What Is A Closing Disclosure?

If you’ve arranged for a home mortgage to help you buy your new home, you will have a few loan-related documents to review and sign prior to closing on the home. One of those documents is the Closing Disclosure form.

The Closing Disclosure form outlines all of the important details of your loan, as well as other costs both you and the seller are responsible for covering. So it’s important to review the document carefully and as soon as you receive it (at least three business days prior to the loan’s scheduled closing date). Any needed changes could delay the closing of your home loan and purchase.

What is a Closing Disclosure?

A Closing Disclosure form is a five-page document you receive from the settlement agent at your mortgage lender. The purpose of the closing disclosure form is to finalize and inform the borrower of the actual costs of their home loan.

A Closing Disclosure will outline all of the loan details, including monthly payments, the total cost of the loan, expenses the buyer and seller are responsible for covering, and more. Once you receive your Closing Disclosure, you should review it and compare it to the information that was given to you in your Loan Estimate from this lender.

While the Loan Estimate and Closing Disclosures are different (the Loan Estimate is an estimate of the loan costs to the borrower and the Closing Disclosure reflects what those costs actually are), they should reflect similar numbers. If there are unexplained discrepancies between the Loan Estimate and Closing Disclosure, you’ll need to contact the lender or the settlement agent to have the Closing Disclosure corrected.

Key Components of the Closing Disclosure Form

The Closing Disclosure Form will communicate a lot of information in its five pages, including loan terms, closing costs, projected monthly payment amounts, cash needed to close on the deal, and more.

This section walks you through the different parts of the form, the pages they appear on, and what certain key terms mean.

Loan Terms

The loan terms are in the first section on the first page of the Closing Disclosure. This section gives a high-level overview of the mortgage terms, including the loan amount, interest rate, and the monthly principal and interest payments.

The total monthly payment that includes any real estate taxes, homeowners insurance, and mortgage insurance will appear in a different section.

Projected Payments

This section appears on the first page and outlines each cost that will make up your total monthly payment. If your lender is requiring you to carry mortgage insurance, this section will outline your mortgage insurance cost and the number of years you will be required to pay it.

Closing Costs

The second page of your Closing Disclosure form will itemize each of the closing costs for your loan. It will list the name of the charge, how much it will be, and whether or not the buyer or seller is responsible for paying it.

Cash to Close

This is the amount of cash the homebuyer will need to pay at closing for outstanding costs. Page three of the Closing Disclosure form should show how this amount was calculated.

Loan Disclosures

Page four of the Closing Disclosure form details important disclosures about how the mortgage will function. These disclosures include what happens if the mortgage payment is late, whether the loan terms include allowances for negative amortization or demand payments, whether the loan can be assumed, and other important details about the loan.

Loan Calculations

On page five of the Closing Disclosure form, you’ll find the total costs of the mortgage. These costs include the total amount of the loan payments (principal, interest, mortgage interest, other loan costs) you’ll make through the life of the loan.

You will also find the finance charge, which is the total amount the loan will cost you, your annual percentage rate (APR), and the total interest percentage, which is the total amount of interest you’ll pay over the life of the loan, reflected as a percentage of the loan amount.

Timeline for Receiving and Reviewing the Closing Disclosure

Your lender must provide you with your Closing Disclosure form at least three business days prior to closing on your loan. Borrowers should review the document as quickly as possible.

If there are errors or discrepancies between it and the Loan Estimate, they will need to reach out to the settlement agent to have those errors or discrepancies fixed. Some errors could cause a delay in closing.

Changes to the Closing Disclosure

There are a few circumstances that could lead to legitimate changes between the Loan Estimate and Closing Disclosure. Those circumstances include:

• You didn’t lock your interest rate or your rate has changed. If you don’t lock your interest rate, it can change with market fluctuations. If you do lock your interest rate, that rate lock is only good for a certain period of time. If you don’t close your loan within that time period, the rate lock expires and your interest rate could change.
• Something has fundamentally changed from your mortgage application. Your lender can change any of your closing costs at their discretion under the following circumstances: your loan type has changed, the appraisal of your home came in lower than expected, your credit score has changed, or your lender couldn’t verify any “other income” you included in the mortgage application.
• Costs that the lender has no control over have changed. These costs include property insurance premiums; prepaid interest; initial escrow deposits; fees for services that are required by the lender, but you shopped for separately (e.g. pest inspection); and fees for services the lender doesn’t require.
• Recording fees and charges from third-party services from vendors on the lender’s approved list of providers can change up to 10% from what they were quoted in the Loan Estimate.

How to Update and Correct any Mistakes on the Closing Disclosure

If you see anything that you know or think is incorrect, you should contact the settlement agent immediately. If your situation had one of the above-mentioned “changes in circumstances,” you should have received a revised Loan Estimate reflecting the new cost estimates. If your situation hasn’t experienced a change in circumstances, and your closing costs have increased beyond the allowed amount, you should reach out to the settlement agent to have them corrected as soon as possible.

Some changes to the Closing Disclosure could delay loan closing because they require a reissuance of the Closing Disclosure form and a new three-business-day waiting period for the borrower to review. The changes to the Closing Disclosure that will trigger a new three-business-day waiting period are:

• Changes to the APR
• The loan product information is inaccurate
• A prepayment penalty has been added to the loan

Any other change to the Closing Disclosure does not require an additional three-business-day waiting period prior to loan closing.

Tips for Reviewing the Closing Disclosure

In order to diligently review your Closing Disclosure form, you will need two things:

• Your most recent Loan Estimate from your lender
• This guide to the Closing Disclosure form

You will want to review each section, one at a time. Check each cell in the document for accuracy and completeness, and where relevant, compare the information against your Loan Estimate. You can use the guide provided in the link above to help you review each section of the Closing Disclosure form and to explain any terms.

If any questions arise, reach out to your lender or settlement agent for clarification. If you find any discrepancies, reach out to your lender or settlement agent to have those errors fixed. You can also bring your Closing Disclosure to the closing to make sure everything is accurate.

The Bottom Line

Your Closing Disclosure form is the document that outlines all of the important details of your home mortgage. You will want to make sure it’s accurate so that you get the loan terms you thought you were applying for, you pay the appropriate fees, and the loan is recorded with accurate information.

Don’t be afraid to reach out to your lender or settlement agent if there’s something you don’t understand. Having a firm grasp on how your home loan will function and how much it will cost can help prepare for those upcoming monthly payments.