Refinancing or closing on a new home is an exciting time, but don’t skip off to the signing table before reading the closing disclosure. After closing, the property and all its financial responsibilities will be…
Refinancing or closing on a new home is an exciting time, but don’t skip off to the signing table before reading the closing disclosure. After closing, the property and all its financial responsibilities will be yours. For this reason, it is essential that you give this document your utmost attention. Your signature on the closing disclosure indicates that you accept each of the conditions and expenses that are listed on the paperwork, whether they’re accurate or not.
“Mistakes can cost people thousands of dollars,” says Todd Huettner, president of Huettner Capital, a real estate lender headquartered in Denver. “You’ll want to look at it carefully before you go into closing, but many people don’t.” If you notice fees you don’t recognize or other serious questions arise in the middle of your closing meeting, you might not know what to do, Huettner says.
Enter closing with confidence by becoming familiar with the closing disclosure. Here is what you need to know about this paperwork and what to do should you spot anything amiss.
You’ve Got Three Days
As a homebuyer, you have three business days to look over the closing disclosure before the closing date. Reviewing this document and identifying areas of concern will take time, so resist any temptation to procrastinate. Instead, read it until you understand every word and each number.
This is also your chance to weigh whether you can truly handle the payments and are comfortable with all the costs associated with homeownership.
“Use these three days to the fullest,” says Samantha Joseph, a Jacksonville, Florida-based lawyer and branch operations manager for Stewart Title Co. “Ruminate over the terms, make sure it’s right for you.”
Don’t Be Overwhelmed by Closing Disclosures
While the impact of a closing disclosure can be intimidating, its size is not. The disclosure consists of five pages and lists all the facts and figures about your mortgage. The lender prepares the disclosure, and toward the end of closing, the document will be in your hands for review.
No matter where you live in the U.S. or which lender you’ve chosen, the disclosure follows the same basic format. If you don’t feel comfortable reviewing the paperwork by yourself, the Consumer Financial Protection Bureau has an interactive tool on its website to help you navigate the closing disclosure.
What to Expect on Each Page
Read each page of the closing disclosure before you compare it with the initial loan estimate that you received when you were approved for the mortgage. This preparation will help you organize your thoughts.
Page 1. The closing disclosure begins with the names and addresses of all involved parties, relevant dates and the property’s sale price. The length and type of loan will be clearly indicated. A breakdown of the loan’s elements will follow:
— Terms: This is where you will see the amount you’re borrowing, the interest rate and information about potential prepayment penalties and balloon payments.
— Payments: Here, you’ll find the total estimated sum that you will be expected to send to the lender every month. You will see which portion of your payment will go toward the principal and interest, mortgage insurance and estimated escrow.
— Closing costs and cash to close: Closing costs reflect the amount of money it takes to close the loan. The cash to close is the final amount you’ll need to submit on the day of closing.
Page 2. This is a detailed explanation of the closing costs, listed in two subcategories. The first subcategory is the costs associated with the loan. The second consists of all the other costs to close, such as recording and transfer fees. It will also include your portion of the transfer taxes and insurance charges.
“As the homebuyer, these two categories can be confusing,” says Huettner. “The best way to look at it is to divide the fees into two logical buckets. Some are only associated with the loan. The rest are the fees you would be charged even if you just paid cash for the home. The end figure equals your closing costs.”
Scan each of the closing fees for legitimacy and accuracy. There should be no double or incorrect charges. Some mistakes might be minor, such as duplicate credit report charges, but others can be far more expensive.
“For example, if you will be paying homeowner association fees, confirm that you’re not being held responsible for the past owner’s dues,” says Joseph.
Page 3. This is where you’ll see a breakdown of the amount of cash you will need to present at closing. The final figure is a culmination of adjustments for credits and expenses you’ve already paid, and the costs that remain outstanding. Read through each line item to ensure you’ve been credited for all transactions and that nothing new has been added.
Flip to the first page of the closing disclosure. The final cash to close figure should be identical to the one on this page.
Page 4. This section begins with a description of what the lender will do if you do not make your payments by the due date or if you only make a partial payment. Being aware of these consequences prior to entering the contract is important, as it will help you make wise decisions in case you experience future financial difficulties.
