Closing Disclosures Explained

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Closing Disclosures Explained
Article Excerpt

See a line-by-line explanation of an example closing disclosure. Know exactly what to check before making one of life's largest purchases.

A closing disclosure (or closing “sheet”) is a multi-page form that outlines specific details about a mortgage. Its main purpose is to help you understand exactly what you’re agreeing to before closing the loan. Lenders are legally required to provide you with one. Every closing disclosure looks very similar in structure.

By the time you receive a closing disclosure, your loan has been approved. But the loan doesn’t take effect until all paperwork is signed on closing day. However, if you make a big change to your financial profile (like getting another loan or making a large purchase) between receiving a closing disclosure and closing day, your approval status can be negatively affected.

On the other hand, a “loan estimate” is like a miniature unofficial closing disclosure that borrowers use to compare mortgage lenders and understand what they can expect to pay when it’s all said and done. It can be given to you early on in the mortgage process.

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How to Read Closing Disclosures

Let’s inspect a closing disclosure example and explain how to read it. This guide will also help you understand a loan estimate sheet since most of its elements are also contained in closing disclosures.

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What does a closing disclosure look like?

Glad you asked! We’re providing a closing disclosure example right here. It’s taken from the Consumer Financial Protection Bureau.

Download Example Closing Disclosure

Page 1: The Big Picture

What to look for: Ensure your name is spelled correctly and your interest rate is exactly what you locked with. If you chose to use an escrow account for taxes and insurance, make sure page one reflects that.

This is what you’ll see on Page 1:

  • The names of all parties involved in the transaction.
  • Basic loan terms like loan amount, interest rate, and whether your lender would charge a prepayment penalty.
  • Project payments: your estimated monthly mortgage payment broken into principal, interest, taxes, and insurance (also known as “PITI”).
  • Closing costs: this is how much you agree to pay on closing day. The “Cash to Close” number represents total closing costs, your down payment, a return of your deposit, and other credits.

Page 2: Closing Cost Breakdown

What to look for: the “services borrower did not shop for” should be close to what you saw in your loan estimate. If the seller agreed to pay for a certain item, verify that it’s reflected here.

Here’s what’s represented on page 2:

Loan costs

  • Closing costs broken down by who’s paying them. Some are borrower-paid (i.e. the homebuyer - you!) and others are seller-paid (the person who’s selling their property to you).
  • “Loan Costs” are essentially fees for the professional mortgage services used during your homebuying process. The origination charges are paid to your mortgage lender.
  • “Services borrower did not shop for” could be a variety of things. Your lender most likely selected these for you. It’s normal to have your lender select several services on your behalf. “Services borrower did shop for” is self-explanatory.

Other costs

  • “Taxes and other government fees” cover the cost of transferring the property to you in public records. Your city and country will now know who to tax for the property.
  • Prepaids and “initial escrow payment at closing” are expenses you’re paying ahead of time. You may see homeowner’s insurance, mortgage insurance, interest, and property taxes.
  • The “other” category is generally optional expenses. It may include a home warranty (like this one from Choice Home Warranty), real estate commissions, and title insurance. The seller traditionally pays for both the buyer’s real estate agent’s commission and their own agent’s commission.

Page 3: Transaction Summaries

What to look for: Ensure that seller credits are accurate. If the seller is paying a portion of closing costs, that should be reflected here. The deposit should include what you’ve already paid to the seller.

  • “Calculating cash to close” shows the final closing cost amount.
  • The “summaries of transactions” show the final amounts of money owed from and to both the borrower and seller.

Page 4: Information about the Loan

What to look for: if you’re not able to make a full payment one month, how will your lender handle a partial payment? What kind of fee comes with late payments? If you’re not using an escrow account, how much is the fee?

  • The “assumption” speaks to whether or not you’re allowed to transfer the loan to someone else.
  • The “demand feature” states whether or not your lender can require an early repayment.
  • The “late payment” terms outline how much of a fee your lender will charge in the case that you’re late on your payment past a certain amount of days. It’s common to see a 5% late fee on principal and interest if your payment is 15 days late.
  • “Negative amortization” is when the loan payment becomes less than the interest charged. It’s typically not featured on normal purchase loans.
  • “Partial payments” explain how your lender handles a monthly payment that’s less than the full amount you owe. If they accept them into a separate account, that means it won’t be applied to your loan amount until you pay the rest of the payment.
  • The “escrow waiver fee” is how much your lender will charge you for choosing not to use an escrow account. If you want to use an escrow account there should be no fee here.

Page 5: Lifetime Loan Calculations and Contact Information

What to look for: you should have contact information for all the key personnel involved in the transaction. At this point, you should have a complete picture of what getting a mortgage means.

  • The “loan calculations” section charts the expenses involved in the entire lifetime of the loan - assuming you take the entire loan term (15 or 30 years) to pay off what you owe. Remember, unless your lender tacks on a prepayment penalty, you are always free to make extra payments at no extra cost.
  • “Liability after foreclosure” explains if you still owe money to the lender in the case that your home is foreclosed on and obtained by the mortgage company.
  • Contact information should contain everything you need to get in touch with your lender if you have questions.
  • Confirm receipt: this confirms that you’ve received the closing disclosure. You’ll most likely receive an email link to eSign.

Ready to see your name on a closing disclosure?

So are we! At The Wood Group of Fairway, the mortgage process is made simpler. We’re here to answer your questions, no matter how small. Get started on your free pre-approval right now.