Exactly how to read the Closing Disclosure Step-By-Step Line by Line.

by | Uncategorized, Indy Anna, Real Estate Investing

Exactly how to read the Closing Disclosure Step-By-Step Line by Line All 16 Points Explained.

 

Let’s Start With the Full Five Page Closing Disclosure

This is a complete example of the Closing Disclosure, I’ll put it below for you.

You can also download the .pdf version here.

You can also go to the Consumer Financial Protection Bureau’s website and download a copy here.

This is a complete example, all five pages are included then I’ll go over page and each section in more detail below.  So here’s the full Closing Disclosure:

So that’s it…

All five pages of the Closing Disclosure

Remember you can download the .pdf version of the Closing Disclosure here.

You can keep it front of you as we go through each section, let’s get started on page one.

Page One of the Closing Disclosure:

There are four sections here, first is the top main part, then the loan terms, then the projected payments and lastly the costs at closing.  We’ll start at the top and work our down, this is all on page one.

Page One Section Header

It starts with Closing Information

Here you will see the date that the closing disclosure was issued.

The closing date is the date of the closing.

The Disbursement Date is the date that the funds will be allocated to the seller, the bank, etc. 

Settlement Agent: This is where and who is handling the closing, usually the title company.

File #:  This is a reference the the title company can use to identifying this closing.

Property: This the address of the property, you want to make sure this is correct and also that they use the right legal description which is often very different than the regular address.

Sale Price: This is the full price being paid for the property, including the down payment, seller repairs, etc. this is the amount that will be recorded.

Transaction Information

Borrower/Buyer: You want to make sure the names are recorded exactly as you want them to be recorded and with the right address.

Seller: This will be the current owners of the property, the names on the deed.

Lender: The name of the bank financing the transaction in the case that a loan is being used to buy the property.

Loan Information

You don’t want to see ANY surprises here this should be exactly what you and/or your buyers expecting if there is anything off then you want get answer immediately.

Loan Term:  This is the length of the loan if the terms are followed, so if there is acceleration or extra payments this is how long the borrower will be paying on the property.

Purpose: This will note whether the loan and closing is for a purchase, refinance,etc.

 Product: The lender will usually call it this, here you will see whether the loan’s interest rate is fixed, adjustable rate (ARM), etc.

Loan Type: There are many kinds of loans but the most common are listed and will usually be conventional, FHA or VA.  We have classes on each type of them, for example you can watch the video VA loans here.

Loan ID# :  This the bank/creditor’s way of identifying this loan, like a phone number for your loan it is very specific will not be used again for any other loan.  It may include letters and/or numbers.

MIC#: This is the mortgage insurance case number.  If there is no mortgage insurance needed on the property this may be left blank or the Loan ID# may be used.  Just look out and make sure in the items below that that if you are not carrying mortgage insurance that you aren’t paying for it.

Page One, Section Two:   Loan Terms

Here the terms of your loan are detailed along with some other details about whether loan like adjustable rates or balance, if there is a prepayment penalty or a balloon payment.

Can this amount increase after closing:  This took a lot of legal fighting to get included because often banks and lenders want to hide this kind of information, make it seem irrelevant or never give a straight yes/no answer.  One of the reasons for the 2008 mortgage meltdown was because not enough people knew or understood the answer to this question of whether or not (or how much) the terms, payments or the loan itself could change and increase after closing.  This will provide a very simple, direct yes or no to answer the question.

Loan Amount: This is the exact amount that you will owe the lender, so this does not include things like your down payment.

Interest Rate:  The cost that you are going to pay for borrowing the money, again make SURE that this is what you were told before in the Loan Estimate.

Monthly Principal and Interest: This will not be the total payment you want to check that info below, this is purely referring to the amount you will pay every month just on the loan.  This includes the payments towards the principal balance (in this case $162,000) and how much goes towards the interest.

Prepayment Penalty: This will be a basic “Yes” or “No” and it tells if you have to pay a fee if you pay the loan off early for any reason.  Banks make their money on the interest so when you pay off a loan fast they don’t make as much money, a prepayment penalty helps them to make more money.

Balloon Payment:  You can see our class on this for more info on balloon payments.  This tells you if your loan has a balloon payment or not.

Page One, Section Three: Projected Payments

On a standard 30 year mortgage the payments that you make are set up in such a way that in the first few years almost all of your payment is going towards the interest.  In the last years more and more of the payment is being applied to the actual principal.  This is why so many banks always want homeowners to refinance, so that they can start the cycle over and get payments that mostly go towards the interest and not the principal.

