What Is A Closing Disclosure And Why Is It Important?

Buying a home is an exciting process, but it can also be a complex one. It’s critical that you understand all of the terms and implications of your loan and exactly what’s expected of you on the closing day. That’s where the Closing Disclosure comes in.

The Closing Disclosure is a document you’ll receive shortly before you close on your new home. It contains all of the important information about your mortgage.

What Is A Closing Disclosure Statement?

The Closing Disclosure is a five-page document detailing the rates and terms of the mortgage loan you’ve chosen and the amount of money you must bring with you on closing day. The disclosure estimates your monthly payments as well as fees and other closing costs associated with the loan.

What Is A Preliminary Closing Disclosure?

The preliminary Closing Disclosure – also known as the initial Closing Disclosure – is the document your lender provides at least 3 days before your closing. You’re usually required to provide an e-signature to acknowledge that you’ve received the document.

However, the document you receive 3 days before the closing isn’t the final disclosure. Instead, the final Closing Disclosure is one that’s completed by the title company in the day or two leading up to the closing. You’ll receive a copy of this document before the closing so you know exactly how much money to bring.

Loan Estimate Vs. Closing Disclosure

The Loan Estimate is another important document you’ll receive during the home buying process. This three-page document outlines important information about your loan, just like the Closing Disclosure does. However, the Loan Estimate provides estimates, while the Closing Disclosure provides final figures.

It includes information such as the:

• Loan terms
• Projected payments
• Loan costs
• Other related costs
• Cash to close

It’s important to note that the Loan Estimate is drafted before the lender has actually approved your mortgage. It’s based on the terms you’ll likely get if both parties decide to move forward with the loan, but it’s not legally binding.

How Does A Closing Disclosure Work In Real Estate?

The Closing Disclosure is an important part of the home buying and closing process. Its primary function is to provide all the final figures about the loan you’re getting, as well as prepare you for closing day.

Federal law requires that you receive your Closing Disclosure at least 3 business days prior to your scheduled closing date. Instituted and enforced by the Consumer Financial Protection Bureau (CFPB), the 3-day rule ensures that you’re given ample time to review the loan terms while comparing them to the Loan Estimate. This helps ensure you’re comfortable with the loan you’re getting before you close the deal.

When you receive your Closing Disclosure, make sure to read it thoroughly. The 3-day rule gives you an opportunity to look for and resolve any errors in the document and clarify any terms that are different from what you expected.

What’s In A Closing Disclosure For A Buyer?

The Closing Disclosure contains all of the financial information about a mortgage. It summarizes the financial responsibilities of both the lender and the borrower. When you’re buying a house, it’s critical that you read your Closing Disclosure thoroughly to ensure you know what to expect with your loan.

Loan Terms

First, your Closing Disclosure includes all of the terms of your loan, including:

• Loan amount
• Interest rate
• Monthly payment
• Prepayment penalty

Projected Payments

Your Closing Disclosure breaks down your projected monthly payments. First, it shows how much money you’ll pay toward principal and interest each month. It also indicates whether mortgage insurance will be owed and when it’s estimated to end.

Next, your Closing Disclosure will show how much money you’ll pay toward escrow each month for property taxes, homeowners insurance and other costs. Finally, the document will tally your total monthly payment, both with and without mortgage insurance.

Total Loan Costs

Among the most important parts of your Closing Disclosure are those that address your loan costs. The following sections of the disclosure show the costs related to your loan.

• Costs at closing: This section breaks down your total closing costs, separating your loan costs from your other costs. It also shows your total cash to close, which is the amount you must bring with you on the closing day.
• Loan costs: This section summarizes all of your individual loan costs, including your origination charges, services you were able to shop around for and services you weren’t able to shop around for.
• Other costs: This section shows other costs you must pay but aren’t directly related to your loan. These costs would include prepaid costs for homeowners insurance and property taxes and your HOA fees.
• Calculating cash to close: This section shows you exactly how much you’ll need to bring with you on the closing day. It’s the sum of your total closing costs and down payment, minus any prepaid closing costs, earnest money and seller credits.

Transaction Summaries

Also included in your Closing Disclosure is a summary of all transactions. This section includes the borrower’s and the seller’s transactions, including the amount each party has already paid to various parties and the amount that will be owed. At the bottom of the section are a few key figures:

• The amount the borrower owes at closing
• The amount the borrower has already paid
• The amount the seller is owed at closing
• The amount the seller owes at closing

Loan Disclosures

Another important part of the Closing Disclosure is the loan disclosure section. This section summarizes various features of the loan, some of which you may not even have thought of as a buyer. Here are some disclosures that may be included.

• Whether your loan is assumable
• Whether your loan has a demand feature
• Terms of late payments
• Whether your loan has negative amortization features
• Whether your lender accepts partial payments
• Whether your loan will have an escrow account and your estimated escrow costs

Loan Calculations

Your Closing Disclosure will summarize all of the long-term financial calculations for your loan. It will show your initial loan amount and annual percentage rate (APR). However, it will also show the total amount you’ll pay over the entire loan term, the entire amount you’ll pay in interest and the total interest as a percentage of your loan amount.

Other Disclosures

This section of your Closing Disclosure will summarize other terms related to your loan. These disclosures may include information about your appraisal, contract, liability in the event of a foreclosure, ability to refinance and ability to deduct your loan interest.

Contact Information

Your Closing Disclosure will include contact information for all parties involved in the loan, including the lender, mortgage broker, real estate broker and settlement agent.

FAQs About Closing Disclosures

The Closing Disclosure is one of the most important documents you’ll receive during the home buying process, so it’s understandable you may have more questions.

Is a Closing Disclosure final approval?

The Closing Disclosure is usually provided after your loan has been given final approval and you’ve been given the clear to close. However, the Closing Disclosure itself doesn’t necessarily indicate final approval. Additionally, it’s possible for the deal to fall through after you’ve received the Closing Disclosure but before you’ve closed on the loan.

What comes after the Closing Disclosure?

In most cases, the only things that happen after you receive the Closing Disclosure are the final walk-through and the closing. However, there may be more things required if there are any errors in your disclosure or any issues arise before you officially close.

Can I be denied a loan after receiving a Closing Disclosure?

While it’s not common, it is possible to have your loan denied after you’ve received the Closing Disclosure. This would typically only happen in extreme situations, such as if there was a major change to your credit report between your receiving the Closing Disclosure and your closing on the loan.

The Bottom Line

The Closing Disclosure is an exciting step in the mortgage process because it means you’re almost ready to close on your new home. If you are in the early stages of the home buying process and are ready to take the next step, start the mortgage process today. You can get preapproved for your loan and start shopping for your dream home.