Closing Disclosure Form The Closing Disclosure form is designed to detail all financial particulars of a transaction and it must be delivered to the borrower at least three days before closing. It might help in understanding the charges if you can look at a blank, annotated Closing Disclosure form. Click on the link to the Closing Disclosure and print off a copy to look over as we continue our discussion. Closing Disclosure The Closing Disclosure is a five-page document. Note: Depending on the type of loan the borrower is receiving, pages 1, 4, and 5 of the disclosure could look different. Pages 2 and 3 will always look the same, regardless of the loan type. This particular form shows the information that would be needed for a conventional, FHA, or VA loan. Closing Disclosure - Page 1 At the top of the first page of the form are three sections: Closing information Includes date issued, closing date, disbursement date, settlement agent, file number, property address, and sale price Transaction information Includes names and addresses for both the borrowers and sellers Loan information Includes the loan term, purpose of the loan, product type, loan type and loan ID number Loan Terms This section of page 1 gives the exact figures for the loan amount, interest rate, and monthly amounts can increase after closing. It also indicates whether or not there is a prepayment penalty or balloon payment with the loan, and if so, gives the specifics that apply to that feature. Projected Payments This section of page 1 shows the actual payments the borrower will make for principal & interest and mortgage insurance, an estimated amount for the escrow payment, and the total estimated monthly mortgage payment. This section also gives an estimated monthly amount for taxes, insurance, and assessments and specifies whether or not the money for these payments will be in escrow. 1
on page 2) and the total amount the buyers need to bring to closing (which includes the closing costs and other amounts that are detailed on page 3). Closing Disclosure Page 2 Page 2 of the disclosure gives the details of the closing costs. The page is divided into four columns: Column 1 Description of the costs Column 2 Costs paid by the borrower Column 3 Costs paid by the seller Column 4 Costs paid by others Loan Costs The first section deals with the loan costs: A. Origination charges - Items such as points, application fee, and underwriting fee B. Services the borrower did not shop for - These are items the lender requires for the loan, such as appraisals and credit reports. C. Services the borrower did shop for - These are items the borrower can get on his own, such as pest inspections, survey fees, and title insurance. D. The total of the costs of A, B, and C above Other Costs The next section deals with other costs: E. Taxes and other government fees - Items such as recording fees and transfer taxes F. Prepaids - taxes. G. Initial escrow payment at closing - An escrow account is an account where money is held for certain payments until they are paid out typically for insurance and taxes. The lender gives the borrower a statement that tells how much money it requires the borrower to put into the account each month. H. Other costs not covered elsewhere on the disclosure - Items such as HOA fees, home warranty fees, home inspection fees, and real estate commission I. The total of the costs of E, F, G, and H above 2
Section J gives the total closing costs to the borrower (D + I from above). This total will be Calculating Cash to Close Closing Disclosure Page 3 Closing costs are only part of the cash a borrower needs to bring to closing. The top of page 3 shows how the final costs of the loan compare to the Loan Estimate the lender originally provided to the borrower and then calculates the amount of cash the borrower will need at closing. This calculation includes such items as costs paid before closing, down payment, deposits, seller credits, adjustments, and other credits. Summaries of Transactions This section is divided into two columns. The left column summa transaction and includes: K. Due from the borrower at closing This includes the sale price of the property and any adjustments for items paid by the seller in advance. L. Paid already by or on behalf of borrower at closing This includes deposit, loan amount, loan assumptions, seller credits, other credits, and adjustments for items unpaid by the seller. The calculation at the bottom of the left column subtracts the totals already paid by the borrower from the total due from the borrower and results in the Cash to Close due from the borrower at closing. This total is the same figure that appears on the bottom of page 1 and includes: M. Due to seller at closing This includes the sale price of the property and any adjustments for items paid by the seller in advance. N. Due from seller at closing This section includes closing costs the seller will pay, payoff of any first or second mortgages, seller credit, and adjustments for items unpaid by the seller. The calculation at the bottom of the right column subtracts the total due from the seller from the total due to the seller and results in the Cash to Seller, which is the amount the seller will receive from the borrower at closing. Note: This last line on page 3 is important because it shows how much cash the borrower needs to bring to closing and how much cash the seller will receive at closing. 3