Understanding your payments is important.  This is why you want to pay attention to this section.  This is also why the Closure Disclosure will show you the difference in payments at the start of the loan versus the end.

Payment Calculation: This is going to be an estimate of your monthly payments and the adding them up so you can see your full and total monthly payment.

Years 1 – 7:  There are a few reasons why you want to know this information.  In the case of adjustable loans the payments in later years could be much different.  In this case the payment is the same except for the $83.35 every month for the mortgage insurance.  That won’t be needed once there is enough equity.

Years 8 – 20: As I explained above if you are making payments then you want as much towards the the principle as possible.  This usually towards the end of loans and not at the start.

Principal and Interest: This tells you the payment if we just look at the loan itself it should be same as the ‘Monthly Principal and Interest’ from the section above under Loan Terms.

Mortgage Insurance: Unless the home has a substantial equity position you will need to pay for this every month until there is a good equity position.

Estimate Escrow (can increase over time).

So to take over the rest of this class will be a question that Indy Anna got about exactly how to read the closing disclosure and other paperwork.  Then she will take over and go over all the necessary items:

Here’s the question:

“I’ve never bought a home before, what do I need to look for in the closing paperwork?”

I’m going to break this down for you and put it into a checklist format in this lesson!

Exactly how to read the Closing Disclosure, here’s Our 16 Part Breakdown Step-By-Step Line by Line.

Part 1:  Name.

Everything on the closing disclosure needs to be “tight and right” to make this transaction as smooth as possible- so let’s jump right in.

The Name Part.

We aren’t using nick names or middle names as first names, etc.  This is you full legal name(s) and spelled right. If it’s not right, get it fixed right away to avoid lender and/or deed problems.

Part 2:  Loan Details.

Make sure that the Loan terms, purchase, product and loan type are correct and what you signed up for, if not call lender right away and ask why things are different.

Example:

Loan Information: Provided
Loan term: 30 years
Purpose: Purchase
Product: Fixed rate
Loan type: Conventional

Part 3:  Loan Estimate Versus Reality

The loan amount should be near most recent loan estimate that you were provided.  If not call the lender and get to the bottom of it.  If you are the agent or somebody else working with the buyer then you want to be on to of this for the buyer.

One disparity may come from closing costs.  Sometimes these are rolled into the loan which means less money up front but more payments and/or interest over time.

Example:
Loan amount: $183,000
“Can change after closing” NO

Then with things like “prepayment penalty” there may be a “Yes” with an explanation.  In that case the penalty can change or be eliminated depending on how early the loan is paid off.

Part 4:  Interest Rate.

Always check your interest rate.  If this is not correct get in touch with your lender to find out why.  You will find that sometimes changes can happen even if interest rates are “locked” in.  This can be because of credit score changes, bonus or overtime income not being able to count for total income, property apprising for less or more than estimated, etc.

Example:
Interest rate:  4.0%
“Can change after closing” NO

Many of the problems that came with ARMs came from the buyers not knowing that their rate cold change or b how much.  

Part 5:  Pre-Payment Penalty.

Make the prepayment part of the loan section is marked correctly.  Make sure it is and that you and your consumer are aware of these terms. If this is not correct then report it immediately.

Example:
Prepayment Penalty:
“Does the loan have these features?”
“Yes, as high as $5038.00 if paid off in the first two years”

Part 6:  Balloon Payment.

You want to verify this section as well and make sure that the balloon terms (if applicable) are correct.  When I work with buyers and investors I always explain this ahead of time to avoid confusion.  You can also check out my video on this HERE.

Example: Balloon payment “NO”

Part 7:  Estimated Monthly Payment.

Verify that the estimated monthly payment is close to matching most recent loan estimate.  You can also confirm with your bank that extra payments be directed immediately to the principle.  Any changes in the monthly payment may come from things like rolling closing costs or other costs into the loan.

Never, EVER assume or be afraid to ask for you and your clients.  Nobody should sign or close on a loan alone (that was for you Azam lol) or without knowing exactly what they are paying for.

Example:
Estimated total monthly payment:
Years 1-7:  $976.57
Years 8-30:  $738.19

Also make sure your clients understand that as a loan matures, more of the payments will be applied to the principle.  This is the main principle that velocity banking is based on.

Part 8:  Estimated Taxes, Insurance, etc.

It is important to know how much of a payment can be eaten by things like estimated taxes, insurance, and other assessments.  You want to make sure these amounts are correct and based on what you were told.

