What Is a Closing Disclosure? Here’s What Home Buyers Should Know
You found a house; you went under contract; and you survived the home inspection, appraisal, and loan underwriting. Congratulations, the end is in sight! You’re well on your way to becoming a homeowner.
If you’ve chosen a conventional loan type, the closing disclosure (CD) is one of many forms you’ll get during the home-buying process, and other than the stack of papers you’ll sign on that fateful day of closing, the CD is the last document you’ll receive before possession of the home. Even though they’re designed to be a simple overview of your loan product, these five pages of numbers and legalese can still be confusing, especially if you’re a first-time homebuyer. Let’s break down what it is, why it’s important, and how to check for any errors.
What is a closing disclosure?
The closing disclosure is a form issued by your lender a few days before you close on your home. The five-page form includes a final roundup of your loan transaction details, like your:
Principal amount (aka the loan amount)
Interest rate, or the annual percentage rate (APR)
Fees and closing costs, such as origination charges
Prepayment penalty, if applicable
Escrow account information
Monthly payment amount
Total finance charge over the life of the loan.
The first page of the closing disclosure provides a good summary of your loan terms, and is a great starting point. The other four pages provide significant additional information. This can help you determine if the loan contract details—like late fees or a demand feature, which allow the lender to demand full repayment—line up with what you expected.
You can compare the CD against your initial loan estimate and contact your lender to settle any errors or unexpected changes prior to closing.
In addition to this other loan information, your closing disclosure will likely specify services borrower did shop for and services you didn’t. In addition to homeowners insurance premiums, things like title insurance are included under services that the borrower shopped for—even if you just used the title insurance provided by your lender or title company. Many borrowers don’t realize they can shop for these services.
Why is the closing disclosure important?
This is your final review of the loan before signing and committing to it. You want to make sure you fully understand your closing costs and monthly payments—and whether they are subject to change, like in the case of an adjustable-rate mortgage—before you tie yourself legally and financially to the loan. Once you sign the closing documents, you’re bound by the terms and conditions until you close the loan, either by refinancing, paying it off entirely, or selling the property.
Houses come with a big price tag, so this information isn’t just small potatoes. Make sure to take the time you need to comb through the details of the CD.
The three-day rule
The Truth in Lending Act was put in place to protect borrowers by giving them as much information as possible when committing to a loan. In line with this, your lender is legally required to give you the closing disclosure at least three business days before closing so you have time to look for unforeseen changes or errors. (Prior to the three-day rule being issued in 2015, these final loan terms were given at closing, which could result in rushed decisions or overlooked mistakes.)
According to the Truth in Lending Act, the three-day rule can technically be waived if “extension of credit is needed to meet a bona fide personal financial emergency.” What is considered a “personal financial emergency,” however, is relatively vague. It typically means that there is some time limit (less than three days) within which you must close on the home. If there’s potential to lose the home without closing sooner, you may be able to waive the three-day rule. One example that the Truth in Lending Act provides is the “imminent sale of the consumer’s home at foreclosure during the three-day period.”
To waive this right, you would need to give the lender a dated statement that describes the emergency, specifically waives the waiting period, and bears the signature of everyone involved. Per the specific instructions, this statement must be handwritten.
It’s worth noting that this rule is in place to protect you, so there are very few reasons to waive this waiting period unless it really is an emergency, like in the foreclosure example. Though you may be eager to close on your home, you should take these three days to comb through the closing disclosure and make sure everything is correct. If you’re unsure about anything on the closing disclosure, reach out to your lender and ask any unresolved questions you have until you’re 100% clear.
Does the CD mean I’m clear to close?
After going under contract on a house, an underwriter will review all of your qualifications—like your financial information, credit history, and employment verification—as well as order an appraisal and title check for the property in question. If all goes well, the underwriter gives your loan final approval and you are “clear to close.”
The closing disclosure includes the final numbers that are based on loan approval, so getting a closing disclosure means you are, in fact, clear to close.