you have an escrow account. The table will also show any possible future changes to the payment for situations like the removal of mortgage insurance or the increase of an ARM rate.
Costs At Closing
This section breaks down the total that needs to be paid at the closing in order to secure the loan and complete the transaction. This includes the down payment and other closing costs for both the loan and third-party fees associated with the transaction.
Lenders charge an origination fee, which is how they make their money on the loan. Sometimes instead of calling it origination, they break it into separate processing and underwriting fees. Whatever they call it, the differences in these fees can help you compare lenders.
If your loan is government-backed, there’s typically an upfront mortgage insurance, guarantee or funding fee which can either be paid as part of your closing costs or added into the loan. You’ll also need a lender’s title policy, which is insurance for the lender that there won’t be any other claims against the property and that there are no existing liens.
Except in certain refinance situations, you’ll need an appraisal to establish the value of a property. There’s also usually a fee for when the lender pulled your credit report. Finally, the lender may charge a fee for the delivery of documents.
This section covers county fees for recording the deed and any applicable transfer taxes as well as any upfront homeowners insurance and property tax payments, along with required funds to set up your escrow account. Home inspections may also be included in these closing costs. These amounts are critical to know when calculating your monthly payment.
Finally, you may pay for an optional owner’s title policy which gives you the money to buy another home in the unlikely event that someone unknown comes forward in the future with a legitimate claim to your property.
Calculating Cash To Close
This section breaks down how the total due for closing costs was calculated. This adds together your down payment, loan amount and other costs, subtracting any existing deposit, any fees you paid in advance and any items being paid by the seller in a purchase transaction.
Summaries Of The Transaction
This shows how much you (and the seller in a purchase transaction) owe or are getting back at the closing table. There’s also a breakdown of how these calculations are made.
Among the items you’ll find here are disclosures on whether your loan can be assumed by another person in a sale and whether your lender can ever call for full repayment of your loan early. You’ll also have a breakdown of your initial escrow costs.
This table looks at the total amount you would pay for your loan assuming you made all your payments as scheduled without paying off any principal early. The finance charge is the difference between the total amount you end up paying and your loan amount.
You’ll also see the annual percentage rate, which is your mortgage interest rate after factoring in closing costs, along with the interest percentage you’ll pay over the life of the loan.
Here you’ll find final miscellaneous details related to your loan. You’re entitled to a copy of any appraisal, and you should also review your contract details to see what happens if you fail your obligation to make payments under the loan, including your foreclosure liability.
Finally, there’s a disclosure around the tax deductibility of interest paid on the property.
Depending on who’s involved in the transaction, this section may include contact info for the lender and mortgage broker, as well as the buyer’s and seller’s real estate agents and the closing agent.
You’re required to sign the Closing Disclosureto acknowledge you received it to move forward with the closing as scheduled.
What Happens After The Closing Disclosure?
After you acknowledge receipt of the Closing Disclosure and the 3-day waiting period has expired you are cleared to close on your new home!
Can You Make Changes To The Closing Disclosure?
No, a buyer can’t make change after they sign the Closing Disclosure.
Why It’s Important To Have A Closing Disclosure
The Closing Disclosure is critical for making sure you are comfortable with the terms of your loan before finalizing the deal. Also, if you find an error within the Closing Disclosure, there is still time to correct it before closing on the home.
How To Check Your Closing Disclosure
Check each of the sections of the Closing Disclosure we have outlined here and make sure they match up with the terms you have discussed with your lender. If they don’t, make sure you ask questions to get issues resolved right away.
Closing Disclosure FAQs
Who sends out the Closing Disclosure?
Your lender will send you your Closing Disclosure a minimum of th3ree days prior to closing.
Who gets a copy of the Closing Disclosure?
You, your lender, and any other people named on the loan.
Does a Closing Disclosure mean approval?
Yes, your loan is approved within the parameters of the terms outlined in the Closing Disclosure.
What if something is wrong with my Closing Disclosure?
Immediately talk to your lender to get your questions answered and any discrepancies on the Closing Disclosure resolved.
What happens if there are changes to the Closing Disclosure?
The buyer must receive a new form and will be given 3 additional business days to review that form before closing.
What changes require lenders to provide a new Closing Disclosure and an additional 3-day waiting period?
The changes that require lenders to provide a new closing disclosure and an additional 3-business-day waiting period include:
- The annual percentage rate increases by more than ⅛ of a percentage point for a fixed-rate loan or ¼ of a percentage point for an adjustable-rate mortgage loan
- There is addition of a prepayment penalty, or a fee charged when they pay off their principal balance ahead of schedule
- There are changes in the loan product
The Bottom Line
A Closing Disclosure breaks down the costs and allows you to review your loan terms before closing on a home. Still have questions? Contact an expert or lawyer before moving forward.
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