The closing disclosure is actually 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:

Eliminate buyer’s surprise at additional last-minute fees.
Eliminate buyer’s shock at loan rate/terms changes from initial quote.
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 exact same fees and costs you will see on an estimated settlement statement displayed in different way.

Loan Estimate

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. 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 pre-payment 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.

The 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. Once the closing disclosure has been generated and acknowledged by 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 Compared to 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.

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” or Why Did the CFPB Make These Strange Groupings of Fees and Do They Hate Title Insurance?

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.