Page 4 details the Loan Disclosures. It covers: Closing Disclosure Page 4 Assumption Indicates whether or not the lender will allow a loan assumption on a future sale or transfer Demand feature Indicates whether or not the loan has a demand feature, which would allow the lender to require early repayment Late payment States what late fee the lender will charge Negative amortization Indicates whether or not the loan has a negative amortization feature, which could result in the loan amount becoming larger than the original loan amount, resulting in a decrease of the equity the borrower has in the property Partial payments Indicates whether or not the lender would accept partial payments on the loan Security interest Lists the address of the property securing the loan Escrow account Breaks down what is and what is not included in the escrow account Page 5 includes the following sections: Closing Disclosure Page 5 Loan Calculations Details the total amount of all payments on the loan, the dollar amount of the finance charges over the life of the loan, the amount financed, the annual percentage rate (APR), and the total interest percentage (TIP) Other Disclosures States other important information for the borrower to know including whether or not the borrower would have any protection from liability for the unpaid balance in the event of a foreclosure Contact Information Gives firm names, addresses, license numbers, contact names, email addresses, and phone numbers for persons involved in the transaction. Confirm Receipt A place for the borrowers to sign confirming receipt of the Closing Disclosure document. Signing the document does not indicate acceptance of the loan. Sample Closing Disclosure Closing Disclosure form for a conventional, 30-year, fixed-rate mortgage. Page 1 of this sample shows the closing, transaction and loan information across the top of the page. http://files.consumerfinance.gov/f/201311_cfpb_kbyo_closing-disclosure.pdf In the loan terms section, you see that the loan amount is $162,000, the interest rate is 3.875%, and the monthly payment is $761.78, incuding interest. The document states that none of those amounts can increase after closing. This section also indicates this loan is subject to a prepayment penalty. 4
The projected payments section shows payment calculations for years 1-7 and then for years 8-30 of the loan term. This section also gives an estimated monthly amount for taxes, insurance, and assessments and specifies whether or not the money for these payments will be in escrow. The bottom of page one shows the closing costs of $9,712.10, which were calculated on page 2 of the form and then posted here. It also shows that the borrowers will need to bring cash in the amount of $14,147.26 to the closing. This figure was calculated at the top of page 3 and Loan Costs Sample Closing Disclosure-Page 2 A. Origination charges - Points, application fee, and underwriting fee B. Services the borrower did not shop for Appraisal, credit report, flood determination fee, flood monitoring fee, tax monitoring fee, and tax status research fee. C. Services the borrower did shop for - Pest inspection, survey fee, title insurance binder, D. The total loan costs for this borrower come to $4,694.05. Note: All of these costs will be paid by the borrower, except for the appraisal fee which is Other Costs The other costs section itemizes costs for both the borrowers and the sellers: E. Taxes and other government fees - Recording fees will be paid by the borrower and the transfer taxes will be paid by the seller. F. Prepaids - will be paid by the borrower. G. Initial escrow payment at closing T H. Other - paid by the borrower; the borrower and the seller will split the home inspection fee; the seller will pay the home warranty fee and the real estate commission. I. The total of the costs of E, F, G, and H that the borrower will pay 5
Section J gives the total closing costs of $9,712.10 to the borrower (D + I from above).this is Closing s what the seller will be paying at closing (along with what has been paid before closing and what has been paid by others). Calculating Cash to Close Sample Closing Disclosure-Page 3 The top of page 3 shows how the final costs of the loan compare to the Loan Estimate the lender originally provided to the borrower and then calculates the amount of cash the borrower will need at closing. The amount of $14,147.26 is the final amount of cash the borrower will need to bring to closing. Summaries of Transactions As we mentioned earlier, this section is divided into two columns. The left column and includes: K. Due from the borrower at closing This includes the sale price of the property, the closing costs paid at closing, and the adjustments for HOA dues paid by the seller in advance. L. Paid already by or on behalf of borrower at closing This includes the deposit, loan amount, seller credit of $2,500, a $750 rebate from the title company, and an adjustment for city taxes unpaid by the seller. The calculation at the bottom of the left column subtracts the totals already paid by the borrower from the total due from the borrower and results in the Cash to Close due from the borrower at closing. This total is the same figure that you see on the bottom of page 1 The right column of page 3 summarizes the and includes: M. Due to seller at closing This includes the sale price of the property and an adjustment of $80 for HOA dues paid by the seller in advance. N. Due from seller at closing This section includes closing costs the seller will pay, payoff of the first mortgage, seller credit of $2,500, and the adjustment for the city taxes unpaid by the seller. 6
