Whether you’re a first-time homebuyer or a seasoned pro, the real estate closing process can be confusing and overwhelming for many. When it comes to purchasing a home, you will become familiar with many types of paperwork throughout the process. Among these is a document known as a closing disclosure. So, what is a closing disclosure and how is it involved in the homebuying process?
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What is a Closing Disclosure Anyway?
A closing disclosure is the final document you see during the mortgage loan process. This document will describe the critical aspects of your mortgage loan including purchase prices, interest rate, loan fees, closing costs, and other expenses. This document should be compared with your loan estimate that you received at the beginning of your home buying process and should be checked to ensure accuracy and avoid surprises at closing.
Lenders are required by law to provide home buyers with a closing disclosure before closing on their home. The closing disclosure lists the final terms of the loan before closing, so by signing the document you will be agreeing to the conditions presented, regardless of whether or not there were mistakes in the paperwork.
Closing Disclosure Breakdown
The closing disclosure is a five-page form that describes in detail your mortgage loan. While the contents may seem overwhelming at first glance, each page is broken down into specific components. Let’s take a look.
Your closing disclosure will look very similar to this, below we dive into each section.
As the first section of the closing disclosure, this will lay out the terms of your mortgage. This section will provide a comprehensive review at what you can expect to pay and for how long. The loan term is broken down into 5 parts and should be compared to the numbers you received in your loan estimate:
- Loan amount
- Interest rate
- Monthly principal and interest
- Prepayment penalty: some mortgage lenders may charge you a fee if you pay off your mortgage early.
- Balloon payment: not all mortgage lenders offer this, but you should check if yours does. A balloon payment is a one-time payment due at the end of the loan.
Following your loan terms, you will see a section breaking down your payments over a month-to-month and year-to-year basis. In this section you should see the following:
- Payment calculation
- Estimated total monthly payment
- Estimated taxes, insurance, and assessments
Closing costs are typically between 2-5% of your total loan amount. This section breaks down your costs in order to give you a clearer picture of how much you will need to pay during closing.
This section takes a look at the associated fees with obtaining your mortgage. This will list items such as:
- Origination fee and administrative costs
- Mortgage points
- Application fee
- Underwriting fee
- Services such as title search, appraisal fee, credit report, land survey, and more.
Other Possible Costs
In addition to your mortgage loan costs, you may see a section containing other associated expenses such as taxes, government fees, and escrow payments.
Cash to Close
The cash to close amount refers to the full amount that you will need to bring to closing including any deposits that you have already paid. The cash to close total will be higher than the sum of your closing costs since this total will include your down payment.
The summary section is a side-by-side comparative view of the seller’s and borrower’s costs at closing. This will include any adjustments that were paid in advance, taxes, assessments, and more. The summary will also let you see the amount due from the seller, what the seller receives as well as what you as the buyer owe and have paid prior.
The loan disclosure section contains the full detailed conditions of your mortgage loan including penalties for late or partial payments, security interest, and other terms set forth by the lender. It is very important to ask your lender for any explanation of terms that you do not understand.
This section will summarize all of the payments you will make over the life of the loan and summarize the costs including finance charges, interest percentage and annual percentage rate.
Other Disclosures (If Applicable)
This section will contain other general information associated with your home including appraisals, contract details, tax deductions and refinance information.
Contact Information and Signatures
Now that you have read through the closing disclosure, it is time to provide contact information for the associated parties such as the mortgage lender, settlement agent, and sign the dotted line.
Closing Disclosure Timeline
As outlined in TILA-RESPA Integrated Disclosures guidelines, your lender is required by law to provide your standardized closing disclosure at least 3 days before your closing day. This is referred to as the Closing Disclosure 3-day rule. Once you have reviewed and signed the closing disclosure, the mortgage paperwork will be prepared and you’re on your way to closing day!
If you have questions about closing disclosures or would like to learn more about the home buying process—contact a member of the Metropolitan Title team today!