Understanding the Loan Estimate (LE) and Closing Disclosure (CD): What Are They?

Posted On: February 15, 2021
By: Matt Fuller

Posted On: February 15, 2021

Your lender is obligated to provide key documents, including a loan estimate and closing disclosure, as part of their legal responsibilities. Learn about the contents of these documents and the legally mandated timeline for their delivery.

Two critical documents – the loan estimate and the closing disclosure – are legally required in the home loan process. These documents, aimed at safeguarding homebuyers, offer transparent insights into the costs associated with their home loan.

The closing disclosure is two documents that a buyer with a loan will receive during their purchase transaction. Sellers do not generally receive closing disclosures unless they are providing seller financing for the sale to the buyer. The closing disclosure documents were part of reforms coming out of the Great Recession

. CDs are the federal government’s attempt to:

  1. Eliminate buyer’s surprise at additional last-minute fees.
  2. Eliminate buyer’s shock at loan rate/terms changes from the initial quote.
  3. Bring greater transparency to escrow fees, who pays them, what is negotiable, and which are required.

The closing disclosure is not the same as an estimated settlement statement, although the fees/costs seen on a Closing Disclosure are the same fees and costs you will see on an estimated settlement statement displayed differently.

What Is A Loan Estimate (LE)?

Buyers receive their first closing disclosure – the Loan Estimate – at the beginning of the escrow, generally after their offer has been accepted and before their appraisal has been ordered. A Loan Estimate (LE) is a detailed three-page form providing key information about the mortgage loan you are evaluating. Federal law mandates buyers receive this document up front and that the appraisal cannot be ordered until a set amount of time has passed to give the buyer the right to change their mind. While it is a nice gesture, the contract ratified by buyer and seller is the ultimate governing document about contingencies and cancellations in your specific real estate trade.

Page 1 of the loan estimate explains the type of loan you are getting, how much it will cost on a monthly basis, and what your total estimated closing costs and cash to close will be.

What is your total loan amount, interest rate (not APR), monthly PITI, and does your loan have a prepayment penalty or a balloon payment? Your loan estimate will also contain a date that your quoted loan rate expires, known as a rate lock. Extending rate locks can be expensive, make sure your purchase can realistically close before your rate lock expires or budget for an extension, if one is available.

What is your estimated monthly payment and what other costs does it include?

 

Page one also estimates your total closing costs and estimated cash to close. These numbers will be used as a baseline and the closing disclosure will compare how this has changed as the transaction has occurred.

What Is A Closing Disclosure?

The second document – typically known as the CD or Closing Disclosure – comes toward the end of escrow, and is required before the lender can generate loan documents for buyer signature. The Closing Disclosure (CD) is a comprehensive five-page document outlining the final details and expenses of your mortgage loan. Once the closing disclosure has been generated and acknowledged by the buyer, the buyer must wait three business days (cooling off period) before they can sign their loan documents and proceed with the closing.

For the purposes of calculation, business days are Monday – Saturday, with the exception of federal holidays. Day 1 is the day after the documents are acknowledged by a buyer. Loan docs can be signed on the third day. For example, if a buyer acknowledges documents on a Monday, day 1 is Tuesday and they could sign anytime on Thursday.

Have any of the most important terms to your loan changed?

Has the monthly payment amount changed? Has what is included in your payment changed?

What is the new total estimate of closing costs and cash to close based on changes during escrow?

Loan Estimate vs Closing Disclosure

The loan estimate and closing disclosure are designed to be easily compared by a buyer so that they can understand how the loan estimate changed during the transaction. The closing disclosure will contain a section titled “Calculating Cash to Close” with side-by-side comparisons between your original loan estimate and your final loan.

Loan Estimate vs Closing Disclosure: What’s the Difference?

The primary distinction between the Loan Estimate and the Closing Disclosure lies in their timing and detail level in the mortgage process. The Loan Estimate is provided early, within three business days of applying for a mortgage, offering an estimated overview of the loan’s terms, rates, and costs. It serves as a preliminary guide for borrowers to compare and understand potential mortgage expenses. 

In contrast, the Closing Disclosure is a detailed, final document received at least three business days before the mortgage closing. It presents the definitive terms, exact costs, and final details of the mortgage loan, ensuring that all elements are agreed upon before finalizing the agreement. These documents bookend the mortgage process, with the Loan Estimate starting the journey and the Closing Disclosure concluding it, providing clarity and transparency at each stage.

What Can and Can’t Change Between a Loan Estimate and Closing Disclosure

  • Fees buyers have little to no choice in can increase the least (0%).
  • Fees for items that the buyer can shop for can increase a little (up to 10%).
  • Items that are not “costs” but related/required like pre-paid interest or optional like buyer/seller credits can vary the most.

The Price is Right

In general, the closing disclosure works like the game show “The Price is Right.” If the closing disclosure is equal or less than the loan estimate, you’re a winner and can proceed to the closing after three business days.

