Closing on a new house is an exciting but anxiety-inducing process. There is no shortage of documents and paperwork that must be completed in order to get you into the home of your dreams. One piece of documentation that must be completed is known as a closing disclosure. But what is this document, what does it include, and why is it important? Let’s find out.
One of the last documents you see in the mortgage loan process is a closing disclosure: a five-page form your lender will provide to you three days before closing day. It outlines the terms and cost of your mortgage. In August 2015, the Consumer Financial Protection Bureau (CFPB) replaced the HUD-1 settlement statement with a new disclosure document alongside the TILA-RESPA Integrated Disclosure guidelines. The new disclosure was streamlined to alleviate the confusion of the longer HUD-1 statement.
What is included in this document? The disclosure lists many aspects of your housing loan. This includes, but not limited to:
- Loan terms: amount, interest rate, etc.
- Monthly mortgage payment projection: principle, interest, mortgage insurance, estimated escrow payment
- Closing costs: what you’ll owe at closing
- Loan costs: origination and service charges
- Cash-to-close tables: designed to help you understand what costs may have changed
- Transaction summary table: providing big picture of who’s paying what
- Loan disclosures and calculations: escrow accounts, property taxes, homeowner’s insurance payments
- Other costs and disclosures: taxes, fees, prepaid costs, and other details about your appraisal, loan, etc.
A closing disclosure is a five-page form that includes loan terms, monthly mortgage payment projection, closing costs, loan costs, cash-to-close tables, transaction summary table, loan disclosures and calculations, and other costs and disclosures.
You may be wondering why your lender provides you a copy of the closing disclosure three days before closing day? This three-day rule is designed to give the buyer ample time to review the document and look for errors. If there are any discrepancies in the terms or details of the loan, for example, the rule allows you to contact either your lender or settlement agent to, hopefully, avoid any drama at closing.
Even the simplest mistakes should be corrected, such as:
- Is your name spelled correctly?: even small mistakes can create a big problem
- Loan type: there are many types of loans, which can either have a fixed or adjustable rate
- Interest rate: if you have a locked-in rate, make sure it is the same amount on both the loan estimate and the closing disclosure
- Loan term: typically, your loan term will either be 15 or 30 years. Obviously, having the right one will have a drastic impact on your finances
- Loan amount: this number may be higher if closing costs were rolled into your loan, so if you’re unsure of this number, be sure to ask your lender
- Estimated monthly payment, taxes, insurance, etc.: your monthly payments may change over time if your interest rate, property taxes, or homeowner association (HOA) fees increase
If you find there are errors in your closing disclosure, you should notify your lender and the title company immediately. As noted above, this is the exact reason why you are given 72 hours to review the document and make sure everything is in order. Verifying the accuracy of the closing disclosure document is important because it features real numbers which outline how your mortgage will be repaid. It is the last piece of paperwork to be completed before the mortgage paperwork is prepared and all parties involved in the transaction are set to close the loan when the time comes.