What’s A Closing Disclosure And Why Is It Important?
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For most people, buying a house may feel like a treasure hunt that culminates in finding a dream home, making an offer and moving in! Although that is what happens, along the way you’ll have to complete tons of paperwork (though most of it can be completed online), provide a variety of closing documentation and read through all the required disclosures.
After all, it isn’t just a home. It’s the largest investment most of us will ever make.
However sick you may be of the legalese and financial information you’ll be given, one document deserves your close attention: the Closing Disclosure form.
What Is A Closing Disclosure?
A Closing Disclosure is a 5-page document that outlines the final terms and expenses of a mortgage, including the home loan amount, interest rate, estimated monthly mortgage payments and closing costs. Mortgage lenders are required to provide home buyers with their Closing Disclosure at least 3 business days before their loan closes. Your Closing Disclosure is one of the most important pieces of paperwork you’ll receive during the mortgage process, so check it over carefully.
In August 2015, under the direction of the Consumer Financial Protection Bureau (CFPB), the Closing Disclosure Form replaced the HUD-1 settlement statement. Federal law had previously mandated that the HUD-1 settlement statement be distributed to home buyers on the day their loan was closing, which didn’t give them much time to react to the figures or ask for clarifications.
Why Is the Closing Disclosure Form Important?
You can consider the Closing Disclosure form the final version of the Loan Estimate – formerly called a Good Faith Estimate – which you received when you first applied for your home loan.
Although the Loan Estimate form outlined the approximate fees you would pay for your mortgage, the Closing Disclosure form uses the actual numbers. This is why you must read this closing form carefully and ask about anything you don’t understand.
Whereas the HUD-1 settlement statement was long and confusing, the Closing Disclosure form used today is more streamlined.
What Is The Closing Disclosure 3-Day Rule?
CFPB regulations require that home buyers receive the Closing Disclosure form at least 3 business days prior to closing, but this 3-day timeline isn’t required for delivering disclosures to the home seller.
Known as the TILA-RESPA Integrated Disclosures – or, more commonly, the Know Before You Owe rule – these federally mandated regulations give mortgage borrowers more time to review and get their questions answered properly.
Additionally, buyers get 3 more days to decide whether they wish to proceed if changes are made in these key areas:
- Increases to the annual percentage rate (APR) of more than ⅛ of a percentage point for a fixed-rate loan or ¼ of a percentage point for an adjustable-rate mortgage (ARM) loan
- Addition of a prepayment penalty, or a fee charged when you pay off your principal balance ahead of schedule
- Changes in the loan product (like a switch from a fixed-rate mortgage to an adjustable-rate mortgage)
It’s important to note that a decrease in the APR or a reduction in fees won’t cause any delays.
What’s In The Closing Disclosure?
The Closing Disclosure form offers a lot of important information you’ll need to review, including:
- Loan terms: These include loan amount, interest rate, projected monthly payments (principal and interest), prepayment penalty (if applicable) and balloon payment (if applicable).
- A breakdown of your projected monthly mortgage payment: This breakdown includes principal and interest, private mortgage insurance (PMI) and your estimated escrow payment (for property taxes and required insurances, which can increase over time).
- Closing costs: These are the costs that you’ll owe when you’re at the closing.
- Loan costs: These costs include origination fees, underwriting fees, the mortgage application fee and any applicable prepaid mortgage interest points. They also include services that you, the borrower, didn’t not shop for (like the appraisal or credit report fee) and did shop for (like the title search, title insurance and pest inspection).
- Other costs: These costs include taxes, recording fees and prepaid costs – like a homeowners insurance premium or mortgage insurance premium – as well as home warranty fees.
- A cash-to-close table: This shows what costs have changed since your Loan Estimate, whether any seller concessions have been made, and the total amount you should bring to closing.
- A transaction summary table: This provides the big picture of what you’re paying versus what the seller is paying, as laid out in the seller’s Closing Disclosure.
- Loan disclosures: Boxes are checked on the loan disclosures because they apply to your loan, such as whether your loan is assumable, whether you’ll have an escrow account to collect and distribute your property tax and homeowners insurance payments, and whether the loan allows for partial payments.
- Loan calculations: These consider total payments, finance charge, amount financed, APR and total interest percentage (TIP).
- Other disclosures: These include details about your appraisal and loan, as well as what happens if you don’t make your payments. For example, these disclosures cover whether your state’s laws protect you from being held liable for the loan balance in the event of foreclosure.
- Contact information: This provides directions for reaching the lender, brokers and settlement agent involved in your home loan.
- Confirm receipt: Signing the final page of the Closing Disclosure form only indicates you’ve received it; this form will be available for you to sign at the close.
How To Check Your Closing Disclosure Form
You’ll want to compare the Closing Disclosure form side-by-side with your Loan Estimate form. Most of the numbers and terms should be similar but may differ because of the weeks (or even months) that have passed between when you applied and your closing date.
Your real estate agent should receive a copy of the Closing Disclosure form from the mortgage lender. They can help you check it for accuracy.
Take plenty of time to review, double-check and ask questions about the information you’ve received. Start with this checklist, but consider this a starting point only:
- How your name is spelled: Even small errors can create big problems later.
- Loan type: There are many types of loans. Conventional mortgage loans typically come with either a fixed interest rate or adjustable rate.
- Interest rate: If you locked in your rate, it should be the same as shown on your Loan Estimate.
- Loan term: Typically, your loan term will be 15 or 30 years.
- Cash-to-close number: This amount includes your down payment and closing costs. It represents how much money you need to bring to closing.
- Closing costs: These are the fees paid to third parties, such as the appraiser. In general, you’ll pay 3 – 6% of the real estate purchase price.
- Loan amount: This number may be higher if closing costs were rolled into your loan. If you’re unsure of this number, ask your mortgage lender.
- Estimated total monthly payment: This number may be higher if you have an adjustable-rate mortgage loan since your monthly payment can change over time if the interest rate increases.
- Estimated taxes, insurance and other payments: This amount can change over time if, for example, your property taxes or homeowners association (HOA) dues increase.
What Happens After You Receive The Closing Disclosure?
The CFPB offers an example Closing Disclosure tool on its website to help you double-check the form for errors. Although your final Closing Disclosure should be ready for signature, you should always read your documentation with the assumption that any element – be it your name, the interest rate or the address of the real estate – could be incorrect.
Once you and your lender sign the Closing Disclosure, no changes can be made to the mortgage information.
If you find an error with your closing documents, notify your lender and title company immediately.
If changes are significant, the document will need to be revised, which will push your closing back at least a few days because you’ll have to review your updated Closing Disclosure form at least 3 days before your new closing date.
The Bottom Line: Closing Disclosure Forms Make Closings More Transparent
The Closing Disclosure is an itemized, comprehensive list of all the costs you’ll need to pay both at closing and throughout the life of your mortgage loan. When you receive your Closing Disclosure form 3 days before closing, be sure to compare it to your loan estimate and mention any concerns to your lender ASAP.
Now that you have a better understanding of how and where the mortgage loan process ends, maybe you’re ready to embark on your own home-buying journey. You can start by getting preapproved with Rocket Mortgage® today.