Closing Disclosure: What it is and how to read the form

The Closing Disclosure is a five-page form that describes the critical aspects of your mortgage loan, including purchase price, loan fees, interest rate, estimated real estate taxes, insurance, closing costs, and other expenses. Reading it thoroughly is one of the most important steps you can take while buying a house.

Why understanding your Closing Disclosure matters

If you’re purchasing a new home or refinancing your current loan, it’s imperative that you understand all the terms of your loan before you sign on the dotted line because once you sign, you’re committing to the conditions presented. It’s crucial that you carefully read the Closing Disclosure your lender sends you once you're clear to close. Before you close on your new loan, the Closing Disclosure gives you an opportunity to compare your loan terms and costs to the terms listed in the Loan Estimate form you received at the beginning of the process.

The Closing Disclosure can be overwhelming to review, especially if you’re not sure what to look out for. Take time to review everything the form covers so you’ll have no doubts when you’re asked to sign. A good real estate agent can help you review your Closing Disclosure and point out common errors. This is just one of the many reasons to use a real estate agent when buying or selling a home.

What is the Closing Disclosure 3-day rule?

Your lender is required by law to give you the standardized Closing Disclosure at least 3 business days before closing. This is what is known as the Closing Disclosure 3-day rule. This requirement is thanks to the TILA-RESPA Integrated Disclosures guidelines, which went into effect on October 3, 2015.

Prior to these rules, home buyers received two documents: the HUD-1 Settlement Statement and the Truth in Lending Disclosure Statement. There were two problems with these previous documents: they were confusing and they were not provided until the closing – which offered home buyers very little opportunity to review and make sense of them. Now, you have plenty of time to go over the final terms of your loan before you sign your closing documents.

How does this rule affect the closing timeline?

The sequence of events leading up to you receiving a Closing Disclosure should be relatively predictable. Lenders are careful to avoid issuing a Closing Disclosure before they are certain about what the closing costs and fees will be because they don’t want to have to change the agreement and wait another 3 business days.

This means that loan approval, home appraisal, insurance, and the calculation of all third-party fees will be completed before the Closing Disclosure is issued to you. The timeline will therefore look like this:

• All costs are calculated.
• The Closing Disclosure form is issued.
• The 3-day rule goes into effect.
• You sign the form.

Closing Disclosure form basics

We’ve broken down each component of the Closing Disclosure below.

Loan term

This section of the disclosure statement lays out the terms of your mortgage. It provides an accurate snapshot of how much you’ll pay and for how long. It’s broken down into five parts:

• Loan amount: This is the total amount you plan to borrow after you subtract the down payment and add any fees or costs rolled into your loan. If this amount has increased from your Loan Estimate and you aren’t sure why, ask your lender.
• Interest rate: The interest rate is the fee you pay for borrowing money. Your interest rate represents a percentage of the loan amount paid annually as interest for borrowing money that’s included in your monthly mortgage payments. Your interest rate shouldn’t change from what’s on your Loan Estimate if you’ve locked in your rate.
• Monthly principal and interest: Here, you’ll see the interest and principal you’ll pay. Note that if your monthly payment includes mortgage insurance or escrow payments, those will not be included here.
• Prepayment penalty: Some lenders charge a prepayment penalty when borrowers pay off their mortgage early. This doesn’t apply to any home loan with Rocket Mortgage^®.
• Balloon payment: This is a one-time payment that is due at the end of the loan. If you have a mortgage that requires a balloon payment, your payments are typically lower during the years leading up to when the one-time payment comes due. It can be risky because you may owe a large amount at the end of the loan. Rocket Mortgage doesn’t offer mortgages that have a balloon payment, but we are dedicated to making you aware of all your options.

Projected payments

This section of the Closing Disclosure breaks down the major components of your mortgage loan and displays how the payments change over the years. It gives you the best picture of what you owe on a month-to-month and year-to-year basis.