The calculation at the bottom of the right column subtracts the total due from the seller from the total due to the seller and results in the Cash to Seller, which is the amount the seller will receive from the borrower at closing. Note: This last line on page 3 is important because it shows how much cash the borrower needs to bring to closing and how much cash the seller will receive at closing. Page 4 details the Loan Disclosures. It covers: Sample Closing Disclosure-Page 4 Assumption Indicates whether or not the lender will allow a loan assumption on a future sale or transfer Demand feature Indicates whether or not the loan has a demand feature, which would allow the lender to require early repayment Late payment States what late fee the lender will charge Negative amortization Indicates whether or not the loan has a negative amortization feature, which could result in the loan amount becoming larger than the original loan amount, resulting in a decrease of the equity the borrower has in the property Partial payments Indicates whether or not the lender would accept partial payments on the loan Security interest Lists the address of the property securing the loan Escrow account Breaks down what is and what is not included in the escrow account Page 5 includes the following sections: Sample Closing Disclosure-Page 5 Loan Calculations Details the total amount of all payments on the loan, the dollar amount of the finance charges over the life of the loan, the amount financed, the annual percentage rate (APR), and the total interest percentage (TIP) Other Disclosures States other important information for the borrower to know including whether or not the borrower would have any protection from liability for the unpaid balance in the event of a foreclosure Contact Information Gives firm names, addresses, license numbers, contact names, email addresses, and phone numbers for persons involved in the transaction. Confirm Receipt A place for the borrowers to sign confirming receipt of the Closing Disclosure document. Signing the document does not indicate acceptance of the loan. 7
Review Much of what the broker does to facilitate a closing happens during the period between the signing of the agreement of sale and the actual closing date. Many times the broker is involved in ordering inspections, surveys or appraisals. The agent can also help the buyer find a mortgage lender or help schedule needed repairs to the property. Closing Instructions Form CL8-8-10 is the mandatory form to be prepared by the broker during the negotiations for the purchase of property. The Closing Instructions are the escrow agreement between the closing company, the buyer and the seller. The duties of the closing agent include the following tasks: Prepare Closing Instructions. Obtain signatures. Order title report. Prepare list of required loan documents and send to lender. Receive and review title report. Contact lender to be sure lender has all documents necessary for loan application. Request name search and investigate tax or other liens. Follow up with lender on loan approval and verify terms. Follow up to see that all conditions to the contract have been fulfilled. Prepare deed, deed of trust, promissory note and other documents necessary for closing. Prepare closing statements, settlement statement. Handle closing: obtain signatures on all documents, verify availability of good funds, and disburse funds. Forward documents to the title company. Return loan documents to the lender. Send documents for recording. Withhold funds as required and transmit to IRS or State. Close file and do accounting. Forward final documents to all parties. As with a broker, much of what the lender does relating to the closing happens long before the closing date comes. Lenders typically require at the very least a title insurance policy and a homeowner's insurance policy. Depending on the individual circumstances, a lender might also ask for a survey and inspections. Lenders can also require the borrower to maintain an escrow account for property taxes and insurance Depending on the type of loan being issued, the lender may also require private mortgage insurance. 8
RESPA requires lenders to use the Closing Disclosure form to detail the costs that the buyer and seller will pay at closing. After-closing activities include: Issuance of the Title Policy Delivery of the Deed IRS Reporting After the transaction has closed, your goal should be to build a lasting relationship with your clients. Perhaps the most important thing you can do to get and keep clients is to set a high standard of ethical behavior for yourself. 9