By Melissa Dorman, April 9, 2021
You find a house you love. You get into contract. You survive inspections, appraisal and the laundry list of underwriting requirements. Congrats, the end is in sight! You’re well on route to becoming a home owner.
If you are using a typical mortgage mortgage, the closing disclosure (CD) is one of numerous disclosures you’ll review during the home-purchasing process. Other than the heap of papers you’ll sign on important day of closing, the CD is the last paperwork you’ll get beforehand. Despite the fact that they’re intended to be a basic outline of your loan terms, these five pages of numbers and legal jargon can easily be confounding, particularly in case you’re a first-time home buyers. We should discuss what it is, the reason it’s significant, and how to check for any blunders.
What is a closing disclosure?
The CD is a statement given by your lender a couple of days before you close. The five-page summary includes the following lending information into one report:
- Principal amount
- Mortgage insurance
- Property taxes
- Annual percentage rate (APR)
- Fees and closing costs
- Prepayment penalty
- Escrow account information
- Monthly payment amount
- Total finance charge over the life of the loan.
Why is the closing disclosure important?
This is your last overview of the loan prior to signing your mortgage and closing. You need to ensure you completely comprehend your end expenses and regularly scheduled installments—and whether they are liable to change, such as an adjustable rate mortgage—before you tie yourself in a legally binding way. When you sign the closing documents, you’re limited by the terms and conditions until you pay off the loan, either by refinancing, paying it off, or selling the property.
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.)
Does the CD mean I’m clear to close?
Indeed it does! 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.
Can closing costs change after the CD?
Technically, things outside of the lender’s control can change even after receiving a closing disclosure, like the cost of homeowner’s insurance for escrow. Lender fees, however, cannot change after the closing disclosure is issued.
The lender must provide a new CD if loan details are altered due to a “change in circumstances,” such as a change in your credit score or down payment amount. Another three-day window is only required if:
- The loan product has changed, like changing from a fixed-rate to an adjustable rate or vice-versa.
- APR increases by more than one-eighth of a percentage point. (The same does not apply for a decrease.)
- A prepayment penalty is added. This is a fee that a lender can charge for refinancing, selling the home, or paying off the mortgage sooner than specified on the loan.
How to check your closing disclosure
First and foremost, compare your closing disclosure to your original loan estimate and check for any undiscussed alterations. The two documents won’t be exactly the same, but there shouldn’t be any glaring differences.
Next, check for any simple errors, like spelling mistakes in your name. These issues are rare, but they will need to be fixed prior to closing.
Finally, consider whether you are truly prepared to make these monthly payments and commit to the loan as it is detailed on the closing disclosure. Hopefully, you’ve already done your due diligence when shopping for the loan, so this shouldn’t be a problem. If you realize you don’t want to buy the house so late in the process, you can technically walk away—but you’re going to lose your earnest money and cause a lot of problems for everyone involved.
If there is an error on the closing disclosure, contact your lender to work through the changes as soon as possible. The document will need to be revised and reissued, which may incite another three-day window and push back your closing date. If this is the case, your purchase contract might also need to be amended.
Melissa Dorman
Broker | OR & WA
She/They
Ten years ago, Melissa was living in a slum in Kolkata, India, helping over 200 women escape sex trafficking by providing alternative work at a social business.
It was there she discovered her passion for financial education as a means of empowering people to move out of poverty. After graduating from UCLA with a Masters, Melissa spent 5 years working as a Social Worker; assisting clients facing homelessness, in jail, or at a psychiatric facility.
As much as she loved the work, imagining saving for retirement on the meager salary of a social worker was becoming grim. That's when Melissa discovered "passive income." In no time, she fell in LOVE with real estate as a vehicle for wealth. Soon after, Melissa began locating off-market multi-family properties to purchase through creative financing strategies and win-win opportunities. Two years into investing, Melissa quit her day job as a Social Worker to become a full-time broker and investor. Initially, she was drawn to people in difficult circumstances, so she developed extensive experience assisting families facing foreclosure, short sales, and probate. Melissa is well versed in helping her clients overcome complex real estate challenges.
Currently, Melissa is teamed up with Super Broker, Yascha Noonberg at Living Room Realty. Together they assist clients to achieve their real estate dreams, including how to strategically buy and sell a personal residence to maximize profits. Far from the slums of Kolkata, her greatest passion now is empowering other working professionals to develop passive forms of income through buying multi-family properties in Portland.
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- T: 503-567-4697
- melissa@livingroomre.com
