The closing date is approaching and a buyer is about to sign a mortgage loan. It’s a huge financial commitment and one that will add to their monthly financial obligations so they need to know exactly what they are getting into. Closing day should be an exciting day but it may often be overwhelming with the amount of paperwork that needs to be understood and signed. That’s where the Closing Disclosure comes into play, to ensure homebuyers have a clear understanding and that there are no surprises at the closing table and beyond. Only one in five homebuyers say they understand all of the closing documents they signed at closing, including the Closing Disclosure.
Required by federal law for all home purchases, the Closing Disclosure is perhaps the most important of all the documents required when buying a home which is why it is so imperative homebuyers understand. But what exactly is a Closing Disclosure? That’s a question homebuyers often look to Title professionals to answer and we’re here to break it down.
What Is a Closing Disclosure?
The Closing Disclosure is a legally required document that outlines the concrete final expenses and terms of a mortgage. The 5-page statement includes the following details:
- Loan amount
- Loan type
- Interest rate
- Estimated monthly payments, and
- Closing costs
The information in the Closing Disclosure form needs to be verified as quickly as possible to prevent delays in the closing date.
What Is the 3-Day Closing Disclosure Rule?
The lender is required by law to hand homebuyers the standardized Closing Disclosure document at least three business days prior to closing. This is what’s known as the 3-day Closing Disclosure rule.
Before the 3-day rule came into effect, homebuyers received two documents: The HUD-1 Settlement Statement and the Truth in Lending Disclosure Statement. These documents were only provided to homebuyers at closing, leaving no room for borrowers to review and make sense of them. In contrast, the Closing Disclosure 3-days rule offers buyers ample time to go over the loan terms before signing the document.
If there are discrepancies in the terms or details of the loan, borrowers are advised to contact the lender within three business days. Here are the things that can trigger the issuance of a revised Closing Disclosure and a new 3-day waiting period.
- A change in the annual percentage rate (APR) for the loan
- Changing the loan product. For example, switching from a fixed to an adjustable-rate mortgage
- An addition of a prepayment penalty to the loan
Why Understanding The Closing Disclosure Is Paramount
The mortgage disclosure statement contains all the critical information homeowners need to know before getting the keys to their new house. Once it’s signed, it’s locked in.
To that end, it’s vital that homebuyers understand every clause and terms of the loan. They’ll need to know the loan costs, amount, expected monthly payments, interest rates, and other aspects of the loan. Understanding the disclosure can help to avoid any surprises down the line.
What’s in the Closing Disclosure?
As mentioned, the Closing Disclosure is a 5-page document. Here’s what can be found on each page of the disclosure and what will need to be reviewed.
Page 1: Loan terms and Projected Payments
Here’s what can be found on the first page of the Closing Disclosure.
Involved Parties and Transaction Dates
You’ll find the name of the borrower, the lender (mortgage company), the seller (if the homeowner buying and not financing), and the settlement agent.
This section will include details of the loan and how much is being borrowed. What are the interest rates and monthly payments, and are they fixed? Does the loan have a prepayment penalty? All this information will be on the first page under loan essentials.
Page 1 also reflects the total PITI (principal, interest, taxes, and insurance) payment at closing and over the life of the loan. You can see how payments will change over time.
This section breaks down the closing costs, so buyers will know how much they owe the lender at closing. This includes the down payment and all the other fees. Make sure the closing costs match the current loan estimate.
Page 2: Other Loan Costs
Page 2 is a detailed explanation of all the loan costs, including origination fees and service charges. Here are the three sections you’ll find on page 2.
All the loan fees and service charges will be detailed in this section. This may include loan origination fees, application fees, mortgage points, and other random expenses.
Services Borrower Shopped For
Any additional services added to the loan, like title insurance and other add-ons, will appear here.
Services Borrower Didn’t Shop For
These are required services that the borrower didn’t initiate, like an appraisal fee, credit report fee, etc. You should be able to see similar services on the loan estimate.
Page 3: Closing
This page shows a breakdown of the amount of cash needed at closing, differences between closing disclosure amounts and the loan estimate, and reasons for any discrepancies.
The downpayment and earnest money deposit will also be listed here. Homebuyers should review each item to ensure everything aligns with what was agreed upon with the seller.
Page 4: Late Fees & Payments
Page 4 shows the late fee and whether the lender accepts partial payments. It discusses how expenses related to the mortgage will be handled and what happens if a payment is late or missed. Sections on this page include:
The monthly mortgage payment is typically due on the 1st of every month and is considered late on the second day of the month.
However, most lenders don’t charge a late payment fee unless the payment is made after the 15th of the month. This section shows the amount that will be charged for making a late payment and when the late payment penalty applies.
This section informs the borrower whether the lender can accept partial payments and the implications.
Information about the loan’s escrow account will be discussed in this section. You’ll see what’s included—usually property taxes and home owner’s insurance. Failure to open an escrow account may attract an opt-out fee, which appears in this section.
Page 5: Interest, Refinancing, and Foreclosure
The final page of the Closing Disclosure will discuss the loan interest rate and what happens should the homebuyer decide to refinance their mortgage or their home goes into foreclosure.
It also contains valuable information about other important disclosures and a list of contacts they may want to keep should they ever have questions after they’ve closed on their home. Here are the key sections they’ll find on page 5.
Annual Interest Rate (APR)
This is not the interest rate. The APR represents the costs over the loan term expressed as a rate. It shows a bigger picture of how much it costs to secure the loan and is usually higher than the interest rate.
The APR includes the mortgage interest rate plus any additional fee—broker fee, mortgage points, etc.—spent on the loan.
You’ll also find the loan refinancing options here, including whether the homebuyer will be able to refinance the loan in the future.
What happens if the borrower fails to honor their debt obligations and the bank takes ownership of the home? This information is discussed in detail on the last page under the foreclosure section.
Lenders are required to hand over a copy of the home appraisal report at least three days before closing. It’s important to make sure buyers have it before the closing.
Last but not least is the contact page.
Homebuyers should make sure to keep a copy of all the professionals involved in the real estate transaction. If any issues arise, buyers might need to contact them after closing.
Homebuyers look to title professionals as a partner and resource as they make their dream of homeownership a reality. Even experienced homebuyers find the closing process daunting and title agents have the chance to lessen the pressure homebuyers feel filling out a great deal of paperwork. The effort spent to communicate the Closing Disclosure prior to the closing, will ensure closing day is an exciting experience for all.