Page‹
Page› Next Page›
What is the Closing Disclosure for a Mortgage?
According to mortgage industry regulations, the lender must provide a Closing Disclosure to the borrower that outlines the final, actual terms of you loan including mortgage rate, closing costs and loan features at least three business days prior to the closing. For example, if the borrower received the closing disclosure on a Monday, the earliest the mortgage could close is Thursday. Typically the borrower receives the Closing Disclosure when he or she signs loan documents prior to the mortgage closing.
The purpose of the Closing Disclosure is for borrowers to understand how and why their mortgage terms changed as compared to the terms the lender offered at the beginning of the mortgage process. The Closing Disclosure outlines what loan terms can change and by how much as a way to protect borrowers against a lender bait and switch. A bait and switch is when a lender promises you an attractive set of mortgage terms to win your business even though they know they cannot deliver those terms. The lender attempts to change the terms, such as charging you a higher mortgage rate or closing costs, toward the end of the mortgage process when borrowers are under pressure to close their loan. The Closing Disclosure is supposed to reduce these lender tactics by providing more information to borrowers.
- Review our Closing Disclosure Example
Because the Closing Disclosure must be provided no less than three days prior to mortgage closing, it could extend the amount of time it takes to process and close your mortgage. For example, all parties may be ready to close the mortgage but if the Closing Disclosure has not been delivered to the borrower then the mortgage cannot be finalized. Borrowers should keep in mind the three day Closing Disclosure waiting period when determining how long it will take to process and close their loans.
The Closing Disclosure must be delivered by the lender to the borrower in-person or by email or mail at least three business days prior to the mortgage closing. If mailed or emailed, the consumer is considered to have received the Closing Disclosure within three business days after the document is delivered or placed in the mail. For example, if the lender mails the closing disclosure to the borrower on a Monday, the borrower is considered to have received the closing disclosure on Thursday and the earliest the mortgage could close is the following Monday (assuming Saturday counts as a business day).
The settlement agent (also known as a closing agent) that administers the mortgage closing process and transfer of funds may provide the Closing Disclosure to the borrower on behalf of the lender; however, the lender is legally responsible for for the Closing Disclosure. The Closing Disclosure must be provided separately to each borrower who has the legal right to cancel or rescind the mortgage prior to closing.
Lenders are required to issue a revised Closing Disclosure if certain changes occur to the mortgage terms after the first Closing Disclosure was issued that cause it to become inaccurate. Below, we outline the three changes that occur before mortgage closing that require a new three business day waiting period after the revised Closing Disclosure is issued. All other changes changes that occur before closing require a revised Closing Disclosure to be issued but do not require a new three day waiting period.
- The Annual Percentage Rate (APR )increases by more than 1/8 of a percent for a fixed rate loan or 1/4 of a percent for adjustable loans. An increase in APR could be caused by an increase in interest rate or closing costs
- The loan product changes. For example, the borrower switches from a fixed rate mortgage to an adjustable rate mortgage
- A prepayment penalty is added. Adding a prepayment penalty at the end of the mortgage process is a red flag for borrowers
Lenders must issue a revised Closing Disclosure if an event occurs within 30 days of the mortgage closing that causes the Closing Disclosure to be inaccurate and results in a change to a cost paid by the borrower. The revised Closing Disclosure must be provided to the borrower no later than 30 calendar days after the lender becomes aware that the event occurred.
The borrower should use the Closing Disclosure document to verify that he or she is receiving a mortgage at the terms agreed to at the start of the process. At the beginning of the mortgage process the lender provides the borrower a Loan Estimate that outlines a good faith estimate of key mortgage terms such as interest rate and closing costs. Prior to your mortgage closing, you should compare the Closing Disclosure with the Loan Estimate to ensure that your final, actual mortgage rate and closing costs did not increase significantly as compared to the initial terms provided in the Loan Estimate.
If there are meaningful discrepancies between the Closing Disclosure and Loan Estimate and the final mortgage terms have changed or increased significantly, then ask the lender for an explanation as this could be a sign that you are getting ripped off. You should cancel (also known as rescind) the mortgage if you are not satisfied with the lender’s explanation and the discrepancies cannot be resolved. For a home purchase loan, you can cancel your mortgage at any time before you sign loan documents and you are free to work with a different lender. Although you may be out non-refundable costs such as your appraisal fee and certain lender fees, canceling a bad mortgage will save you much more money over the life of the mortgage.
For a mortgage to purchase a home, borrowers cannot cancel the mortgage after they have signed loan documents. For a refinance, you can cancel your mortgage up to three business days after signing loan documents and then you are free to work with a different lender. We recommend that you do not sign your loan documents if you identify any significant issues or discrepancies.
One way to avoid potential negative surprises is to lock your mortgage. That way, all key terms and costs are agreed to by you and the lender at the start of the process and remain unchanged through the closing of your mortgage.
The Closing Disclosure contains much of the same information as the Loan Estimate although the information is presented in a somewhat different layout. We summarize each page of the Closing Disclosure below.
- Summary information about the borrower and the mortgage
- Key loan terms such mortgage amount, interest rate and monthly principal and interest (P&I) payment
- Projected payment included taxes and insurance and if this payment can change over time
- Costs at closing which includes the final closing costs and cash to close figures
- A breakdown of all transaction costs including all closing costs. In a purchase transaction this page also includes costs typically paid for by the seller including property transfer taxes and real estate commissions
- A Calculating Cash to Close table that outlines the total amount of money including total closing costs and down payment that the borrower must contribute to close the transaction. This table also indicates if the figures changed as compared to the Loan Estimate
- A Summaries of Transactions Table that outlines the transaction from the perspective of both the buyer and seller including the total amount of money required from, or received by, each party at closing
- A summary of loan disclosures that outline the key features of the mortgage including:
- Summary contact information about the key parties involved in the transaction including the lender, mortgage broker (if applicable), real estate brokers and settlement (closing) agent
- A summary of loan disclosures including information about the appraisal report, mortgage contract, foreclosure liability, refinancing the mortgage and the interest expense tax deduction
- A table that summarizes the total amounts the borrower pays over the course of the mortgage including:
Sources
"Mortgage Disclosure Rule." Consumer Protection Topics - Mortgages. Federal Deposit Insurance Corporation, January 8 2018. Web.
About the author