You have found a house and after due diligence and planning, you are finally on your way to become a homeowner. However, the most time-consuming part before you close is the tons of paperwork that you need to review and sign. One such document that you will receive if you have chosen a conventional loan will be the Closing Disclosure (CD). This deserves your close attention as it provides one-stop access to all your mortgage details.
Though the Closing Disclosure is a standardized form with very clear language and layout, the terminology can be a bit baffling for first-time home buyers. Here is what it is, why it is important, and how to correct any errors.
What Is A Closing Disclosure Form?
A closing disclosure is a five-page document that is issued at least three days before you close on a home and lays down the final details about the loan you have selected. This standardized document gives you the most relevant details of your loan so that you understand what you are agreeing to before you arrive at the signing appointment. Your CD will include:
- Your Mortgage type
- Your Loan term
- Your monthly mortgage payments
- Total mortgage Closing Costs
- Mortgage Interest Rate and Fees
- The total cost of the mortgage loan.
- Any probable future changes to the interest ( such as an adjustable-rate)
- Any valid Prepayment penalties
Why Is It Important?
The Closing Disclosure is similar to the loan estimate that you received when you applied for your home loan. However, the Loan estimate only outlined the approximate costs of your mortgage whereas the Closing Disclosure gives you the actual numbers and is the final review of your loan. It is also referred to as Know Before You Owe. Take your time to comb through the details of your Closing Disclosure. You should understand what your closing costs and monthly payments are and if there will be any changes to the interest rates (like if you have an ARM). You should also ask questions about anything that you do not understand as you will be legally and financially bound by the terms and conditions until you close the mortgage, either by refinancing, selling your home, or paying it off entirely.
If you have missed out on reading our previous blog on the Loan Estimate click here.
What Is The Three-day Rule?
Federal law requires that lenders give borrowers the closing disclosure at least three days before the closing date. According to the Consumer Financial Bureau “If you do not receive a closing disclosure you can request one from the lender immediately”. Also, you should not proceed with the closing until you have reviewed the document.
The idea here is that you have been given ample time to review the document and understand the terms and conditions of the mortgage you are getting.
What You Need to Check on Your Closing Disclosure
When you receive your Closing Disclosure you need to compare it with your LD (loan estimate). Most of the details and numbers should be similar but can differ as it has been weeks or maybe even months since you applied for your mortgage. Take time to triple-check and ask questions about any issues you come across. The list of things that you need to check are:
- How your name has been spelled: As even minor misspellings can lead to big issues later on.
- Type of mortgage applied for: There are many types of mortgage loans. However, conventional loans usually come with either a fixed rate or an ARM(adjustable-rate).
- Loan term: Generally your mortgage will be 15, 20, or 30 years
- Interest rate: This may change from what was shown on your loan estimate if you have not locked in your rate.
- “Cash-to-close”: This is the amount of cash you will need at closing ( including down payment and closing costs)
- Mortgage Closing Costs are fees that are associated with your home purchase (like appraisal and underwriting fees). Generally, they amount to three to six percent of the home’s purchase price.
- Mortgage amount: This number may be higher since your Loan Estimate. This could be due to closing costs being added to your mortgage. If you are unsure as to why this amount has changed ask your lender about it.
- Monthly mortgage payments: If you have an ARM then your monthly mortgage payments may be higher or increase over the period of the loan.
- Estimated insurance, taxes, and other payments: This may have changed from your L.E if your property taxes or HOA dues increase.
Additionally, you need to check if there are any substantial changes in these key areas as they qualify for a new three-day review.
- The Annual Percentage Rate(APR) increases more than one-eighth of a percentage point for a fixed-rate loan or one-fourth of a percentage for an ARM(adjustable-rate mortgage).
- Addition of a prepayment penalty to the loan terms.
- Your mortgage type changes: Like switching from a fixed-rate mortgage to an adjustable-rate mortgage or an interest-only mortgage.
How to Correct Errors?
You can find a Closing Disclosure form explainer on the CFPB website to help you double-check for errors. If you find an error you should inform your lender and Title Company right away. Even a minor error like a typo can be significant. However, a major issue like an increase in the APR will lead to a revised document and can lead to a delay in your closing date.
Sign the Closing Document once you have fully understood the loan terms and conditions. By signing it you acknowledge that it is accurate.
The closing disclosure is an important document. As a consumer, you have a right to know what you are signing up for when you sign your mortgage and the closing disclosure ensures just that. If you have more queries about Closing Disclosures or anything related to the mortgage process reach out to ratebeat mortgage. One of our professionals will answer all your questions and ensure that your closing goes smoothly.