The closing disclosure explains all the details of a home loan. It’s a most important document of a real estate transaction, as it helps to avoid errors and misunderstandings that could cause problems during the repayment process.
The closing disclosure document includes such vital information as the money a buyer must present at closing, the interest rate of the loan, and the total of the required monthly payment. Buyers need to be fully prepared to avoid unexpected revelations at closing and later in the repayment process. They certainly don’t want to find that the loan payment exceeds their budget when it’s too late to make a change, or that they’re required to make a balloon payment – a condition of which they weren’t aware.
Closing disclosures inform borrowers of the affordability and risk their mortgage presents. A thorough and clear closing disclosure document makes for a timely closing process. It benefits both the buyer and the lender by helping to ensure that the requirements of the mortgage can be seamlessly fulfilled throughout the term.
But to be effective, the closing disclosure must be well organized and straightforward. Borrowers must read the entire document and ask questions if necessary, so they fully understand the requirements and implications of their mortgage.
The following is an overview of what is included in a well-composed closing disclosure, and why it’s so important to the arrangement of a successful real estate deal and fulfillment of the mortgage repayment process.
What Is a Closing Disclosure?
A five-page form, required by federal law, for lenders to complete and present to borrowers before closing is called a closing disclosure. The form highlights such key information as:
- Interest rate.
- Loan type.
- Loan term.
- Closing costs.
A closing disclosure document serves as a guide to ensure that the buyer understands what they are committing to when they take out a mortgage or refinance their current home loan.
The Three-day Rule of a Closing Disclosure
Lenders are required to give borrowers a closing disclosure document at least three business days before a loan will be finalized. The three-day rule is intended to provide sufficient time to review the loan’s terms and make certain the agreement is the same as the estimate of the loan’s terms that the buyer received when applying for the mortgage.
Closing Disclosure Contents
Closing document samples can be viewed on the Consumer Financial Protection Bureau (CFPB) website. But here’s an overview of the information that must be included on each page of a properly composed closing disclosure document.
Date of Transaction
The date that the loan will close must be listed on the first page of the closing disclosure.
The names of the borrower and the seller – if the party taking out the loan is buying – not refinancing the home – and the name of the lender and the settlement agent are all important.
Essential Loan Information
The type of loan – the length of the term, whether the interest rate is fixed or flexible must be noted. Also, the loan amount, the interest rate and monthly payment, and whether the amount can change. The borrower must be made aware of any prepayment penalty or required balloon payment.
Escrow – Impound account details
The closing disclosure shows whether homeowners insurance, mortgage insurance, or property taxes are required to be included in the total monthly payment, along with the principal and interest amounts.
The total costs to close the loan – and the total amount of cash needed to close the transaction are essential information.
Total loan costs, like those listed below, and other costs must be recorded. Additionally, loan origination charges.
- Application fee.
- Underwriting fee.
- All additional costs associated with the loan, like title insurance, pest inspection, and the appraisal
The name of the party that receives each fee must be noted, along with the amounts of fees that have already been paid. Recording and transfer taxes, homeowners’ insurance, property taxes, and HOA fees must also be included, if applicable.
Cash Payments and Cost Adjustments
The cash needed to close, changes between the loan estimate and closing disclosure amounts, and reasons for any discrepancies, are important points to note. The down payment amount and earnest money deposit are included if the loan is for a home purchase.
A notation regarding whether your loan is assumable by another party or whether the next buyer would be required to take out a new loan must be specified. Most loans, other than Veteran’s Administration VA loans, are not assumable.
Late Fees – Negative Amortization – Partial Payments
The amount of the late payment fee and when it applies must be included here along with whether the loan balance can increase for some reason, even if all payments are received on a timely basis, and whether the lender accepts partial payments.
The total the borrower will pay in principal and interest over the life of the loan. And a warning that it may not be possible to refinance the loan later, are points of information that must be made available.
Consequences of Foreclosure
It should be specified whether the borrower will be liable for any unpaid mortgage balance if the lender must foreclose.
Contact information should be included for the lender, settlement company (and real estate broker if the loan isn’t a refinance of an existing mortgage).
By following this guideline, you can prevent, as a lender, or detect, as a buyer or refinancing homeowner, common errors, and omissions in closing disclosure documents. Making certain all the bases are covered regarding the inclusion of all required and relevant information in a closing disclosure protects both the buyer and the lender. It facilitates a timely closing and prevents future loan collection problems.
The Einfach Group provides complete title and closing services, for title companies, including closing disclosure preparation. We take the pressure off your team so they can focus on providing your clients with optimal customer service. We conduct professional reviews and audits at every step of the closing process to ensure optimization and to make certain quality standards are met.
Contact us for assistance in making certain your closing disclosures, a most important document in finalization and follow-up for every home loan transaction, are accurate and properly prepared to meet government requirements.