What Is a Closing Disclosure in the Mortgage Process?
Navigate your mortgage closing with confidence. Learn what the Closing Disclosure is and how this vital document summarizes your loan terms and costs.
The Closing Disclosure is a significant document in the mortgage process. It provides a comprehensive summary of the final loan terms and all associated closing costs for a mortgage. Its purpose is to provide transparency to borrowers, ensuring they understand their financial obligations before finalizing their home loan. This helps consumers make informed decisions.
What the Closing Disclosure Is
The Closing Disclosure is a five-page form that outlines the final details of a mortgage loan, including loan terms, projected monthly payments, and the fees and costs associated with obtaining the mortgage. This document is a regulatory requirement, mandated by the Consumer Financial Protection Bureau (CFPB). It aims to standardize and simplify the disclosure process, enhancing consumer understanding.
Lenders are required to provide the Closing Disclosure to the borrower at least three business days before the scheduled closing date. This three-day period allows borrowers sufficient time to review the final terms and costs, comparing them against the initial Loan Estimate. This review period is crucial for identifying any discrepancies or unexpected changes and for borrowers to ask questions before committing to the loan.
Key Details on Your Closing Disclosure
The Closing Disclosure details various financial aspects of your mortgage. The first page presents an overview of the loan terms, including the loan amount, interest rate, and monthly principal and interest payment. It also indicates if the loan includes features like a prepayment penalty (a charge for paying off the mortgage early) or a balloon payment (a large one-time payment due at the end of the loan term).
The document also provides a breakdown of projected payments, showing the total estimated monthly payment. This typically includes the principal and interest, any applicable mortgage insurance, estimated property taxes, and homeowner’s insurance. If the property is part of a homeowners association, applicable HOA fees might also be included.
A detailed breakdown of all costs at closing is provided, distinguishing between loan costs and other charges. Loan costs include origination charges, such as application, underwriting, and discount points. It also separates services the borrower did not shop for, like appraisal fees, from services the borrower did shop for, such as title insurance or pest inspection. Other costs encompass items not directly tied to the loan, including taxes, government recording fees, and initial escrow payments for property taxes and insurance.
The Closing Disclosure also states the “Cash to Close,” which is the final amount of money the borrower needs to bring to the closing. Summaries of transactions show how the total transaction is calculated, detailing amounts due from and to both the borrower and the seller.
Reviewing Your Closing Disclosure
The three business days provided to review the Closing Disclosure are an important opportunity to ensure the final loan terms align with your expectations. A primary step in this review is to compare the Closing Disclosure with the initial Loan Estimate. This comparison helps verify that the loan terms, such as the interest rate and loan amount, remain consistent.
Borrowers should carefully examine all listed fees and costs to identify any significant changes or unexpected additions. Substantial differences should prompt immediate questions to your lender or settlement agent. It is important to understand every line item on the document and seek clarification for anything that is unclear. This review is the final opportunity to address potential errors or misunderstandings before the loan is finalized.
The Closing Disclosure and Your Closing Day
Once the borrower has reviewed the Closing Disclosure and is satisfied with its terms, signing the document signifies agreement to the final loan terms and costs. This step is a precursor to the actual closing day, where the loan is formally finalized.
If significant changes occur after the Closing Disclosure has been issued, a new three-business-day review period may be triggered, potentially delaying the closing. These changes include an increase in the Annual Percentage Rate (APR), the addition of a prepayment penalty, or a change in the loan product. On the closing day, the Closing Disclosure serves as the definitive document, and it is signed along with other necessary loan papers to officially fund the mortgage.