Getting Your Closing Costs in Stone: Looking at the Closing Disclosure Form
In our last post, we explained the Loan Estimate form and how it can help a mortgage shopper decide between mortgage loan options. This blog is about that form’s fraternal twin, the Closing Disclosure form. They’re two pieces of a whole, designed to ensure that you get the loan you think you’re getting and all your mortgage and closing related expenses are spelled out in plain English.
Note: This article is part two in a two-part series about closing costs on your mortgage. Part one is all about the Loan Estimate form.
When Do You Get Your Closing Disclosure Form?
You’ll get your Closing Disclosure form at least three business days before your closing date to allow ample time for you to examine it from top to bottom. You should, too, because there are probably lots of entries that won’t have been on the Loan Estimate form. These result from actual invoices being turned in to the closing company, as opposed to general estimates.
Before you read any further, grab the Loan Estimate form for the loan option you chose, as well as the Closing Disclosure form you’ve just received. Here's a sample Closing Disclosure form you can check out to follow along.
Checking Your Loan Estimate Against Your Closing Disclosure Form
The primary reason for having the Closing Disclosure form is to ensure that you’re still getting the loan that you think you’re getting. The secondary reason is so you can verify your closing costs have remained more or less the same (sometimes they will change slightly. This is normal, as different houses may have different tax or insurance rates, for example).
A third reason, for some buyers, is to see a detailed breakdown of exactly where all their money is going. If that’s important to you, then this form is everything. It’s usually a few pages longer than the Loan Estimate form because of the detailed breakdowns. But, before you get to that, start by verifying certain bits of information from the Loan Estimate form are the same on the Closing Disclosure form. Those items are:
Closing Disclosure Header
The correct spelling of your name and your current address
Your loan term
Your loan purpose
Your loan product and loan type
Loan Terms Section
Loan Amount line
Interest rate line
Prepayment penalty line
Balloon payment line
The Projected Payments and Costs at Closing sections may not match your Loan Estimate form exactly. Remember, that form is only a best guess. When it was generated, taxes may have been only an estimate. That will affect the total amount you’re paying every month, as well as your closing costs and cash to close, especially if you’re establishing an escrow account.
This isn’t an excuse for your bank to change your payment dramatically. If there’s a very significant difference between your Loan Estimate form and the Closing Disclosure form, you should call your bank or closing company immediately and report the problem. They’ll have to redraw the document, which restarts the mandatory three-day examination period and could potentially push your closing back a few days.
Exploring the Closing Disclosure Form
Once you’ve done your initial check, you might as well look around your form and see what else there is to see. Pages two and three consist of ledgers recording every cent that has been involved in your transaction. You’ll notice that there are now three columns: Borrower-Paid, Seller-Paid, and Paid by Others.
Not surprisingly, the stuff you paid for will be under the Borrower-Paid header. The Seller-Paid stuff (for example, if they paid your closing costs) will be under Seller-Paid, and Paid by Others may contain items like first-time home buyer grants.
If this isn’t your first house, these pages will look similar to the old HUD-1 form (remember that?). This is essentially the new generation of the HUD-1, but instead of being read back to front, they work in a logical, linear way. The second page contains the calculations used to determine your cash to close amount, as well as a summary for both sides of the transaction.
Please note, in some cases the seller can request that their expenses are hidden from the buyer. In these cases, there won’t be much in the Seller’s column, even though it’s clear that there are figures missing. You’ll just have to live with the insatiable curiosity about how much your home’s prior owners made off of you in this transaction.
Page 4: Loan Disclosures
The loan disclosures page is a really important one. There are only seven items on it, but each and every one can have long term impact. Let’s walk through them.
Loan Disclosures: Assumption
An assumable loan allows a future home buyer to purchase your home and your mortgage at the same time. Typically, the buyer provides extra cash on top of taking over your mortgage at closing. This feature has been a bit of a bum in these years of low interest, but as rates creep back up, it may become a valuable selling point again. If you can get an assumable loan for the same price as one that’s not, you may want to go for it.
