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Of all the documents required to buy a home, one of them stands out above the rest: the closing disclosure form.
The closing disclosure form is a five-page federally required document that lays out to homeowners how much money they’ll need to have on hand to get the keys to their new home. It describes the terms of the loan, the length, and the interest rate. It’s one of the most important pieces of information homeowners receive in the homebuying process, and it should be read thoroughly.
You’ll receive your mortgage closing disclosure at least three business days before your closing. Read it closely to make sure you know exactly what to expect.
“The whole point of the closing disclosure is for borrowers to cover their rear ends and make sure they’re not getting screwed,” says Michael Piazza, originating branch manager at CrossCountry Mortgage. “It’s a huge safety net for them.”
Read on to learn more about the mortgage closing disclosure and why it’s so important.
What Is a Mortgage Closing Disclosure?
The mortgage closing disclosure is the final summary of what you owe for buying your home. It uses actual numbers to let homeowners know what all the final costs and fees will look like. There are many fees associated with closing, so the document coming at least three days in advance serves to remind the homeowner to get all the necessary funds ready.
It also summarizes all of the lender’s information about a loan, such as the interest rate, term, and estimated monthly installment payments.
“Everything that’s on a closing disclosure is important because it’s a breakdown of what the borrower is paying,” Piazza says.
When looking for a loan, you’ll get what is known as a loan estimate. It’s a three-page document that describes an estimated interest rate, monthly payment and estimated closing costs. When you receive the mortgage closing disclosure, it may look different from the initial loan estimate you may have received. You can take this time to check if anything is incorrect or doesn’t match up and confirm with your lender as to why.
The mortgage closing disclosure became a requirement as of 2015 as part of the TILA-RESPA Integrated Disclosure (TRID) rule. Before that, two other documents were provided, which were given right at closing and provided homeowners little time to review.
What to Expect From a Closing Disclosure Form
Here’s what to expect in this five-page document:
Loan Amount and Term
The first page lays out the loan amount. It’s the total amount you borrow after the down payment and other fees. This section explains how much you’ll pay and for how long. The interest rate — which is how much you are charged to take out the loan — is also disclosed. You’ll also see any penalty fees that are associated with your mortgage, like a prepayment penalty that some lenders include if you pay your mortgage off in full early.
Fees and Payments
The second page talks more about how much this loan is going to cost. “You’ll find costs like credit report fees, appraisal fees, and some tax monitoring fees,” says Khari Washington, broker and owner of 1st United Realty & Mortgage.
There is also a section that shows costs homebuyers could shop for from title and escrow companies, along with the total borrowers have to pay. The bottom of the page is for other costs including recording fees, taxes, interest, and insurance costs, as well as the total added together. This page also features any mortgage points purchased by the homebuyer to lock in their rate.
The top portion of the third page shows how much cash you’ll need to close on the mortgage, followed by a summary of the transactions that have taken place thus far. The other sections on the page show any adjustments, lender credits, and fees already paid.
“Closing costs will typically be about 2% to 5% of your loan amount,” says Matthew Martinez, a real estate broker at Diamond Real Estate Group in California. “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.”
Page four includes additional information, such as a breakdown of escrow payments over a 12-month period, if it’s required in the mortgage. There are also disclosures, such as whether the loan can be transferred to someone else, if partial payments are allowed, if payments can be less than the interest owed, and whether the lender can demand repayment early.
This is the big numbers page. It shows how much the homebuyer will pay over the course of the mortgage, typically 30 years. It breaks down how much will go to the principal and how much goes to paying off interest.
“It gives you the best picture of what you owe on a month-to-month and year-to-year basis,” Martinez says. This is followed by contact information for the loan.
The final page is where the borrower confirms receipt of the disclosure by providing their signature.
Why Understanding Your Closing Disclosure Matters
The mortgage closing disclosure contains all the vital information that homebuyers need to know before they get the keys to their new home. Once it’s signed, you’re locked in.
“You must understand the disclosure because others involved with your loan are assuming you do,” says Washington. “You need to know your loan costs, your interest rate, your payment due date, and all of the other aspects of your loan. The loan originator could have thrown all sorts of options at you, but the one that is going to be binding in the end is the one on the disclosure.”
Discrepancies Between Your Closing Disclosure And Loan Estimate
Make sure everything is correct. Double check your name, the address of the home you’re purchasing, the loan description and loan amount, triple check the interest rate, and understand any fees. Typically, the biggest discrepancy people see is the difference between the loan estimate and closing disclosure is the amount of taxes owed, but other differences are possible.
“If your credit dropped, the loan-to-value changed, or your income came out to be less than expected, your interest rate may change,” Washington says. “Costs from third parties you shopped for, escrow deposits, and services the lender doesn’t require all can increase in any amount. Lender fees and fees you can not shop for can not increase at all. Fees from third parties that the lender provides and recording fees can change 10%. All of these fees can also change in your favor by any amount.”
If something is confusing or doesn’t feel right, speak to your attorney or lender to try to clear it up. Contacting them immediately when something is off may help prevent any delays in getting new paperwork.