What Is a Closing Disclosure and Why Is It Important?

A Closing Disclosure (CD) is a standardized, five-page document provided to borrowers by their mortgage lender, encapsulating the final details of a home loan. This document serves as a comprehensive summary of the mortgage terms, the exact closing costs, and the precise amount of cash required to finalize the transaction. It is a fundamental document in a real estate transaction, ensuring transparency by providing a comprehensive overview of the loan and all associated expenses before the borrower commits to the agreement.

Understanding the Sections of a Closing Disclosure

The Closing Disclosure is structured into several sections, each providing specific financial details related to your mortgage and the real estate transaction. The initial pages detail the core loan terms, outlining the financial commitment a borrower undertakes, including the precise loan amount, the agreed-upon interest rate, and the estimated monthly principal and interest payment.

This section also indicates whether the loan includes features such as a prepayment penalty, which imposes a fee for paying off the loan early, or a balloon payment, a large lump sum due at the end of the loan term. The projected payments section illustrates how the estimated total monthly payment is calculated.

This total includes principal and interest, estimates for mortgage insurance, if applicable, and amounts allocated for an escrow account. The escrow portion typically covers property taxes and homeowners insurance premiums, which are collected by the lender and paid on the borrower’s behalf.

A significant part of the CD details the “Costs at Closing,” categorized into “Loan Costs” and “Other Costs.” Loan Costs encompass charges directly related to obtaining the mortgage, such as origination charges, which are fees paid to the lender for processing the loan. This category also includes fees for services the borrower cannot shop for, like an appraisal or credit report, and services the borrower can shop for, such as title insurance or pest inspection.

Other Costs cover various expenses not directly tied to the lender, including taxes and other government fees like recording fees, and prepaids such as property taxes or homeowners insurance premiums paid in advance. It also lists the initial escrow payment at closing, which funds the newly established escrow account.

The “Summaries of Transactions” section provides a detailed accounting of both the buyer’s and seller’s financial contributions and credits, leading to the final cash to close amount. This section clarifies who is responsible for each cost and how deposits, such as earnest money, are applied towards the total.

Finally, the “Loan Disclosures” section presents additional terms and conditions of the loan. These disclosures might include information about loan assumption, a demand feature that allows the lender to call the loan due early, late payment policies, and details regarding negative amortization or partial payment acceptance.

Reviewing Your Closing Disclosure

Upon receiving your Closing Disclosure, a thorough review is essential to ensure accuracy and prevent unexpected issues at closing. A primary step involves comparing the CD with the initial Loan Estimate (LE) provided earlier in the loan process. While some variances are permissible, any substantial changes in loan terms or costs should be questioned.

Verify all personal information, including names and the property address, as minor errors can cause delays. Check the accuracy of loan terms, such as the interest rate and loan amount. All listed fees and credits should be cross-referenced with the Loan Estimate.

The TILA-RESPA Integrated Disclosure (TRID) rule mandates a minimum three-business-day waiting period between receiving the CD and the scheduled loan closing. This period is specifically designed to allow borrowers ample time for a careful review of the document.

If errors are found or questions arise, promptly contact the lender, real estate agent, or closing agent. Resolving issues beforehand can prevent complications and delays in the transaction.

Next Steps After Receiving Your Closing Disclosure

After a comprehensive review and approval of the Closing Disclosure, several key steps follow leading up to the final closing of the home loan. Any discrepancies identified should be addressed and resolved with the lender or closing agent before the scheduled closing date. In some cases, significant changes might necessitate a new Closing Disclosure and a fresh three-business-day waiting period.

A final walk-through inspection of the property typically occurs shortly before closing. This is an opportunity to ensure the home is in the agreed-upon condition, any promised repairs have been completed, and all included items remain. It is not a substitute for a comprehensive home inspection but rather a final verification.

The “Cash to Close” figure on the Closing Disclosure indicates the total amount of funds the buyer needs to bring to the closing table. These funds usually cover the down payment, remaining closing costs, and any pre-paid expenses. Acceptable forms of payment are typically a wire transfer or a cashier’s check, as personal checks or cash are generally not accepted for large sums.

The closing appointment involves signing numerous legal documents, including the mortgage note and deed of trust, which formally transfer ownership and establish the loan agreement. Once all documents are signed, loan funds are disbursed, and property ownership is officially transferred to the buyer.