What is a Closing Disclosure?

There’s a great deal of paperwork to review before you close on your new home. One of these documents is the Closing Disclosure, which spells out your loan terms in detail. You’ll need to check this document closely for errors before you sign on the dotted line to make sure it doesn’t contain small errors, like misspellings, or costly errors, like an inaccurate loan amount.

How a Closing Disclosure works

The Closing Disclosure is a five-page document that details your finalized mortgage terms. Your lender is required to give you this document at least three business days in advance of your closing, which should give you enough time to review the details and compare the costs with those in your Loan Estimate, the three-page form you received when you applied for a mortgage with the lender.

The Closing Disclosure is an important part of the homebuying process — it breaks down all costs associated with the loan in an easy-to-read format. At closing, you’ll sign paperwork to accept the terms of your loan.

The Closing Disclosure also states exactly how much cash you need to bring to closing (called “cash to close”). Your mortgage lender will tell you what payment method they prefer — usually a wire transfer or cashier’s check.

Final vs. preliminary Closing Disclosure

You’ll receive the preliminary (or initial) Closing Disclosure at least three business days before closing. Your lender may also send a preliminary disclosure at certain points in the closing process — if most of the costs have been accounted for and you request an updated estimate of the cash to close, for example. These costs are still considered preliminary because they may change by the closing date.

You sign the final Closing Disclosure at closing. This document contains the finalized loan terms along with the closing costs.

It’s a good idea to ensure all parties review and agree on these terms every step of the way; otherwise, you could be in for an unpleasant surprise at closing. One homebuyer in Virginia told us their processor didn't properly review the docs, which resulted in a higher-than-expected closing cost.

Loan Estimate vs. Closing Disclosure

The Loan Estimate is a shorter document you receive within three business days after you apply for a mortgage. The format is similar to that of a closing disclosure; it includes the estimated interest rate, projected payments and closing costs if you are approved for a loan. You’ll want to review each of the line items to help you prepare for the finalized costs later.

As with the Closing Disclosure, you’ll want to verify the information is correct on the Loan Estimate (e.g., down payment amount, legal names, etc.). The biggest difference between the two documents is that the Loan Estimate is an estimate of what the lender will offer if you are approved, while the Closing Disclosure lists the final terms of your home loan.

What's in a Closing Disclosure?

Before the closing date, you’ll want to review each item in the Closing Disclosure (see an example) for any mistakes or inaccurate information.

Closing information: Shows the closing and disbursement (when the bank releases the funds) dates. You’ll want to check the sale price to ensure it’s the same price you and your real estate agent negotiated with the seller.

Transaction information: Provides information about the buyer, seller and lender. Ensure the spelling of your name matches your legal name — you can run into issues later if there are any misspellings. Also, if you changed any part of your name when you got married, verify that your current legal name is printed correctly.

Loan information: Shows the type of loan you have (conventional, FHA, VA or USDA) and the loan term. If you were expecting a fixed interest rate but your loan is described as an adjustable-rate loan next to “Product,” you’ll need to contact your lender.

Loan terms: Specifies the loan amount, interest rate, and monthly principal and interest payment amount. Remember that the loan amount will differ from the purchase amount if you are making a down payment. You’ll want to verify that the interest rate is what you expect. You’ll also want to note any prepayment penalty or balloon payment listed in this section. (Most traditional mortgages have neither.)

Projected payments: Shows the monthly payments to escrow for mortgage insurance, property taxes and homeowners insurance. Your lender will estimate these costs, add them to your monthly payment and hold the funds in an escrow account to pay taxes and insurance at regular intervals. If any of these costs aren’t set aside for escrow, like homeowners association dues, you’ll need to save for those on your own. Ensure the estimated monthly payment matches what you anticipated.

Costs at closing: Separates your total closing costs and the cash to close. All closing costs will be itemized on Page 2 so you can see the breakdown. Compare each of those costs with the ones in the Loan Estimate to ensure the total is calculated correctly, and pay special attention to the cash to close — this is how much you have to actually bring to the closing. Your lender will specify the preferred payment method.

Loan costs and other costs: Outlines all of the final closing costs associated with the loan. If the closing cost total seems wrong, check the Loan Estimate to find the issue.

Calculating cash to close: Shows the changes from the Loan Estimate to the Closing Disclosure.

Summaries of transactions: Breaks down the borrower’s transaction and the seller’s transaction. At the bottom, you’ll see the total due from the borrower at closing, the total already paid by the borrower at closing, the total due to the seller and the total due from the seller.

Loan disclosures: Gives additional loan information, like the late payment penalty, whether loan assumption is allowed and if the lender will accept partial payments. It also tells you if your loan has an escrow account.

Loan calculations: Shows the loan calculations over the course of the entire loan period, including your total loan payments and total finance charge. You’ll also see your annual percentage rate.

Other disclosures: Mentions your right to see a copy of the appraisal and tells you if state law protects you from liability if there is an unpaid balance after foreclosure. It also advises you to look over your note and mortgage (or deed of trust) for more information about defaulting on the loan.

Contact information: This is where you find contact information for your lender, the real estate brokers for the buyer and seller, and the settlement agent.

Confirm receipt: This is the signature line. It’s important to note that your signature doesn’t mean you agree to accept the loan — only that you received the document. If you find any mistakes on this form, though, alert your lender immediately so they can correct it before closing. You can wait to sign it until after you’ve talked through your concerns with your lender.

Bottom line

The Closing Disclosure is an important legal document that details your loan terms and your individual closing costs. By law, the lender is required to provide the Closing Disclosure at least three business days before the closing date.

Pay close attention to how the costs on the Closing Disclosure compare with those in the Loan Estimate, which you received after applying. Also, make sure to check for any spelling errors or other mistakes that could cause future problems.