Information about escrow accounts is also on this page. Odds are you have one, and if you do, its costs will be embedded in your monthly payment. You’ll see what is included, which are usually property taxes and homeowners insurance. If you decide against an escrow account, you may spot an opt-out fee from the lender.
Page 5. Take a deep breath because on the last page you will see the total amount of interest the loan will cost. For a $200,000, 30-year mortgage at a 4.65 percent rate, the total interest will be about $171,000.
A brief explanation about foreclosure and refinancing follows. Then, the disclosure specifies the lender, real estate brokers and settlement agent, along with their phone numbers and mailing and email addresses. “You may be surprised by how often you may need to contact them, especially in the beginning, so it’s worth a double-check,” says Joseph.
At the very end of the closing disclosure will be a place for you to date and sign. But don’t. That will come later.
Compare Your Closing Disclosure With Your Loan Estimate
After reading the closing disclosure at least once, take out the initial loan estimate from your lender and conduct a side-by-side comparison. The loan estimate, which the lender sends after approving your loan, shows the estimated interest rate, monthly payment, closing costs and other details about the loan. The two documents won’t look exactly alike, but the figures and expenses ought to be the same or similar. “If it’s within a few hundred dollars, that’s what I consider a bull’s-eye,” says Huettner.
As you go through the two forms, highlight anything on the closing disclosure that is not on the estimate or that doesn’t seem right. This is your time-sensitive chance to obtain clarification, should you need it. Once you’ve identified discrepancies, bring your loan officer into the fold.
Heidi Barnes, a Sacramento, California, senior loan officer for Reliant Lending, says, “It’s the borrower’s responsibility to understand the disclosure before signing it, but it’s the loan officer’s to be available for any questions. Buyers should see consistency in the numbers for such costs as the underwriting, appraisal and title fees. Others can vary, but they still should be close to what is on the estimate. The days of prepaid interest might be different, and homeowners insurance costs might have gone up a little.”
Dispute any charges you don’t believe should be on the closing disclosure form. The loan officer can rectify mistakes, but if you don’t say anything, the charges will go through.
The most crucial figure on a closing disclosure is the interest rate. If it’s even a fraction of a point too high, it will result in the difference of many thousands of dollars in additional interest over the life of the loan. Talk to your loan officer about this immediately so it can be changed. It’s possible that the new rate is correct, and if that’s the case, the lender will explain the reasons.
Reviewing the Disclosure at Closing
At the end of the three-day period, you will attend the closing along with key players, typically including the seller’s real estate agent, your agent, an escrow officer and sometimes an attorney. You will be expected to sign the closing disclosure and present the cash to close.
If all goes according to plan, you will have addressed and mitigated any discrepancies about the closing disclosure in advance. However, if it gets to this stage and you’re still (or suddenly) uneasy, back away from the paperwork.
“Don’t be afraid to stop and ask even more questions about the disclosure,” says Huettner. “Take a break. Step out of the room, make a few phone calls to people you trust. Collect yourself and look at the paperwork again in private. It’s not out of the ordinary for buyers to remember different numbers.”
In this high-pressure environment, it takes bravery to stop the transaction. Everyone from the seller to the lender might be confused and exasperated. But if you truly feel uncomfortable with what’s on the closing disclosure, wait and ask more questions. Never sign an incorrect contract or one that you can’t fulfill.
Pull your agent or loan officer aside and discuss your concerns. You chose that person, so you should trust his or her answers and recommendations.
If you must put the entire transaction on hold until the closing disclosure is tweaked to your satisfaction, ask about the ramifications of a delay. “It’s possible that you will lose your earnest money,” which is the deposit you gave when the seller accepted your offer, says Huettner. The earnest money is typically between 1 and 3 percent of the sale, so you’d be looking at a $2,000 to $6,000 loss for a $200,000 home.
Or, you may be charged a penalty of $250 a day until you close, Huettner says. “They may have another buyer and are willing to go in another direction for the sale.” That’s a risk you may or may not want to take.
Thankfully, negative developments can be avoided by thoroughly reading the closing disclosure then hammering out any problems within the three-day waiting period. Do so, and you’ll be ready to sign on the bottom line at closing.