• Payment calculation: Your mortgage loan consists of the principal and interest, mortgage insurance (if applicable), and the estimated escrow that’s used to pay your homeowners insurance and property taxes. This section shows you what all of those payments will be during the terms of your mortgage. If your mortgage payment can change (for example, an adjustable-rate mortgage), there will be a calculation for what your maximum payment can be at each change based on interest rate caps.
• Estimated total monthly payment: This is the amount you’ll pay each month, including the principal, interest, mortgage insurance, and escrow amount.
• Estimated taxes, insurance, and homeowners association assessments: You may choose not to escrow your taxes, HOA dues, and insurance. If so, they’re laid out in this section of the document.

Costs at closing

This section will tell you the full amount you’ll need at closing. Costs at closing will include your down payment plus closing costs, which can be 3% – 6% of your loan amount. To provide a clear picture, the costs are itemized and accounted for.

Loan costs

This portion of the Closing Disclosure is a comprehensive overview of the fees involved in getting your mortgage.

• Origination fee: Typically, this is anywhere from 0.5% – 1% of the loan amount. The origination fee covers all the administrative costs associated with your mortgage application.
• Mortgage points: If you’re buying mortgage points, it’ll be reflected here. Points reduce the interest rate on your loan. One point equals 1% of the loan amount. For example, one point will cost you $2,000 if your loan is $200,000. Mortgage points, along with the origination fee, are listed on the Closing Disclosure under Origination Charges.
• Application fee: The mortgage application fee covers the cost to process your application. The total amount varies by lender.
• Underwriting fee: When a lender underwrites your loan, they take a look at your full financial picture to determine how risky you are to lend to. The underwriting fee is included in the loan costs.
• Services borrower did not shop for: This is a list of required services that the lender chose. It can include an appraisal fee, credit report fee, flood determination fee, tax monitoring fee, and tax status research fee.
• Services borrower did shop for: These are the third-party services like a pest inspection, survey, and any title-related services.

Other costs

There are other costs that could be wrapped up in your mortgage, including taxes and government fees, prepaids, initial escrow payment at closing, and more.

• Taxes and other government fees: You’ll see recording fees here, which are the fees for legally entering the new deed and mortgage into the public records. They include transfer taxes that are paid when a property changes hands or when a mortgage loan is made. City, county, and possibly state taxes are also included.
• Prepaids: This section will tell you how much money you need to put in escrow for certain prepaid costs, whether it’s a homeowners insurance premium, a mortgage insurance premium, prepaid interest, or property taxes.
• Initial escrow payment at closing: Your initial escrow payment will include homeowners insurance, mortgage insurance, and property taxes.
• Other: There may be other expenses you’ll need to pay, including none or any of the following: HOA fees, a home inspection fee, a home warranty fee, real estate agent commissions, and title insurance.

At the end of this section, all other costs are added together, so you get a comprehensive overview.

Calculating cash to close

Cash to close reflects the full amount you need to bring to closing and any deposits you’ve already paid to the seller. It will include how much money, if any, the seller is planning to pay toward your closing costs – known as seller concessions. These are closing costs that you negotiate with the seller to pay.

Summaries of transactions

This section is a side-by-side view of the borrower’s and seller’s costs due at closing. It shows you what’s due from both parties at closing, such as payoff amounts of all mortgages, closing costs, seller credits, and more.

Loan disclosures

The loan disclosure section details the conditions applicable to your mortgage.

• Assumption: This section will tell you whether the loan is assumable, meaning that the loan can be transferred to another person with little to no change in terms, including the interest rate.
• Demand feature: A demand feature on a Closing Disclosure indicates that the lender can demand, for any reason and at any time, full repayment before the loan term ends. Most mortgage agreements do not have a demand feature. If this box is checked you can ask to have it removed or even pull out of the mortgage agreement.
• Late payment: Your lender will tell you what your late fees and penalties are. Reviewing this section is critical to remain in good standing with your lender and credit bureaus.
• Negative amortization: Negative amortization means that the loan does not fully mature. In other words, any interest payments not met throughout the term of the loan are added to the original principal balance.
• Partial payments: This section will indicate whether the loan allows for partial payments. Your partial payment may be held in a separate account instead of being applied toward your loan and you may be charged a late fee until you make your full payment.
• Security interest: A security interest simply means that if you stop making payments or don’t fulfill your mortgage agreement, the lender can take your home and sell it to pay off the loan.
• Escrow account: This part is a detailed overview that explains your escrow account, the homeownership expenses included in the account, and how much you’ll be required to pay into it. If your Closing Disclosure doesn’t provide this overview, and you’d prefer to have your lender pay your property taxes and homeowners insurance every month using an escrow account, talk to your lender.

