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How to Read a Closing Disclosure (And Why You Really Should)

November 09 2018
by Leisl Bailey

Agent handing house keys to young couple who read over closing disclosure

A closing disclosure (sometimes called a CD) is one of the most important documents in the home closing process. It is absolutely essential that you not only read it but also that you understand what you are reading.

Here is everything you need to know about your closing disclosure:

What is a closing disclosure?

Your closing disclosure form outlines the terms of your mortgage as well as the costs associated with it.

The law requires that your lender provide you with a copy of your CD at least three business days before the official closing day. You are only a candidate to receive a CD when your loan underwriter approves all of your paperwork and issues you are “clear to close.”

Once you are clear to close, you’ll go to your closing day.

Closing day is when you officially become the owner of your new home. You sign any final paperwork and you get the keys to your house. The reason you get your CD well in advance of this is so that you have plenty of time to look it over and ask any questions that you might have.

The CD is also the final version of a preliminary loan document called the loan estimate. Sometimes called the good-faith estimate, the loan estimate gave you a ballpark figure of the loan terms and fees associated with this mortgage. When you receive your CD, you have the final figures for the total loan amount.

Closing Disclosure vs. Settlement Statement: What’s the Difference?

The CD used to have another name.

Before Aug. 1, 2015, everyone called closing disclosures the HUD-1 settlement statement. However, this document had a bad reputation. This is because it was long, confusing, and difficult to read for many potential homeowners.

The federal laws at the time also only required that homeowners receive the confusing document on closing day. As you can imagine, this was very frustrating to many people! This is because people did not have enough time to read and digest the contents of the document.

Finally, the government changed the laws. Now, the five-page CD has replaced the hard-to-understand HUD-1 settlement statement. So yes: A closing disclosure and a settlement statement are the same thing.

However, just because the new CD is easy to read does not mean you don’t need to take your time carefully combing through it page by page.

Reading a Closing Disclosure Page by Page

The Consumer Financial Protection Bureau recommends that you check and double-check these things on your closing disclosure.

Your Name

Be sure that the document spells your full legal name correctly. It’s a big hassle to change your name on legal documents later on down the line, so it’s a good idea to get it right the first time.

The Length of Your Loan

Be sure the loan term listed is what you agreed to. Mortgages are usually about 15 to 30 years in length but can vary based on what you and your lender agree to. In situations where the seller is the lender or a balloon payment is due, the term is typically 5-7 years.

Loan Type

There are many different types of home loans to choose from. It is important that your CD lists the type of loan you agreed to. FHA, VA, USDA, and conventional loans typically have a fixed interest rate loan, while loans like bridge loans and seller financing can have an adjustable rate mortgage.

Interest Rate

You need to pay special attention to the interest rate of your loan if you locked in your rate. Make sure the amount on the CD matches what you agreed to pay.

Loan Amount

This is a fairly self-explanatory, but also very serious inclusion. You need to know exactly how much money you are taking out for your mortgage, including how much is in escrow.

The “Cash to Close” Amount

This is the amount of money it will take to cover all of the closing costs. This amount includes your loan’s down payment (usually 20% of the final sales price) and all of the closing costs.

You will typically pay closing costs on closing day via a cashier’s check or bank transfer. Because of this, it is very useful that you receive the CD at least three business days in advance. This way you can double check everything and ensure you can have the appropriate funds ready on the day.

Closing Costs

The buyer of the home typically pays the closing costs. These are fees paid to people who help make the sale of the home happen. This could be people like the home appraiser, the loan underwriter, and the real estate lawyer.

In general, closing costs tend to run about 3 to 4 percent of a home’s final sales price. However, the specifics for your purchase should be laid out in your loan estimate. If for some reason the CD has highly different costs from the loan estimate, be sure to ask your lender for immediate clarification.

Your Estimated Monthly Payments

The reason your monthly mortgage payments are an estimate and not a guarantee is because monthly payments can technically change over time. This is especially true if you have an adjustable rate mortgage and your introductory rate expires.

Estimated Taxes, Insurance, and Other Payments

The final things to keep an eye out for when you are looking over your CD is your estimated property taxes, mortgage insurance, and title insurance. Be sure that you understand these charges and the reasons they might increase over time.

If Your Closing Disclosure is Wrong

Closing disclosures are not final. If you discover an error in the CD, reach out to your lender immediately.

Human error is always possible, so they might need to correct a fact or figure. It is also possible that you perceive and error due to a misunderstanding. Either way, you can prevent a plethora of headaches on closing day simply by doing your homework and checking over your CD as soon as you receive it.

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