Is a Closing Disclosure the Same as a Settlement Statement?
Gain clarity on essential real estate closing documents. Understand the nuances between key financial statements for property transactions.
Real estate transactions involve many documents. The Closing Disclosure and the HUD-1 Settlement Statement often cause confusion regarding their purpose. While both detail the financial aspects of a real estate closing, they serve distinct roles. This article clarifies what each document entails and how they relate.
The Closing Disclosure Explained
The Closing Disclosure summarizes a consumer’s mortgage loan terms and associated closing costs in a real estate transaction. Its purpose is to provide transparency, helping borrowers understand their financial commitments. This document consolidates loan information, including the interest rate, estimated monthly payments, and any prepayment penalties or balloon payments.
The Closing Disclosure also itemizes all closing costs, distinguishing between borrower and seller payments. These costs include origination charges, appraisal fees, title insurance premiums, and other charges related to the loan and property transfer. Lenders provide this document to the borrower. It must be delivered at least three business days before the scheduled closing date for most residential mortgage transactions, allowing time for review and comparison with the initial Loan Estimate.
The HUD-1 Settlement Statement Explained
Historically, the HUD-1 Settlement Statement was the standard document itemizing all charges and credits for both buyer and seller in a real estate transaction. It provided a detailed accounting of funds, ensuring all parties understood the financial breakdown. The statement included a summary of the borrower’s transaction, a summary of the seller’s transaction, and a list of all settlement charges.
Settlement or closing agents prepared the HUD-1. This document was provided to parties at or before closing. While important, its use has largely been phased out for most consumer mortgage transactions. It continues to be used in specific scenarios, such as reverse mortgages, home equity lines of credit (HELOCs), cash transactions, and commercial loans, where modern disclosures do not apply.
Comparing the Documents and Their Evolution
The Closing Disclosure and the HUD-1 Settlement Statement are not the same document, though both present financial details of a real estate transaction. Their primary distinctions lie in their regulatory basis, purpose, applicability, and format. The Closing Disclosure was introduced under the TILA-RESPA Integrated Disclosure (TRID) rule, which was implemented by the Consumer Financial Protection Bureau (CFPB) in 2015. Conversely, the HUD-1 was governed by the Real Estate Settlement Procedures Act (RESPA).
The TRID rule aimed to simplify and integrate various mortgage disclosures, leading to the creation of the Closing Disclosure to replace the HUD-1 and the Truth-in-Lending (TIL) Statement for most consumer mortgage transactions. The Closing Disclosure is consumer-focused, designed for clarity and ease of understanding for borrowers. In contrast, the HUD-1 provided an accounting of funds for both buyer and seller, with a detailed breakdown. The Closing Disclosure also requires a mandatory three-business-day review period for the borrower, unlike the HUD-1 which was provided at or before closing. Consequently, a typical consumer undergoing a residential mortgage transaction today will encounter the Closing Disclosure.