You've found the home of your dreams. You've made the offer, and it was accepted, and you've been approved for financing. Now, you're ready to seal the deal. Here's where the fun begins. Whether buying a home, buying a car, or investing in a bit of fun in the sun with a new boat or RV, you will ultimately have to close on the loan, which can be quite a process. The better you understand what lies ahead, the better prepared you will be to avoid unpleasant surprises that could put your loan at risk. Here's what you need to know.
Closing Disclosure
The closing disclosure is a document. The document is five pages and includes all the essential information about the loan, including fees, interest rates, and repayment terms. This document must be issued to consumers at least three days before the loan's closing, allowing them to scrutinize the document for any discrepancies or to seek clarification on any details that invite questions. This three-day period is a requirement by the Consumer Financial Protection Bureau (CFPB) under the TILA-RESPA Integrated Disclosure (TRID) rule.
In most instances, the information on the closing disclosure must remain the same. However, it is unlikely that adjustable-rate loans will experience a change in interest rates during the days between the issuance of the disclosure and the actual closing of the loan. The only other information that may change revolves around third parties, including insurance premiums, recording fees, etc. It is worth noting that a new three-day review period will be required if significant changes occur, potentially delaying the closing.
Reviewing the Closing Disclosure
As discussed above, you have three days to review the disclosure with a fine-toothed comb. If you have an attorney, this is where your lawyer gets to earn that astonishing fee by reviewing the document on your behalf. If you notice any errors or have any questions, now is the time to take care of clarification and correction. Otherwise, this will be the document you go to the closing table with and, ultimately, agree to when signing for the loan.
There are a few issues that may prompt changes or adjustments to the closing disclosure, such as:
- Changing the APR for the loan.
- The discovery of prepayment penalties in the loan.
- Switching from an adjustable rate to a fixed-rate loan or the reverse.
Changes such as these will trigger an additional three-day waiting period once the revised document is issued. In other words, it is better to address necessary changes sooner rather than later – especially if you rush to close the loan.
Settlement Statement
As the name implies, the settlement statement details the agreement the borrower and lender have made. It lists the terms and conditions of the transaction and precisely what is owed to each party due to the contract. This document is commonly called the closing statement when obtaining a mortgage to purchase a home. This document will also detail any fees charged as part of the lending process, including loan origination fees, underwriting fees, title administration, search fees, etc. It helps you better understand the total costs involved in closing your loan.
The settlement statement, also known as the Closing Disclosure or HUD-1 Settlement Statement, replaced the Good Faith Estimate and Truth-in-Lending disclosures as of October 3, 2015.
Paying Closing Costs
For some, this is the most painful part of the closing process. Many feel you're spending a fortune in interest and have already spent a fair sum on appraisals, inspections, and other fees. However, the closing costs are a necessary part of the process and must be paid before closing the loan. At least for this part of the process, there's no painful reading involved. It's a simple transaction that has stalled more than its fair share of closings in the past. Be prepared and plan to have more money available than you believe you'll need in case of unexpected expenses and fees.
Signing Loan Documents
Many borrowers find that signing documents is the most time-consuming component of the closing process. That is because it generally is. In fact, you could spend quite a while signing documents longer if there are documents you haven't read and need to examine more closely before signing. For this reason, consider bringing an attorney to the closing with you to ensure no unexpected terms or conditions are hidden within the documents you sign. The documents you may be asked to sign at the closing include the promissory note, an escrow disclosure statement, and a deed of trust.
Loan Funding
This is part of the closing process when the lender delivers the money to the title or escrow company that, in return, sends the money to the seller. For many borrowers, this is considered the finish line, which certainly appears to be the finish line for those selling the property (car, home, RV, boat, etc.). Once these funds exchange hands and all the appropriate documentation is signed, you are on your way to owning the property in your own right. You have to make the loan payments according to the terms.
The funding of the loan typically happens within a few days after the signing of the loan documents. Depending on the state and lender, the funds may take a little longer to be disbursed.
After the Loan Closes
Most things will remain the same after your loan closes unless yours is an adjustable-rate loan. However, escrow payments, in the case of a mortgage loan, may change over time as insurance premiums and tax rates change. The good news is that if you pay more into your escrow account than is necessary, that money will be issued to you as a refund once you've repaid your loan in full.