Closing Disclosure Forms 101

Much confusion still exists about the purpose and contents of the standardized Closing Disclosure statement used in financed real estate purchases throughout the United States.

Although this form has been in use for several years, many buyers, sellers and realtors find its contents convoluted and difficult to decipher.

The following serves as an overview explanation of the origins of the Closing Disclosure statement as well as the information contained therein.

An Introduction to Closing Disclosure Forms in the State of Florida

Federal law in the United States mandates that all residential transactions financed through a mortgage have all closing costs and fees documented in a detailed statement prior to closing.

In October 2015, the federal government introduced a standardized form known as the Closing Disclosure form to replace both the HUD-1 Settlement Statement and the Truth in Lending Disclosure stated.

While the HUD form may still be used for non-financed purchases or reverse mortgages, the Closing Disclosure must be used for all real estate purchases that are being financed by a Lender.

The Closing Disclosure is a five-page form that details all the important aspects of the subject mortgage loan, including purchase price, interest rate, taxes, loan fees, title fees and other closing costs and expenses.

As a result of the TILA-RESPA Integrated Disclosures guidelines that went into effect on October 3, 2015, Lenders are required to provide a completed Closing Disclosure statement to all borrowers at least three business days prior to closing on the purchase of the property.

This time period allows the borrowers to examine all costs and compare them to the loan estimate originally provided by their lenders. Any discrepancies can be discussed and resolved with the lenders or other third parties at that time.

Terms found on the Closing Disclosure form

The following is a list of the terms that may be found on each page of the Closing Disclosure:

Florida Closing Disclosure Form – Page One

Loan Terms – this section delineates the terms of the borrower’s mortgage by providing information on the amount to be paid and for what duration. It contains the following five sections:

• Loan amount: this is the amount the borrower is borrowing from the Lender after taking into consideration any down payment being made. Also, it indicates whether this amount may be increased after the closing. If the amount can increase, the borrower should be aware of the reasons why.
• Interest rate: this rate is the “cost” to borrower money from the Lender. This amount is determined ahead of the closing while qualifying for the loan with the Lender and is paid as part of the monthly mortgage payments.
• Monthly Principal and Interest: this sub-section illustrates the amount of the borrower’s monthly payments that represent the repayment of the loan principal, as well as, the interest rate.
• Prepayment Penalty: this sub-section indicates whether there is a fee for making advanced payments on the borrower’s loan. Not all loans contain this provision.
• Balloon Payments: Again, while not every loan contains balloon payment provisions, it is extremely important for the borrower to be aware of any such clause in their mortgage. This provision calls for a lump-sum payment due within a certain time after the inception of the loan. It is highly risky for borrowers since they will owe a huge amount all at one time.

Projected Payments – this section reflects the changes of loan payments throughout the term of the mortgage by providing the amounts due each month from year to year.

• Payment Calculation: this sub-section reflects the amount of each monthly payment that is attributed to the Principal and Interest, the Mortgage Insurance (typically due if a less than 20% down payment is paid when initially borrowing the funds), as well as, the estimated Escrow payments (property taxes and homeowner’s insurance payments).
• Estimated Total Monthly Payment: this amount totals the Payment Calculation subsection and shows the monthly payments throughout the years.
• Estimated Taxes, Insurance & Assessments: this subsection illustrates fees that may not be escrowed such as Association Assessments. These figures are important for a borrower to allow them to budget accordingly.

Costs At Closing – this section illustrates both the amount owed to the Lender and the total amount owed by the borrower to close (which may include more than just Lender costs).

• Closing Costs: this subsection provides a further breakdown of the total amount owed by the borrower to the Lender and other parties at the time of closing. Usually, it is anywhere from 2% to 5% of the total amount of the loan.
• Cash to Close: this figure shows the amount that must be paid to the title firm by the borrower at or prior to the closing in order to complete the purchase. It will always be higher than the amount of Closing Costs because it includes any down payment paid.

Florida Closing Disclosure Form – Page Two

This page contains the Closing Cost Details, which includes the loan costs and other costs incurred by the borrower.

Loan Costs – this section lists all the fees and costs associated with the borrower obtaining the subject mortgage.

• Origination Fee: this fee represents the administrative fee charged by the Lender surrounding the application and underwriting of the subject mortgage. It is usually 1% of the total loan amount.
• Mortgage Points: borrowers are permitted to buy “points” at a rate of 1% of the loan amount to reduce the ongoing interest rate. If a borrower chooses to do so, the cost is listed here.
• Application Fee: this amount varies from Lender to Lender and represents the cost of processing a borrower’s application.
• Underwriting Fee: underwriting a loan involves a comprehensive examination of a borrower’s financial picture to determine how risky of a transaction the loan would be for the Lender. This amount is usually known ahead of time and included in any loan estimate provided by the lender.
• Services Borrower Did NOT Shop For: this is a list of services chosen by the Lender that is needed to process the loan application. Such services may include property appraisal costs, credit report fee, flood zone certification etc.
• Services Borrower Did Shop For: this list represents third-party services, such as title agent fees, surveying, inspection fees etc. that the borrower is able to shop for themselves.

