Closing Disclosure

What is a Closing Disclosure?

The Closing Disclosure (CD) is a five-page document that provides final details about the mortgage loan you have selected. It includes the loan terms, projected monthly payments, and the costs to close the loan. The CD is a critical document for real estate investors, as it outlines all financial aspects of the transaction, ensuring transparency and allowing for a thorough review before signing the final loan documents. Lenders are legally required to provide the Closing Disclosure to borrowers at least three business days before the scheduled closing date, giving investors ample time to compare it against the initial Loan Estimate and ask any questions.

This document is a cornerstone of the TILA-RESPA Integrated Disclosure (TRID) rule, designed to help consumers understand the costs and risks of their mortgage. For investors, understanding every line item on the CD is paramount to protecting their interests, verifying the accuracy of all charges, and confirming that the loan terms align with their investment strategy and financial projections.

Key Components of the Closing Disclosure

The Closing Disclosure is structured to provide a clear, comprehensive overview of the entire loan transaction. Each section serves a specific purpose, detailing different aspects of the mortgage and the closing process.

Loan Terms

This section details the core elements of your mortgage. It includes the loan amount, interest rate, and whether the rate is fixed or adjustable. It also specifies the monthly principal and interest payment, the loan term (e.g., 30 years), and any prepayment penalty or balloon payment features. Investors must meticulously check these terms against their initial agreement and financial models, as even small discrepancies in the interest rate can significantly impact long-term profitability.

Projected Payments

Here, you'll find a breakdown of your estimated monthly payments, including principal and interest (P&I), mortgage insurance (if applicable), and estimated escrow payments for property taxes and homeowner's insurance. This provides a full picture of your total monthly housing costs, often referred to as PITI. Investors should verify these figures against their cash flow projections to ensure the property remains a viable investment.

Costs at Closing

This is a detailed list of all fees and charges associated with obtaining the loan and closing the transaction. It includes loan origination fees, appraisal fees, title insurance, recording fees, attorney fees, and other third-party services. These costs are categorized by who pays them (borrower, seller, or both) and whether they are zero tolerance (cannot change from Loan Estimate), 10% tolerance (can increase by up to 10%), or no tolerance (can change by any amount). Investors must scrutinize these costs to identify any unexpected increases or unauthorized charges.

Cash to Close

This section summarizes the total amount of money you need to bring to the closing table. It factors in your down payment, closing costs, and any credits or debits from the seller or lender. This is a crucial figure for investors to confirm, ensuring they have sufficient liquid funds available to complete the purchase.

Summaries of Transactions

This provides a detailed breakdown of all funds involved in the transaction, for both the borrower and the seller. It lists the purchase price, loan amount, down payment, closing costs, prorated property taxes, HOA fees, and any other adjustments. This section helps investors understand the flow of funds and ensures all financial aspects are correctly accounted for.

Loan Disclosures

This part includes important information about the loan, such as whether the loan is assumable, if it has a demand feature, late payment fees, and the lender's escrow account policies. It also details the total interest percentage (TIP), which is the total amount of interest you will pay over the life of the loan as a percentage of the loan amount. Investors should review these disclosures carefully to understand all terms and conditions of their mortgage.

Contact Information

The final page lists the contact information for all parties involved in the transaction, including the lender, mortgage broker, real estate brokers, and the settlement agent. This ensures you know who to contact if you have questions or need to address any issues after closing.

The TILA-RESPA Integrated Disclosure (TRID) Rule

The Closing Disclosure is a direct result of the TILA-RESPA Integrated Disclosure (TRID) rule, implemented by the Consumer Financial Protection Bureau (CFPB) in 2015. This rule aimed to simplify and standardize the mortgage disclosure process, replacing older forms like the Good Faith Estimate (GFE) and the HUD-1 Settlement Statement with the Loan Estimate and the Closing Disclosure.

Purpose and Impact

TRID's primary goal is to provide consumers with clear, consistent, and comparable information about their mortgage loans, both at the beginning of the process (Loan Estimate) and just before closing (Closing Disclosure). This allows borrowers to easily compare the initial estimates with the final terms, identify any significant changes, and make informed decisions. For real estate investors, TRID has brought greater transparency to the financing process, making it easier to track costs and prevent last-minute surprises.

Key Differences from HUD-1

Before TRID, the HUD-1 Settlement Statement was the primary closing document. While it provided a detailed breakdown of costs, it was often complex and difficult for consumers to understand. The Closing Disclosure, by contrast, is designed with a more user-friendly format, clearer language, and a direct comparison section to the Loan Estimate. This makes it significantly easier for investors to perform a side-by-side comparison and ensure consistency in their loan terms and closing costs.

Step-by-Step Review Process for Investors

Reviewing your Closing Disclosure thoroughly is a critical step in any real estate investment. Follow these steps to ensure accuracy and protect your financial interests.