If the cash to close is 10% higher on the closing disclosure than the loan estimate, the schedule for closing will likely be delayed by a few days at least and a refund for the difference must be issued to the buyer after the close of escrow

How the Consumer Financial Protection Bureau Looks at Closings, Fees, and Costs  – “Page 2” 

If you want to get wonky, keep reading…

The CFPB groups costs for buying or selling a home into groups that make sense to the government but no one else. Here’s how they group the costs.

  • Group A: Loan Costs. Any points paid to buy down the interest rate, application, underwriting fees.
  • Group B: Services You Cannot Shop For (appraisal, credit report, flood or tax monitoring, for example).
  • Group C: Services You Can Shop For (inspections, surveys, insurance, lender’s title, escrow fee).

 

When you add A+B+C you get D, what the government calls the “Total Loan Costs” even though that’s a horribly misleading name.

Other Costs

  • Group E: Taxes and Other Government Fees (transfer taxes, recording fees, all but property taxes).
  • Group F: Prepaids are things that are paid in advance; some may be prorated between the buyer and seller based on closing date. Examples include insurance premiums paid in advance, PMI, and pre-paid interest. Property taxes may be paid in advance and prorated between the buyer and seller.
  • Group G: Impound Account. If a buyer is handling future insurance and tax payments through their lender with an impound account, the amounts collected in advance will go here.
  • Group H: Other. The CFPB really wants you to know that the owner’s title insurance policy is optional. It’s a Group C cost that gets its own group because the CFPB wants to call attention to the fact — again — that it’s optional.

When you add E+F+G+H you get I, Total Other Costs.

 

Adding D (total loan costs) to I (total other costs) gives us J, the Total Closing Costs prior to any lender credits.

Which Leads to the CFPB estimate of your Cash to Close

How the Consumer Financial Protection Bureau estimates a buyer’s cash to close on the loan estimate and closing disclosure.

Partner with a Local San Francisco Real Estate Agency with You in Mind

Jackson Fuller Real Estate is an invaluable resource for those looking to buy or sell homes in San Francisco. Our team offers expertise and personalized service, assisting clients in finding the right property or navigating the complex process of selling real estate in San Francisco. Reach out for guidance and support in your San Francisco real estate journey. Speak to an agent now or whenever you are ready! 

Frequently Asked Questions

What does LE and CD mean in real estate?

LE and CD stand for Loan Estimate and Closing Disclosure, respectively. They are two crucial documents you’ll encounter during the home buying process in the US, mandated by the Truth in Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA).

Loan Estimate (LE):

  • An early snapshot of your loan terms and estimated closing costs, provided within 3 business days of submitting a mortgage application.
  • Offers an initial picture of your monthly payment, interest rate, and potential fees associated with the loan.
  • Not final, but serves as a baseline for comparison as you progress with your loan options.
  • The final breakdown of your loan terms and closing costs, delivered 3 business days before closing.
  • Reflects any changes since the LE, ensuring transparency and accuracy of the costs you’ll incur.
  • Serves as the official document you sign at closing, finalizing your loan agreement

What is the main purpose of a Loan Estimate in the mortgage process?

The Loan Estimate, a standardized 3-page form, is your key to understanding a mortgage offer. It details the estimated interest rate, monthly payment, closing costs, and other loan terms. Compare Loan Estimates from different lenders to choose the best deal and budget effectively for closing costs. Remember, it’s an estimate, not a final quote, but it empowers you to shop smart for your mortgage

What specific information is included in a Closing Disclosure?

The Closing Disclosure, a crucial five-page document, holds the final details of your chosen mortgage before you officially seal the deal. This information empowers you to review and confirm everything aligns with your expectations, ensuring a smooth and transparent closing process. Remember, the Closing Disclosure is your final chance to ensure transparency and understanding before committing to your mortgage.

How do Loan Estimate and Closing Disclosure requirements differ for refinancing?

While the core requirements for Loan Estimates and Closing Disclosures remain similar for refinancing and purchase mortgages, some key distinctions emerge:

Loan Estimate: When refinancing, the Loan Estimate explicitly specifies the purpose as “refinancing your current mortgage.” It dives into details of your existing loan, including the current interest rate, remaining balance, and the amount needed to pay it off. Additionally, it highlights potential savings or changes brought about by the refinance, such as a projected reduction in your monthly payment.

Closing Disclosure: Unlike in purchases, the Closing Disclosure for refinancing may reflect additional fees unique to the process, such as early payoff penalties or fees associated with assuming the existing loan. It also details how the loan proceeds will be used, typically covering the payoff of your current mortgage and any closing costs. Changes to escrow accounts, like transferring existing funds or establishing new ones, are also often outlined in the disclosure.

In essence, both documents adapt to provide information specific to the refinancing process while upholding the fundamental principles of transparency and cost comparison for borrowers.

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