You found a house; you went under contract; and you survived the home inspection, appraisal, and loan underwriting. Congratulations, the end is in sight! You’re well on your way to becoming a homeowner.
If you’ve chosen a conventional loan type, the closing disclosure (CD) is one of many forms you’ll get during the home-buying process, and other than the stack of papers you’ll sign on that fateful day of closing, the CD is the last document you’ll receive before possession of the home. Even though they’re designed to be a simple overview of your loan product, these five pages of numbers and legalese can still be confusing, especially if you’re a first-time home buyer. Let’s break down what it is, why it’s important, and how to check for any errors.
What is a closing disclosure?
The closing disclosure is a form issued by your lender a few days before you close on your home. The five-page form includes a final roundup of your loan transaction details, like your:
- Principal amount (aka the loan amount)
- Mortgage insurance
- Property taxes
- Interest rate, or the annual percentage rate (APR)
- Fees and closing costs, such as origination charges
- Prepayment penalty, if applicable
- Escrow account information
- Monthly payment amount
- Total finance charge over the life of the loan.
The first page of the closing disclosure provides a good summary of your loan terms, and is a great starting point. The other four pages provide significant additional information. This can help you determine if the loan contract details—like late fees or a demand feature, which allow the lender to demand full repayment—line up with what you expected.
You can compare the CD against your initial loan estimate and contact your lender to settle any errors or unexpected changes prior to closing.
In addition to this other loan information, your closing disclosure will likely specify services borrower did shop for and services you didn’t. In addition to homeowners insurance premiums, things like title insurance are included under services that the borrower shopped for—even if you just used the title insurance provided by your lender or title company. Many borrowers don’t realize they can shop for these services.
Why is the closing disclosure important?
This is your final review of the loan before signing and committing to it. You want to make sure you fully understand your closing costs and monthly payments—and whether they are subject to change, like in the case of an adjustable-rate mortgage—before you tie yourself legally and financially to the loan. Once you sign the closing documents, you’re bound by the terms and conditions until you close the loan, either by refinancing, paying it off entirely, or selling the property.
Houses come with a big price tag, so this information isn’t just small potatoes. Make sure to take the time you need to comb through the details of the CD.
The three-day rule
The Truth in Lending Act was put in place to protect borrowers by giving them as much information as possible when committing to a loan. In line with this, your lender is legally required to give you the closing disclosure at least three business days before closing so you have time to look for unforeseen changes or errors. (Prior to the three-day rule being issued in 2015, these final loan terms were given at closing, which could result in rushed decisions or overlooked mistakes.)
According to the Truth in Lending Act, the three-day rule can technically be waived if “extension of credit is needed to meet a bona fide personal financial emergency.” What is considered a “personal financial emergency,” however, is relatively vague. It typically means that there is some time limit (less than three days) within which you must close on the home. If there’s potential to lose the home without closing sooner, you may be able to waive the three-day rule. One example that the Truth in Lending Act provides is the “imminent sale of the consumer’s home at foreclosure during the three-day period.”
To waive this right, you would need to give the lender a dated statement that describes the emergency, specifically waives the waiting period, and bears the signature of everyone involved. Per the specific instructions, this statement must be handwritten.
It’s worth noting that this rule is in place to protect you, so there are very few reasons to waive this waiting period unless it really is an emergency, like in the foreclosure example. Though you may be eager to close on your home, you should take these three days to comb through the closing disclosure and make sure everything is correct. If you’re unsure about anything on the closing disclosure, reach out to your lender and ask any unresolved questions you have until you’re 100% clear.
Does the CD mean I’m clear to close?
After going under contract on a house, an underwriter will review all of your qualifications—like your financial information, credit history, and employment verification—as well as order an appraisal and title check for the property in question. If all goes well, the underwriter gives your loan final approval and you are “clear to close.”
The closing disclosure includes the final numbers that are based on loan approval, so getting a closing disclosure means you are, in fact, clear to close.
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Can closing costs change after the CD?