Other Costs – this section includes other costs such as prepaid escrows, recording costs and other third-party costs associated with the closing of the purchase.

• Taxes and Other Government Fees: this subsection includes the cost of recording documents, such as the transfer deed from the seller to the buyer and the mortgage, and any city or county transfer taxes that may be assessed on such transactions.
• Prepaids: these amounts include prepayments for certain taxes, homeowner insurance premiums, interest or mortgage insurance premiums advanced by the Lender.
• Initial Escrow Payment at Closing: this subsection, on the other hand, presents the borrower’s initial escrow payment for taxes, homeowner insurance premiums, interest or mortgage insurance premiums.
• Other: additional costs and fees associated with the closing, such as association fees, real estate commissions, title insurance etc. are typically listed in this section.

Total Other Costs and Total Closing Costs – these two sections provide a total of the other costs and a total of all costs listed on this page, respectively.

Florida Closing Disclosure Form – Page Three

This page provides a calculation of the cash needed to close, as well as, a summary of the transactions.

Calculating Cash to Close – this section reflects the amount the borrower needs to bring to the closing and includes escrow deposits already paid. It also includes a section for “Seller Credits” which represents the amount the seller is willing to contribute to the closing costs, if any. It also provides the amounts listed on the Loan Estimate for the borrower to compare to the final figures. Any discrepancy should be addressed with the Lender.

Summaries of Transactions – this section provides lists of the closing costs attributed to both the borrower and the seller, as well as, all adjustments made for the amount paid in advance by the seller such as taxes, association fees etc. It also lists the payoff amount owed to any existing loans by the seller. The section ends with a breakdown of the total owed by each party to the transaction.

Florida Closing Disclosure Form -Page Four

This page details certain Loan Disclosures about the borrower’s mortgage itself. They include:

• Assumption: this section indicates whether the mortgage loan is assumable, meaning the borrower may sell or transfer the property without much change to the original loan terms. In most cases, loans are not assumable and must be paid off at the time of the sale to be considered fully satisfied.
• Demand Feature: this section determines whether the Lender can demand early repayment of the entire loan balance, principal and interest inclusive, at a date earlier than the maturity date of the loan. This information is very important for the borrower to know prior to entering into the loan agreement.
• Late Payment: this section reiterates certain portions of the mortgage or note in that it illustrates when a payment is considered late, whether late payments are assessed and, if so, the amount of the late payment penalty.
• Negative Amortization: this indicates whether the loan provides for any interest payments not paid during the term of the loan to be added to the original principal balance of the loan and, therefore, must be paid off at the time the property is resold. This is important for a buyer to know since they must base their selling price of the property high enough to cover this negative amortized amount. Most loans do not have a negative amortization feature.
• Partial Payments: this section indicates whether the Lender may apply partial payments to the loan amount. Certain loans allow for partial payments to be applied directly to the loan amount while others require them to be held in a separate account until a full payment is available to be applied to the loan.
• Security Interest: this section confirms that if a borrower defaults on a loan and stops making payments then the Lender may foreclose the mortgage and sell the property to pay off the loan.
• Escrow Account: this section details and explains the escrow account associated with the loan. It provides the alternative costs for both escrowed and non-escrowed loans, as well as, initial escrow payments and the total monthly escrow amount.

Florida Closing Disclosure Form -Page Five

This page states Loan Calculations, Other Disclosures and Contract Information for all the professional parties. It also contains a Confirmation Receipt for the borrower to sign at the time of closing.

Loan Calculations – this section provides a summation of the cost of the mortgage to borrower over the life of the loan. It includes a total of payments, a total of finance charges, the amount being financed, the Annual Percentage Rate (APR) which is the cost of loan in terms of a rate but not the interest rate of the loan and the Total Interest Percentage (TIP) which is the total amount of interest paid by the borrower over the life of the loan as a percentage of the loan amount.

Other Disclosures – this section provides general information regarding the appraisal, contract details, liability and foreclosure, refinance options and tax deductions regarding the interest paid on amounts loaned above the value of the property.

Contact Information – this section contains the contact and license information of all the professional parties involved with the purchase transaction, including the realtors, title agents and the Lender.

Confirm Receipt – the borrower(s) must confirm receipt of the information contained in the Closing Disclosure statement. However, the acknowledgment states that signing the form does not obligate the borrower from actually accepting the loan.

Conclusion

The preceding information provides a comprehensive explanation of the various figures encountered by borrowers when reviewing their Closing Disclosure.

Since this document is provided a mere 3 days prior to closing, borrowers may not have sufficient time to fully review and understand its contents.

However, considering much of the information provided mirrors that contained in the Loan Estimate used at the beginning of the purchasing process, it is imperative that a borrower address any discrepancies or incorrect information with their Lender immediately.

Additionally, it is always wise for parties to a real estate purchase transaction to be represented by a qualified attorney to help them through the process.

Contact us directly at ASR Law Firm for answers to your questions or to obtain a free estimated quote for title insurance and associated charges for your Florida real estate closing.