What Is a Closing Disclosure in the Homebuying Process?
Buying a property makes it possible for you to own the home of your dreams. But as with virtually any other transaction in life, the home buying process is full of paperwork that needs to be done to ensure the sale goes through without a hitch and that all parties are protected.
The closing disclosure is part of this paperwork. And it is perhaps the most important paperwork you will review before you close the purchase of your home, whether it’s a new construction home or a resale home. For this reason, you need to have a solid understanding of what a closing disclosure is. Read on to find out everything you need to know about the closing disclosure.
What Is a Closing Disclosure?
A closing disclosure is a five-page form that presents all the final terms of your mortgage. For this reason, this is a document you must check over thoroughly to make sure every detail, from the spelling of your name to the loan details are accurate.
Don’t worry about whether you’ll have time to go over the closing disclosure with a fine-toothed comb. There is a 3-day rule associated with the closing disclosure, which means that your lender is legally obligated to provide you with the form at least three days before your closing date. This gives you ample time to review the document and get clarification on anything you are not sure of.
If any changes are made to the closing disclosure after you have reviewed it and brought any issues to your lender’s attention, you may then have an additional three days to determine whether you want to move forward with the purchase. There are select changes that will give you those extra three days, including:
- Your annual percentage interest rate increases by more than ¼ of a percentage point for a variable-rate mortgage or ⅛ of a percentage point for a fixed-rate mortgage.
- A prepayment penalty is added, requiring you to pay a fee if you pay off your mortgage early.
- The type of loan is changed (such as being changed from a fixed rate to an adjustable rate)
What Is Included in the Closing Disclosure?
There are many pieces of information that are included in a closing disclosure. These include:
- Loan terms – This includes information such as the amount of the loan, the loan term, interest, and the prepayment penalty.
- Breakdown of mortgage payments – Your monthly mortgage payments will be broken down into principal and interest payments, as well as mortgage insurance, other insurance, and taxes.
- Loan calculations – The total of your monthly payments, the amount of the purchase that is financed, the finance charge, and the APR and total interest percentage (TIP).
- Loan costs – This includes origination fees and services, such as the appraisal, pest inspection, and title search.
- Closing costs – The amount of money you will owe at closing.
- Additional costs – Other fees, taxes, and prepaid costs.
- Cash-to-close table – A table that outlines what costs have changed since your initial loan estimate.
- Transaction summary table – Shows you what you are paying vs. what the seller is paying as indicated in the seller’s closing disclosure.
- Loan disclosures – Criteria that apply to your mortgage loan, such as whether you will have an escrow account for your taxes and insurance and whether your loan is assumable.
- Additional disclosures – Disclosures that apply to your loan, appraisal, and what takes place if you can’t make your loan payments.
- Contact information – How you can reach your lender, settlement agent, and broker.
- Receipt confirmation – A place for your signature on the final page of the closing disclosure.
What to Check When Reviewing Your Closing Disclosure
This is a lot of information packed into five pages, but it is critical that you go through it thoroughly. You should check the spelling of your name and make sure that all the loan information is accurate. If you find anything that is not correct, whether it’s as simple as a spelling mistake or as significant as an incorrect interest rate, let your lender and title company know right away.
Any significant changes will require a revision of the document, after which your closing date will be adjusted so you have three days to review the changes.
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