Technically, things outside of the lender’s control can change even after receiving a closing disclosure, like the cost of homeowner’s insurance for escrow. Lender fees, however, cannot change after the closing disclosure is issued.
The lender must provide a new CD if loan details are altered due to a “change in circumstances,” such as a change in your credit score or down payment amount. Another three-day window is only required if:
- The loan product has changed, like changing from a fixed-rate to an adjustable rate or vice-versa.
- APR increases by more than one-eighth of a percentage point. (The same does not apply for a decrease.)
- A prepayment penalty is added. This is a fee that a lender can charge for refinancing, selling the home, or paying off the mortgage sooner than specified on the loan.
An explanation of form elements
Here’s a brief overview of what each section on the closing disclosure entails. (If you’d like more information and guidance on reviewing this document, we recommend checking out the interactive explainer from the Consumer Financial Protection Bureau.)
- Loan terms: This section includes hard numbers like your loan amount, interest rate, monthly principal and interest, any prepayment penalties, and whether or not there is a balloon payment.
- Projected payments: This is where you’ll find a breakdown of each payment, including principal, interest, what your payment will look like with and without PMI, estimated escrow, and an estimated total monthly payment.
- Costs due at closing: The total amount you’ll bring with you to closing, detailed in full on the following pages. “Cash to close” takes all of the loan costs into consideration along with your down payment, earnest money, and seller credits.
- Loan costs: A summary of any lender fees, loan points, the cost of appraisal and title search, and any insurance or tax amounts due as prepaids.
- Summaries of transactions: This compares the borrower’s and seller’s transaction costs next to each other, including the total costs due from the borrower and the total amount due to the seller.
- Loan disclosures: Any and all terms between you and your lender, including the penalty for late payments, whether partial payments are allowed, and the details of your escrow account.
- Loan calculations: A series of calculations that make it clear what your APR is and how much interest you will pay over the life of the loan.
How to check your closing disclosure
First and foremost, compare your closing disclosure to your original loan estimate and check for any undiscussed alterations. The two documents won’t be exactly the same, but there shouldn’t be any glaring differences. Your real estate agent will also receive a copy of the closing disclosure, and they can help you check for accuracy.
Next, check for any simple errors, like spelling mistakes in your name. These issues are rare, but they will need to be fixed prior to closing.
Finally, consider whether you are truly prepared to make these monthly payments and commit to the loan as it is detailed on the closing disclosure. Hopefully, you’ve already done your due diligence when shopping for the loan, so this shouldn’t be a problem. If you realize you don’t want to buy the house so late in the process, you can technically walk away—but you’re going to lose your earnest money and cause a lot of problems for everyone involved.
If there is an error on the closing disclosure, contact your lender to work through the changes as soon as possible. The document will need to be revised and reissued, which may incite another three-day window and push back your closing date. If this is the case, your purchase contract will also need to be amended.
Why is the closing disclosure different from my loan estimate?
You will have gotten a loan estimate after you went under contract and officially applied for a mortgage. (Note that this is different from a pre-approval letter, which is given before formally applying for the loan.) The three-page loan estimate looks similar to the five-page closing disclosure, and it includes all of the important information like your monthly payment, interest rate, and estimated closing costs.
The loan estimate is issued before the loan is underwritten and approved, so the key word here is “estimate.” These numbers can change during underwriting if there are any issues approving you for the initially provided rates and amount. Additionally, things like insurance premiums, appraisal costs, and prepaid interest amounts can (and probably will) change before the final disclosure is issued.
When will I get my closing disclosure?
Your lender will issue a closing disclosure at least three business days before closing. This five-page document will tell you, with reasonable accuracy, what your monthly payment will be. It also accounts for everything you’ll be paying, what the seller is paying, and how much money you will need to bring to the closing.
Review these dollar amounts and prepare any extra money that you need to bring to the table. Take the allotted three days to review the document in full; you should compare it against your initial loan estimate and let your lender know if there are any errors. Once you’ve done that, you’re off to the races—all that’s left is closing time!