Loan Disclosures: Demand Feature
Sometimes, your lender will send you a nasty letter demanding that you pay your mortgage off right now. Not tomorrow, today, and don’t delay. This typically happens in response to an adverse action on your part. Let’s say you set your porch on fire and melted all the siding on the front of your home into a weird, runny wad, and the lender got wind of it because you just left it that way for a year. This might be a reason for a lender to activate their demand feature.
Essentially, you’ve increased the bank’s risk beyond what it agreed to. Your melted house of lies is now going to be almost impossible to move, even at a foreclosure sale, should you decide that you’re tired of looking at it and stop making your payment. The bank isn’t going to wait for you to default. They don’t have to give you a reason, either, but it’s almost always because the risk has exceeded established thresholds.
If you can get a loan without a demand feature, do it. Many still have this in place, though, and you may have to accept that you’ll have to play with your blow torch in the backyard, far away from the siding.
Loan Disclosures: Late Payment
Most mortgages have a 15-day grace period to allow your payment to arrive and be credited before the bank starts making calls and charging fees. This section tells you if you have a grace period, how long it is, and what late fee to expect if your payment is made outside of that grace period.
Loan Disclosures: Negative Amortization
There’s little in this world as evil as negative amortization; it ranks right up there with raisins disguised as chocolate chips in cookies. Before the 2008 real estate market crash, there was a loan product called the “Pay Option ARM.” Essentially, you’d get a coupon in the mail every month that had three different amounts written on it that you could choose as your minimum payment.
Those were: your full payment, including interest, your interest payment only and zero dollars. Yes, that’s correct. You could choose to pay nothing. Every month. These had an incredible failure rate, as you might imagine. Coupling the fact that interest continued to compound on top of the non-payments, the pay option ARM would result in you having a house that was deeply underwater. Then the market collapsed. The lesson here is that there’s no good negative amortization -- just say "no."
Loan Disclosures: Partial Payments
You should always make a full payment on your loan every month, but you can pay more, too. This section describes what your lender will do with anything above and beyond your full payment, even if it’s just a few dollars (but paying those few extra dollars per month can really add up!).
Loan Disclosures: Security Interest
This should have the address of the property you’re purchasing. When you take out a mortgage, the real estate that’s being purchased is the security.
Loan Disclosures: Escrow Account
The last section describes your escrow account, what’s going into it, and how much you’ll pay each month toward maintaining it. Your escrow will very likely change year to year, but your bank is required to keep you in the loop. It’ll send you a detailed report showing where your money is going and what’s changed. Typically the increase is just a few dollars to accommodate rising taxes and insurance costs.
Page 5: More Good Stuff
On the last page of the Closing Disclosure form, you’ll find information that’s similar to the last page of your Loan Estimate form. The loan calculation information should match on both documents, though both the APR and TIP may be slightly different for the same reason some of the numbers on the first page may be different: your lender will have the exact figures instead of possibly using estimates.
This page also contains all the contact information you’ll ever need, so keep it somewhere safe just in case you need to reach out to your lender, real estate agent, settlement agent (the person who’s closing your loan) or your Realtor’s brokerage.
It’s not common that you’ll need to talk to these people ever again if you don’t sell your home, but every once in a while a buyer hits a bump and needs a pro. Whether that’s because the roof springs a leak and they’d like a referral or due to neighbors who decide to point a camera at the house, a good Realtor and their brokerage are still going to be around to help when a former buyer calls.
The Closing Disclosure Form Reduces Closing Day Surprises
Before the Closing Disclosure form, it wasn’t unusual to show up to closing with the wrong amount of money in hand because the closing documents weren’t finalized until the 11th hour. The change in the law in 2015 went a long way to prevent this from happening to buyers, who were often already pretty rattled. It’s also nice that the two forms are so similar, which makes it easy to compare your estimate to the reality of the loan you’re getting.
Do you have burning questions about closing documents? Do you see dancing disclosures when you close your eyes at night? Let us set your mind at ease. Our loan pros at Home.Loans are eager to help, just reach out and say “Hello!” Until then, we’ll be staring at the phone, trying to use the Force to will it to ring.