Understanding the Closing Disclosure
At some point during the mortgage loan application process, shortly before closing on your home, you will receive a form called a Closing Disclosure from your mortgage lender. This form will usually arrive any time after the first round of underwriting and no later than three days before you are scheduled to close on your mortgage loan. For first-time homebuyers, the Closing Disclosure might be confusing or tedious. It can be tempting to skim the document or maybe not look at it at all before signing it and returning it to your lender.
Loan Estimate vs. Closing Disclosure
The Loan Estimate and Closing Disclosure are two different documents. The Loan Estimate is a three-page document received no later than 3 business days after applying for a mortgage. The Loan Estimate gives a summary of the loan terms, costs associated with the mortgage loan, the mortgage loan size, interest rate, and mortgage payments.
The Loan Estimate will also disclose whether the mortgage loan will include balloon payments, prepayment penalties, or other payments and penalties. The Loan Estimate will also include a schedule for repayment and an estimate of monthly mortgage payments based on estimated taxes and insurance payments.
Closing Costs are included in the Loan Estimate as well. The Closing Disclosure should include all of the same information, but the difference with the Closing Disclosure is once you sign it, you cannot make any changes to it. When you receive your Closing Disclosure, it is important to compare it to the original Loan Estimate and review them for any discrepancies. If you notice any discrepancies between your Loan Estimate and Closing Disclosure, such as an increase in the mortgage interest rate or borrowing costs, it is important to bring these up with your lender before signing and returning the Closing Disclosure.
Why the Closing Disclosure is Important
It can be tempting to skim your Closing Disclosure, but here are a few reasons why you need to review it in depth.
- As soon as you sign and return your Closing Disclosure, you have legally bound yourself to the terms and conditions of your mortgage loan. It’s important to understand those terms and requirements before signing!
- The Closing Disclosure gives you an opportunity to compare the loan terms and costs of your loan to the original Loan Estimate provided by your mortgage lender when you first began the mortgage loan application process.
- The Closing Disclosure gives you the repayment plan and payment projection for your mortgage, which will help you financially plan to start making payments on your mortgage.
While the Closing Disclosure can be a tedious document to read, it’s essential that borrowers review it and take time to understand the sections that might be confusing.
What is in A Closing Disclosure?
The Closing Disclosure is a form with five pages containing information on the mortgage loan term, mortgage projected payments, costs at closing, loan costs and other costs, necessary cash to close, summaries of transactions, loan disclosures, loan calculations, other disclosures, and contact information and signature lines at the end.
Loan Term
The loan term section of the Closing Disclosure describes the terms of the mortgage loan and details your mortgage loan payments and how long it will take to pay off your mortgage loan. There are five sections within the loan term section.
- Loan Amount–the amount of your mortgage loan after the down payment is subtracted and fees and costs that are rolled into your mortgage are added.
- Interest Rate–a percentage of the loan amount you pay annually as interest that serves as the fee you pay your mortgage lender for borrowing money.
- Monthly Principal and Interest–the interest and principal you will pay, not including mortgage insurance or escrow payments that will also be included in your monthly payments.
- Prepayment Penalty–In the event that a borrower pays off their mortgage early, some lenders charge a prepayment penalty.
- Balloon Payment–a balloon payment is a large payment due at the end of a mortgage loan term for a balloon loan. These types of loans and payments are not as common as they once were, and can be risky if borrowers are not prepared to pay the large one-time payment when the time comes.
Projected Payments
The projected payments section of the Closing Disclosure covers payment calculation, estimated total monthly payment, estimated taxes, insurance and assessments.
- Payment Calculation–This section details what your mortgage payment will be each month over the lifetime of your loan and will calculate how your payments will change if you have a mortgage type where the payments can change. Your mortgage loan payment includes the principal and interest, mortgage insurance (if you have PMI), and the estimated escrow to pay your homeowners insurance and property taxes.
- Estimated Total Monthly Payment–the monthly payment amount you will pay each month. This includes principal, interest, mortgage insurance and escrow amount.
- Estimated Taxes, insurance, and Assessments–taxes and insurance are detailed in this section for borrowers who choose to not escrow their taxes and insurance.
Costs at Closing
Closing Costs typically cost anywhere between 2% to 6% of the amount of your mortgage loan. These Closing Costs include a variety of fees and costs associated with your mortgage loan application and the purchase of your home. Closing Costs can be categorized as loan costs and other costs.
- Loan Costs–Origination Fee, Application Fee, Underwriting Fee, Services Borrower Did Not Shop For, and Services Borrower Did Shop For.
- Other Costs–Taxes and Other Government Fees, Prepaids, Initial Escrow Payment at Closing, and Other Costs.
Calculating Cash to Close
Cash to Close is the exact amount of money you need to bring to closing. This will be included in your Closing Disclosure so you can be prepared at closing with all the funds necessary. In this section you will also see any deposits you have paid to the seller, such as earnest money, and any money the seller is putting toward closing costs (seller concessions).
Summaries of Transactions
Summaries of Transactions display both the borrower’s and seller’s costs at closing side-by-side. This section will include any adjustments for items paid by the seller in advance, what is due from the seller, and what is due to the seller at closing.
Loan Disclosures
This is the section that gives you the details of your loan’s terms and conditions. It includes the following:
- Assumption–whether or not your loan can be assumed.
- Demand Feature–whether or not your lender can require you to immediately pay the entire loan balance (principal and interest) at any time.
- Late Payment–whether there is a late payment fee in the event your mortgage payment is late.
- Negative Amortization–the loan does not mature and any interest payments not made during the term of the loan are added to the original principal balance.
- Partial Payments–whether the loan allows partial payments and whether late fees apply to partial payments.
- Security Interest–the lender can take your home and sell it to pay off your loan in the event you stop making payments.
- Escrow Account–explains your escrow account, whether you have one or not, and the homeownership expenses included in the escrow account and how much of your mortgage payment will go into your escrow.
Loan Calculations
This section of the Closing Disclosure summarizes all the mortgage payments you will make over the life of the mortgage loan, including finance charges, the amount financed, and the annual percentage rate (APR).
Other Disclosures
This section includes generic information concerning tax deductions, contract details, refinance information, and appraisal (may not be applicable). This section also specifies whether the laws in your state protect you from liability for the unpaid balance of your mortgage in the event you foreclose on your mortgage.
Contact Information and Receipt Confirmation
The final section of the Closing Disclosure includes the Contact Information and Signature lines for you to sign off on the Closing Disclosure, indicating that you have received the Closing Disclosure. “By signing, you are only confirming that you have received this form. You do not have to accept this loan because you have signed or received this form.”
Signing and returning the Closing Disclosure does not make you legally bound to commit to purchasing the home. However, if you do back out of a home purchase contract prior to closing and are past the contingency date, you may not be able to get your earnest money deposit back.
Got Questions?
We hope this information empowers you as a homebuyer to make the best possible financial decisions for you. If you have any questions, feel free to give us a call or leave us a message at 1 (888) 232-1428 or info@veteransloans.com. VeteransLoans.com is a VA-approved mortgage lender that specializes in VA loans and offers conventional and FHA loan products as well.