At least three business days prior to closing on a home mortgage, buyers will receive a closing disclosure. This important document summarizes all of the details of a new home loan and what’s owed in order to close on the purchase. It’s critical to review this document to ensure there are no discrepancies compared to the initial loan estimate.
Here’s a look at what a closing disclosure includes and what items you’ll want to review closely.
What is a closing disclosure?
Using a mortgage loan to purchase a home is a very involved process, and usually results in a debt that will be repaid over many decades to come. It’s important that all parties understand exactly what this new mortgage loan agreement entails, from the overall purchase price to a final interest rate, any applicable fees, and how long it will take to repay that new loan.
As part of this process, lenders are required to provide buyers with a particular five-page document prior to the finalization of their purchase. This real estate closing statement is known as a closing disclosure, and it must be presented to a buyer no less than three business days before closing on the home.
So what is a closing disclosure? This document spells out exactly what the agreement is between buyer and lender, including the:
- Mortgage loan terms
- Estimated monthly loan payments
- Estimated property taxes and home insurance costs
- Any applicable loan fees (including purchase points, closing costs, and prepayment penalties)
- Important mortgage loan terms (like whether the loan can be assumed or if there is a balloon payment involved)
Buyers are given three (or more) business days to review their mortgage disclosures before going to closing. This gives them time to compare this final document with any pre-closing statements that were given — like the lender’s loan estimate — as well as to ask any questions they may have about the mortgage loan.
And what happens after a closing disclosure is received? If there are no issues or changes to be made, the transaction can go to closing and the mortgage lender can fund the home purchase.
Loan estimate vs closing disclosure
Both loan estimates and closing disclosures aim to do the same thing: offer buyers an overview of their new mortgage loan, including how much that loan will cost and any important financial terms involved. Both are provided to buyers by mortgage lenders, and both are personally tailored to the buyer’s specific situation.
However, there are some very important differences to note when comparing these two types of mortgage disclosures. Here’s what you need to know about a loan estimate vs a closing disclosure.
A loan estimate is offered to a new mortgage applicant within three days of applying for a home loan. It is not the same as a mortgage loan approval, and the buyer isn’t required to be under contract on a property in order to receive this three-page document.
This loan estimate is simply a home mortgage estimate, based on the details provided to the lender up to that point. It is also not legally binding to either party, and both parties can back out if desired.
A closing disclosure, however, is only provided once the loan has been approved and the final details ironed out. Underwriting has already occurred by the time this document is issued, and the lender has agreed to fund the purchase. Once signed, this is legally binding for the buyer.
|Loan estimate||Closing disclosure|
|Requires a home purchase contract||No||Yes|
|Means the mortgage loan is approved||No||Yes|
|Is tailored to the buyer and specific home purchase situation||Yes||Yes|
|Includes the overall loan cost and interest rate||Yes||Yes|
|Outlines loan features such as penalties, estimated payments, and fees||Yes||Yes|
|Notes (estimated) details of the loan and its repayment||Yes||Yes|
|Gives buyers a “cash to close” amount||Yes, estimated||Yes, final|
|When it’s provided||Within three days of buyer’s application||Three or more business days before closing|
With both the loan estimate and the closing disclosure, buyers should scan all pages for any errors, including mistakes in their name, Social Security number, date of birth, purchase price of the home, and the purpose of this new loan.
The buyer also should look for any mismatched numbers or fees that they don’t understand or weren’t expecting. Buyers can also compare their closing disclosure to their most recent loan estimate to ensure that nothing has changed (or to get clarification if it has).
Closing timeline: How the 3-day rule works
There is a very important closing disclosure timeline that must be followed in the mortgage loan process. Thanks to the closing disclosure three-day rule, this five-page document has to be provided to a buyer by their lender no less than three business days prior to closing.
This three-day rule ensures that the buyer completely understands the loan terms to which they are agreeing. It also allows the buyer to get clarification, ask questions, and even catch mistakes that may have been made. If any issues are found, a new closing disclosure may need to be issued.
What happens after the closing disclosure is received depends on whether everything is correct or not. There are only three circumstances in which a change to the closing disclosure could result in a delayed closing and review process. The three-day rule could mean pushing the closing back if:
- The APR on the mortgage loan needs to increase by a certain amount from what’s shown on the disclosure
- A prepayment penalty is added to the mortgage loan terms
- The loan’s repayment details change, such as moving from a fixed-rate loan product to an adjustable-rate mortgage (ARM)
Even though the closing disclosure is only received once the loan has been approved, a buyer can still be denied after the closing disclosure is sent. If the buyer is found to have provided incorrect or fraudulent information, the home is suddenly destroyed, or the buyer makes any significant financial changes (such as opening a new credit card, quitting their job, etc.), the lender can still back out or delay closing.
Closing disclosure example walkthrough
As mentioned, the closing disclosure form is a five-page document outlining all of the details of a new home mortgage loan that will be used to buy a house. Here’s a look at a closing disclosure sample and what this lengthy form includes.
The very first section of the loan disclosure includes the buyer’s personal information and a summary of the new loan. Buyers should check over this section carefully to ensure that their personal information is correct, as well as that items like the home’s purchase price and property address are shown accurately.
Next up are the loan terms. This section summarizes how much is being borrowed, the agreed interest rate, and how much the monthly payments will be on the principal and interest alone. This section also tells buyers whether these numbers can increase over the course of the loan, and whether there are prepayment penalties or a balloon payment involved in the loan agreement.
The Projected Payments section is “projected” for a reason — it shows how much buyers can expect to pay for the home monthly once mortgage insurance (PMI), if applicable, is added in, along with the estimated costs of homeowner’s insurance, property taxes, and HOA dues.
This section also shows whether these expenses are included in escrow, or if they will need to be paid separately.
Costs at closing
Buyers will then see a Costs at Closing section at the bottom of page one. This summarizes how much the overall closing costs will be and how much money the buyer will need to bring to the table in order to close on the loan.
Closing cost details
The following page will detail the closing cost expenses, showing what costs are the responsibility of the buyer, what falls on the seller, which lender credits are offered, and what’s already been paid.
If the buyer sees any discrepancies here — or has questions about a line item — they can ask their lender for clarification.
Calculating cash to close
At the top of page three, buyers will see the section titled Calculating Cash to Close. This section shows certain expenses, what they were projected to be on the original loan estimate, and what they actually were in the end. If there is a difference between this cost on the loan estimate and the closing disclosure, it will say YES and have an explanation from the lender as to why the number changed.
These numbers could be different because the cost of the home was negotiated further, the buyer made deposits not included in the loan estimate, or seller credits were offered.
Then, there is a transaction summary. This summarizes all aspects of the loan, from the purchase price to deposits made, line items already paid, or credits offered. It shows both the buyer’s and seller’s obligations, and how much is owed by each party in order to close on the loan.
Again, this five-page document that you should receive at least three days prior to closing is the final summary of the new loan and should be reviewed carefully. Don’t hesitate to ask questions if you need any part your closing disclosure explained.
Ready to buy a home? Contact a local Finance of America Mortgage Advisor today to learn about your home loan options.