Of all the mortgage closing documents you’ll encounter during the homebuying process, keep an eye out for two in particular: the Loan Estimate and the Closing Disclosure.
They’re not long and don’t contain a lot of fine print, but together, these legally required documents boil down all of the closing costs you’ll encounter when getting a home loan.
Reading them carefully can reduce last-minute loan signing drama. (“Wait, what? That’s a teaser interest rate?”)
What is a Loan Estimate?
The first of these government-mandated documents is just three pages long.
A Loan Estimate details the terms of your loan, including:
- Expenses, with clear “yes” or “no” answers to important questions, such as whether each amount can increase after closing, whether your loan includes a prepayment penalty or a balloon payment, and which expenses are included in your escrow account.
- The projected monthly mortgage payment, including taxes, insurance and other assessments.
- Estimated closing costs and the amount of cash you’ll need to have on hand at the time of settlement.
- Information on services you can, and cannot, shop for — such as pest inspections, survey fees and the appraisal.
You’ll receive the Loan Estimate within three days of submitting an application to each potential lender.
The Loan Estimate also offers data that can help you compare loan offers from multiple lenders, including total costs, the annual percentage rate — your interest rate including fees — and the amount of interest you’ll pay over the loan term, expressed as a percentage of your total loan amount.
» MORE: Calculate your closing costs
What is a Closing Disclosure?
After choosing a lender and running the gantlet of the mortgage underwriting process, you will receive the Closing Disclosure. It provides the same information as the Loan Estimate but in final form. This means that it contains the locked-in costs of your loan and the specific amount you’ll need to pay at closing.
You’ll receive this document three days before your scheduled loan closing. Use this time to review the document for any changes, comparing your Closing Disclosure with the Loan Estimate side by side.
What can cause a 3-day closing delay
Any substantial revision to the loan’s terms triggers a new three-day review. However, a change in the amount of a real estate agent’s commission, modifications to the escrow, or adjustments to prorated payments for taxes, utilities and the like don’t qualify. Only three things can reset the 72-hour clock:
- The APR increases by more than one-eighth of a percentage point for fixed-rate loans or more than one-quarter of a percentage point for adjustable-rate mortgages.
- A prepayment penalty is added to the loan terms.
- The loan product changes, such as moving from a fixed-rate to an adjustable-rate loan or to an interest-only mortgage.
2 closing documents among many
No doubt you’ll see many other documents during the loan closing. Lots and lots of them.
But these two legally binding and required documents bookend the loan process: The Loan Estimate comes after you submit an application with a lender, and the Closing Disclosure arrives when you’re nearing the get-a-mortgage finish line.