1. Receive and Acknowledge: Ensure you receive the CD at least three business days before closing. This is a legal requirement. Acknowledge receipt promptly to avoid delays.
2. Compare with Loan Estimate: Immediately compare every line item on the CD with your initial Loan Estimate (LE). Pay close attention to loan terms (interest rate, loan amount), estimated monthly payments, and all closing costs.
3. Verify Loan Terms: Confirm the loan amount, interest rate, loan term, and whether there are any prepayment penalties or balloon payments. These should match your agreed-upon terms exactly.
4. Scrutinize Closing Costs: Check all fees, especially those with zero tolerance (e.g., origination fees, interest rate lock fees). Any increase in these categories requires a new CD and a new three-day waiting period. For 10% tolerance items (e.g., recording fees, title insurance), ensure the increase is within the 10% limit.
5. Review Cash to Close: Confirm the final Cash to Close amount. This figure should align with your financial planning and account for your down payment, closing costs, and any credits or debits.
6. Check Prorations and Credits: Verify all prorated expenses (property taxes, HOA dues) and any seller credits or lender credits. Ensure these are calculated correctly based on the closing date and your purchase agreement.
7. Ask Questions and Seek Clarification: If you find any discrepancies or have questions about any item, immediately contact your lender, real estate agent, or settlement agent. Do not sign until all concerns are resolved.

Real-World Examples

Understanding the Closing Disclosure through practical scenarios helps solidify its importance for real estate investors.

Example 1: Single-Family Rental Purchase

An investor, Sarah, is purchasing a single-family rental property for $300,000. Her Loan Estimate showed an interest rate of 7.00% and an origination fee of $3,000. Three days before closing, she receives her Closing Disclosure. Upon review, she notices the interest rate is now 7.125%, and the origination fee has increased to $3,300. This is a red flag. The origination fee is a zero-tolerance item, meaning it cannot increase from the LE without a valid change of circumstance. The interest rate change also triggers a new CD and a new three-day waiting period if it was not due to a rate lock expiring or a borrower-requested change. Sarah immediately contacts her lender, who discovers a clerical error. The lender corrects the CD, reverting the interest rate and origination fee to the original terms, and issues a new CD, pushing the closing date back by three days. This delay is acceptable, as it ensures Sarah is not overcharged.

Example 2: Multi-Family Refinance

David is refinancing a multi-family property with a loan amount of $800,000. His Loan Estimate included an appraisal fee of $1,200 and title insurance of $2,500. On his Closing Disclosure, the appraisal fee is $1,200, but the title insurance is $2,700. Title insurance is typically a 10% tolerance item. The increase of $200 from $2,500 is an 8% increase, which is within the allowable 10% tolerance. While acceptable, David still reviews the specific title policy details to ensure he is receiving the coverage he expects. He also notices that property taxes were prorated incorrectly, showing him owing an extra $500. He flags this with the settlement agent, who adjusts the prorations based on the correct tax assessment and closing date, reducing his cash to close.

Example 3: Seller Concessions Impact

Maria is buying a commercial property for $1,200,000. Her purchase agreement includes a seller concession of $10,000 towards her closing costs. On her Closing Disclosure, she carefully reviews the Summaries of Transactions section. She confirms that the $10,000 seller credit is correctly applied, reducing her Cash to Close from an estimated $60,000 (including down payment and full closing costs) to $50,000. If this credit were missing or incorrect, her out-of-pocket expenses at closing would be significantly higher, impacting her initial investment capital. Her vigilance ensures the terms of the purchase agreement are honored.

Common Pitfalls and How to Avoid Them

Even with the transparency of the Closing Disclosure, investors can encounter issues. Being aware of common pitfalls can help you navigate the closing process smoothly.

• Ignoring the Three-Day Rule: Failing to review the CD within the mandated three business days can lead to rushed decisions or overlooked errors. Always prioritize this review.
• Not Comparing to the Loan Estimate: The primary purpose of the CD is to compare it to the LE. Skipping this step defeats the purpose of TRID and can result in accepting unexpected charges.
• Overlooking Proration Errors: Property taxes, HOA fees, and other recurring charges are prorated based on the closing date. Errors here can significantly alter your cash to close. Double-check all prorations.
• Misunderstanding Tolerance Levels: Not knowing which fees have zero, 10%, or no tolerance for change can make it difficult to identify legitimate versus illegitimate increases. Educate yourself on these categories.
• Assuming All Charges are Correct: Always approach the CD with a critical eye. Mistakes happen, and sometimes unscrupulous parties may attempt to include unwarranted fees. Verify every charge.
• Not Asking for Clarification: If something is unclear or seems incorrect, do not hesitate to ask questions. It's your right to understand every aspect of your loan and closing costs before signing.

Importance for Real Estate Investors

For real estate investors, the Closing Disclosure is more than just a formality; it's a critical financial document that directly impacts the profitability and legality of their investment. A thorough review ensures that the final loan terms align with their financial models and investment strategy. It helps prevent unexpected costs that could erode initial returns or strain cash flow. Moreover, it serves as a final check on the integrity of the entire transaction, confirming that all agreements, from the purchase contract to the loan terms, are accurately reflected. By diligently reviewing the CD, investors protect their capital, mitigate risks, and lay a solid foundation for a successful real estate venture.