The Closing Disclosure

April 20, 2022by Brandon Banks

As anyone who has ever bought real estate can attest, there is no shortage of paperwork involved in the closing process. For those that are new to the process the sheer amount of paperwork involved can be maddening.

But there is a reason for all that paperwork.  Florida law requires any facts or conditions about the property that could have a substantial impact on its value, desirability, and usability to be disclosed. These disclosures are intended to make sure the buyer is fully aware of the condition of the property they are buying.

By the same token, if you are taking out a mortgage to make the purchase, the terms and conditions of the loan must also be fully disclosed by the lender. To do this the lender will issue what is called a Closing Disclosure.

What is the Closing
Disclosure & its importance?

The closing disclosure is a document that lenders are required, by law, to provide to borrowers outlining the terms, conditions, and expenses of the mortgage loan. Throughout the loan process you will receive several estimates starting with the initial loan estimate, possibly a revised loan estimate, then a preliminary closing disclosure and finally the closing disclosure.

The lender must provide the “closing disclosure” at least three business days prior to closing on the house. This is known as the Three Day Rule.

If you the borrower does not sign and return that document within that time period, the closing will be delayed. With that said, when you sign the document, you are only signing to acknowledge that you received it, not that you are committing to the terms and conditions.

The three-day requirement creates a window of time for you to review the closing document, ask any questions you might have, identify discrepancies, and raise any issues you might have with the lender.

However, at closing you will be presented with a final closing disclosure to acknowledge and sign. There are often fees, expenses, or other cost adjustments that didn’t make it onto the previous closing disclosure. For instance, the cost of a late appraisal or inspection would be added to this final closing disclosure.

This may seem like an unnecessarily drawn-out process. But it is intended to protect the borrower by making sure they have enough time to fully understand the loans terms. And conditions and that those terms and conditions cannot change without the borrower being informed.

What is in the
Closing Disclosure?

The law requires that the lender present the closing disclosure to the borrower in a standardized format. The document is organized into five pages. Each page has a distinct purpose.

Page 1 - Closing Disclosure

The first page is arguably the most important page since it summarizes most important points of the entire document.

At the top, basic information about the closing, the transaction and the loan is provided.

You’ll want to check items such as your name, the loan term, loan purpose and loan type for accuracy.

You’ll also want to check the next sections; Loan Terms, Projected Payments, and Costs at Closing against the closing disclosure that you previously reviewed.

Make sure you thoroughly understand this page, it is the meat of this document. If something has changed or has been added ask questions and understand why.

Page 2 - Closing Cost Details

Page Two provides a full accounting on the total closing costs listed on first page. This page is broken into two sections: Loan Costs and Other Costs.

The Loan Costs section is further organized into three sections:

  1. Origination Charges – fees associated with obtaining the mortgage loan.
  2. Services Borrowers Did Not Shop For – fees for services required by the lender that the borrower has no control over service provider or cost.
  3. Services Borrower Did Shop For – fees for services that the borrower can control who the service provider is and cost; for instance, title services, pest inspection, etc.

The Other Costs section includes items such as government fees, taxes, homeowners insurance, property taxes and attorney’s fees.

Page 3 - Calculating Closing Costs

On the third page you see both a breakdown of how the “Cash to Close” on the front page was calculated and a full summary of the transaction.

The “Calculating Cash to Close” section should include the total closing costs, your down payment, deposits and any lender or seller credits. You will also be able to see whether or not the final costs and the estimated costs have changed and by how much; along with a brief explanation for the change.

The “Summaries of Transactions” breaks down the entire transaction from both the buyer’s and seller’s perspectives; including any credits or adjustments.

Although the overall transaction is the same, the numbers are slightly different between the buyer and seller.

Page 4 - Loan Disclosures

The fourth page provides additional information about lender policies governing the loan. The page covers information regarding

  1. Can the loan be assumed.
  2. Whether or not the loan has a demand feature – lender is able to require early payment.
  3. When a payment is considered late and what the associated fees are.
  4. Is there negative amortization that could cause the loan principal to increase.
  5. Whether the lender will accept partial payments and how they will be applied.
  6. The address of the property being used to secure the loan.
  7. Whether or not you have an escrow account and what the estimated costs will be. Any fee associated with waiving escrow is listed here as well

Page 5 - Other Disclosurers

The fifth and final page is organized into 4 sections:

Loan Calculations: includes the core loan calculations, including your annual percentage interest rate (APR), total interest expressed as a percentage of the initial loan balance, and any financing charge.

Other Disclosures: includes information about the possible implications of refinancing and tax deductions.

Contact Information: lists the contact information for the lender, settlement agents, and any real estate or mortgage brokers involved with the transaction.

Confirm Receipt: by signing this document you are not accepting the loan. You are only confirming that you have received the document.

A Few Final Thoughts

During the closing process you will review and sign a lot of documents, especially on closing day. You will be given several opportunities throughout the process to review the closing disclosure to make sure it reflects your understanding of both the transaction and the loan being used to fund it.

Mistakes happen. It’s better to catch them early in the process, when they can be quickly corrected, than it is to be surprised at the closing table.

Don’t ignore this document either. You have to return it, signed, within three business days. Otherwise, a new closing disclosure must be sent, restarting the 72-hour clock. That added three-day window could put other aspects of the transaction out of compliance, which could delay the closing even further.

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