Loan calculations

This section tells you how much your loan will cost you over the loan term. In other words, it’ll summarize all the payments you’ll make over the life of the loan, including finance charges, the amount financed, and the annual percentage rate..

Other disclosures

In this section, you’ll find general information about the appraisal, contract details, refinance information, and tax deductions. All of this is just general information, though it will indicate in your loan whether the laws in your state will specifically protect you from liability for the unpaid balance after foreclosure.

Contact information and confirm receipt

Finally, the last section includes the Contact Information and Signature lines. You’ll see the following: “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.” In other words, signing the form does not require you to take the loan.

Loan Estimates and Closing Disclosures

The Loan Estimate is a three-page document you receive 3 business days after applying for a mortgage. It provides a summary of the loan terms, the costs associated with the mortgage, the loan size, interest rate, and payments. It lays out whether there are any balloon payments, prepayment penalties, or more. The document also includes a schedule of your payments, estimated taxes, closing costs, and insurance payments.

The Closing Disclosure includes the same information, but you can’t make any changes after you sign it. It’s important to compare your Closing Disclosure with your initial Loan Estimate to identify any discrepancies.

Discrepancies between your Closing Disclosure and Loan Estimate

If you find a discrepancy between the Loan Estimate and the Closing Disclosure that you don’t understand, contact your lender or real estate agent immediately. These mistakes can be as minor as misspelled names or as serious as a change in the interest rate.

Alerting your lender to the errors may delay closing, but it’s vital to get any discrepancies cleared up before signing. If changes need to be made, you have 3 additional business days prior to closing to review the revised Closing Disclosure. Once they’ve been fixed, compare the Loan Estimate and Closing Disclosure again to ensure that they match up.

Do I have to take on the loan after signing the Closing Disclosure?

No, signing the Closing Disclosure signifies that you’ve reviewed the mortgage information sent by your lender. If you change your mind about purchasing a property after signing the Closing Disclosure, you can still opt out.

It’s important to note that there can be financial and credit consequences to backing out at the last second. You may have to pay for things like application fees and the appraisal to compensate the lender for services performed, and you’ll likely lose your earnest money deposit. Also, there’s a minor negative credit impact associated with applying for any loan. This small ding to your credit bounces back within a few months.

FAQ

To learn more about Closing Disclosures, review the following frequently asked questions:

Does receiving a Closing Disclosure mean the loan is approved?

The loan is approved prior to a lender issuing a Closing Disclosure. However, you’ll want to make sure your credit, income, and debt are in check during this time frame until the transaction is finalized.

Who gets a copy of the Closing Disclosure?

Typically, buyers and lenders will receive a copy of the Closing Disclosure. It’s recommended that buyers share a copy of their Closing Disclosure with their real estate agent to review before signing.

What happens after signing the Closing Disclosure?

After you sign the Closing Disclosure, you and your lender are not allowed to make any changes to the mortgage information. However, you’re still able to opt out of the deal, as detailed in the section above.

What happens if I don’t receive a Closing Disclosure?

Your mortgage lender is required to send you a Closing Disclosure. If you haven’t received the document, reach out to your lender immediately.

The bottom line: The Closing Disclosure is there to help you

The Closing Disclosure lists your final costs in a comprehensive overview so you know what you’re responsible for paying at closing and throughout your loan term. It walks you through important aspects of your mortgage loan, including the purchase price, loan fees, interest rate, real estate taxes, closing costs, and other expenses.

Take the time to look over both your Loan Estimate and Closing Disclosure in detail to make sure everything matches up. Are you ready to get started with the home loan process? Apply for a mortgage with our team today. You can also speak with one of our Home Loan Experts by phone at (855) 504-1755.