Example:
$413.18 /month
“This estimate includes: In escrow or not?”

Property Taxes:  YES
Homeowner’s Insurance:  YES
Home Owner’s Association Dues:  NO

The HOA fees can be a real big deal so make sure your buyer knows about this.

Part 9:  Closing Costs.

These are usually surprising for new buyers so make sure you have explained this correctly and there are no surprises.  You want to see a detailed breakdown and not let any BS fees go through.  The better your relationship with title companies and attorneys the better pricing you can get on closing costs.

Example:
$8,112
“Includes $5112 in loan costs + $3000 in other costs + $0 in lender credits”

Make sure you know exactly what those “other costs” are and why you or your buyer are paying them.

Part 10:  Cash to Close.

This tells you how much money you need to bring to closing.  Verify cash to close reflects closing costs and any other fees accurately.  These detailed costs should be laid out on page 3 of the closing disclosure forms. 

Example:
$10,112
“Includes closing costs. See cash to closing details on page 3”

Part 11:  Services Borrow Did/Did Not Shop For.

There are things that people “shop” for and those costs are usually items like  survey fee, title search, inspections, etc.  Then there are services that you normally don’t “shop” for like credit report fees, tax monitoring fee, tax status research fee, etc.  So in this section the Closing Disclosure will break down which ones are which.

Some of these can be BS so make sure your Loan Estimate was accurate and you get clarity on any surprises.  

Example:

Services borrower did not shop for:
Appraisal fee:  $295.00
ABC Appraisal Borrower Paid:  $295.00
Seller Paid:  $0
Others Paid:  $0

Credit Report:  $29.00
ABC Credit Co.
Borrower Paid:  $29.00
Seller Paid:  $0
Others Paid:  $0

Tax Monitoring Fee:  $79
ABC Tax Co.
Borrower Paid:  $79.00
Seller Paid:  $0
Others Paid:  $0

Part 12:  Serviced Borrower Did Shop For.

These are things that you typically knew about or “shop for” yourself or have choices in who was used, when and why.  In most cases the buyer will choose the providers that are given to them from the bank or lender.  You want to make sure each of these is clearly explained and you recognize and agree with each item.

Example:

Pest Inspection: $89.00
ABC Pest Co.
Borrower Paid: $89.00
Seller Paid: $0
Others Paid: $0

Survey: $55.00
ABC Survey
Borrower Paid: $55.00
Seller Paid: $0
Others Paid: $0

Title Search: $300.00
ABC Title
Borrower Paid: $300.00
Seller Paid: $0
Others Paid: $0

Title insurance: $500.00
ABC Title
Borrower Paid: $500.00
Seller Paid: $0
Others Paid: $0

Part 13:  Additional Loan Information.

Under Additional loan information you will find how much of a penalty there will be for late payments and any other potential charges that would be outside the normal loan information.  

Example:
“If your payment is more than 15 days late, your lender will charge a late fee of 5% of the monthly principal and interest payment.”

Part 14:  Escrow Account Info.

Under “Additional Loan Information” you will find out if you will have an escrow account and the details of it.

Example:
Escrow property costs over 1 year: $2,885
Escrow property costs include property taxes and property insurance

Non Escrow Property Costs Over 1 Year:  $386
Estimated property costs for non-escrowed property costs.
Home owner’s association dues

Initial escrow payment: $538 a cushion the amount in escrow you pay at closing

Monthly escrow payment amount: $202.19
This amount is included in your monthly payment

Part 15:  Escrow Account Waiver Fee.

This is also “Under Additional Loan Information” and you will see if there is a fee for not having an escrow account.  If you want to have escrow account and it is not set up then you can ask your lender to do it or you can set it up by yourself with your bank.

Example:
Escrow Waiver Fee:  $0

Part 16:  Contract Details.

In this section you will see a breakdown of the following info below.

Example:

See your note and security instrument for information about:

–  What happens if you fail to make your payments
–  What is a default on your loan
–  Situations in which your lender can require early repayment of
the loan and
–  The rules for making payments before they are due

Okay so…

Those are the 16 parts of the “Closing Disclosure” and how to fix any problems.

What you’ve learned in this lesson: The 16 parts of the closing

disclosure broken down piece by piece and what to do for each item
that could be wrong. Remember, this is the time to say something if

there are corrections that need made or the numbers don’t match your
most recent loan estimates.

Thanks much!

Make the Universe Smile.

~ Indy Anna

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