By David McMillin

When buying a home, you’re going to receive lots of reading material from your mortgage lender and real estate agent. That mountain of paperwork can feel overwhelming, but this is a time when you need to focus on every word — particularly when you read the closing disclosure. 

What is a closing disclosure?

If you’re getting a mortgage, you’ll get a closing disclosure. The closing disclosure is a five-page document that includes the important final details of your loan — the terms of the loan, fees, the money you need to bring to the closing, what the seller will cover and more.

It’s important to know how to read the closing disclosure so you can effectively compare all the information with the loan estimate you received shortly after you applied for the mortgage. 

The three-day closing disclosure rule

You won’t receive the closing disclosure at the very last minute. Federal law stipulates that your mortgage lender must send you the closing disclosure at least three business days before the date your loan is scheduled to close. Therefore, it’s important to review the disclosure as soon as it arrives to allow enough time for questions if something looks amiss.

What’s in the closing disclosure?

You can view a sample closing disclosure on the Consumer Financial Protection Bureau’s website. Here’s a breakdown of the key points you’ll find on each page:

Page 1

The first page of the closing disclosure includes all of the basic details of the transaction: the buyer’s name, the seller’s name, and a complete list of your projected monthly payments and closing costs. This page also highlights whether your loan has any prepayment penalties — most loans don’t have this, but it can’t hurt to check, especially if you plan to accelerate the payoff of your mortgage at some point in the future.

Page 2

The second page of the closing disclosure is an itemized breakdown of every expense that goes into the large closing cost sum on the first page. The origination fee, application fee, home inspection fee, and more — you’ll find a complete list of everything that costs money to process and close the loan on your home. It’s divided between what you as a borrower are responsible for paying, what the seller is covering, and any other charges paid for by someone else (typically a lender credit). You’ll also see a distinction between the services you were not allowed to shop for versus the services you were allowed to pick on your own. 

Page 3

The third page of the closing disclosure includes a convenient comparison with your loan estimate, so you can see what — if anything — has changed since your initial application. You’ll also want to double-check that any credits the seller agreed to are listed accurately here.

Page 4

While you don’t ever want to pay your mortgage late, that might happen. This page includes a breakdown of the fee you’ll pay for any late payments, along with disclaimers about the potential for negative amortization and whether your lender accepts partial payments. The escrow account portion is especially important, as it will outline if your monthly payments include cash to cover other expenses like property taxes and homeowners insurance. 

Page 5

The final page of the closing disclosure shows a true picture of how much you’re going to pay for the property over the course of the loan by highlighting the total interest costs. Plus, you’ll see additional disclosures, including the requirement for your lender to give you a copy of the appraisal and your liabilities in the event of a foreclosure.

Finally, the closing disclosure isn’t just about reading; you’ll need to sign and return it to acknowledge receipt. Signing it does not show that you accept the loan, however. You can still submit questions about it even after you put your name on the dotted line.

How to check your closing disclosure

To check your closing disclosure, go back to your loan estimate to review the terms you first accepted — plenty of details can change between the two. Consider these questions as you review your closing disclosure:

  • Did you lock your rate? If you locked your interest rate, the rate on your closing disclosure should be the same rate as quoted on the loan estimate. If you didn’t lock your rate, it might look different based on how the market has changed throughout the lead-up to closing.
  • Was there a significant change in your circumstances? Your loan estimate was based on fundamental information — the amount you wanted to put down, the offer price you submitted on the home, and your financial situation. So, if some of these factors are different (the appraisal came in lower than the offer price, or you quit your job, for example), your closing disclosure will likely look different. 
  • Which costs look different? If nothing has changed from your initial application, some costs should look the same: the fees you’re paying to the lender and or the mortgage broker; the fees for required services that you weren’t allowed to shop around for; and the transfer taxes. However, there are other costs that can change, particularly the fees attached to services you shopped for. The lender doesn’t have a say over those.

What to do if you have questions

If the closing disclosure raises some red flags, address those right away. Contact your mortgage lender for clarification, and if you’re working with a real estate attorney, be sure to ask for their assistance, too. That legal counsel can play an especially helpful role in understanding how to read a closing disclosure, and what to do if your review turns up some question marks.

This article is also posted on Bankrate here.