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How to Compare the Closing Disclosure to the Loan Estimate
At the beginning of the mortgage process, the lender is required to provide you Loan Estimate that outlines a good faith estimate of key mortgage terms such as interest rate and closing costs within three business days of submitting your mortgage application. At the end of the mortgage process, the lender is required to provide you a Closing Disclosure that outlines the final, actual terms of the mortgage at least three business days before the mortgage closes. Below we review how to compare the Closing Disclosure to the Loan Estimate so that you can understand if your mortgage terms changed and by how much.
Review the Closing Disclosure and the Loan Estimate Side-by-Side
You should compare the Closing Disclosure with the Loan Estimate to ensure that your final, actual mortgage rate and closing costs did not increase significantly as compared to the initial terms provided by the lender in the Loan Estimate. The key items to review when comparing the Closing Disclosure and Loan Estimate are mortgage rate (middle of page one of the Closing Disclosure) and total closing costs (bottom of page one of the Closing Disclosure).
- Review How to Use a Loan Estimate
Compare the Key Figures Outlined in the Documents Including Your Mortgage Rate and Closing Costs
If the figures and information in the Closing Disclosure and Loan Estimate match or are relatively close, then you are all set to close your mortgage. Significant differences between the Closing Disclosure and Loan Estimate such as an increase in mortgage rate or higher closing costs may be a sign that the lender has “bait and switched you” -- promised you one set of terms but delivered another set of terms that cost you more money.
If there are meaningful discrepancies between the Closing Disclosure and the Loan Estimate, ask the lender for an explanation and do not sign the loan documents. You should cancel (also known as rescind) the mortgage if you are not satisfied with the lender’s explanation and the differences cannot be resolved. You can cancel your mortgage at any time before you sign loan documents and you are free to work with a different lender. Although you may be out non-refundable costs such as your appraisal fee and certain lender fees, canceling a bad mortgage can save you much more money over the life of the mortgage. Please note that for a mortgage to buy a home, you cannot cancel your loan after you have signed loan documents.
One way to prevent changes in your loan terms is to lock your mortgage. When you lock your loan, your interest rate, closing costs and other key terms are set for a fixed period of time, usually between 30 and 60 days. Your lock period should be long enough to close your mortgage. Locking your loan helps you avoid bait and switch by lenders and also protects you if interest rates increase over the course of the mortgage process.
Understand What Mortgage Costs Can Change and by How Much
According to the regulations that govern the mortgage process, there are specific rules about how mortgage costs can change and increase from the beginning of the mortgage process to when your loan closes. The rules are designed to prevent lenders from quoting one set of mortgage terms upfront to win your business and then attempting to charge you a higher interest rate or fees prior to closing when you are under pressure to complete your home purchase. In general the mortgage rate and closing costs outlined in the Loan Estimate should match the Closing Disclosure.
A lender may charge the borrower higher costs than the amount disclosed on the Loan Estimate when changed borrower or mortgage circumstances permits the cost to increase. Examples of these circumstances include:
- An event beyond the control of the the borrower and the lender occurs;
- Information the lender relied upon is inaccurate; or
- The lender finds new, material information about the borrower or mortgage such as an updated borrower credit score or a revised property value after receiving the appraisal report
If the actual closing costs paid by the borrower at closing exceed the amounts disclosed on the Loan Estimate beyond the limits and rules outlined below, the lender must refund the excess costs to the borrower within 60 calendar days of the mortgage closing
For the following items the lender may charge the borrower more than the amount on the Loan Estimate without any limit:
- Prepaid interest: this is interest the borrower pays the lender in advance at mortgage closing (for interest from the day your mortgage closes until the end of the month in which your mortgage closes). The amount of prepaid interest depends on the day of the month the mortgage closes so it is subject to change because it is not possible to predict when your mortgage will close at the start of the process
- Homeowners insurance premiums: the borrower typically selects the homeowners insurance company so he or she is responsible for potential changes to the premium cost
- Amounts placed into an escrow, impound or trust account: The lender may require the borrower to place money into an escrow, impound or trust account to cover one-to-four months of property taxes and two months of homeowners insurance and mortgage insurance (if applicable)
- Services required by the lender if the lender permits the borrower to shop and the borrower selects a service provider not on the lender’s approved list: Because the borrower has selected service providers not on the lender’s approved list he or she is responsible for cost increases even though the services are required by the lender
- Charges paid to third-party service providers for services not required by the lender: In some cases the borrower may elect to hire service providers to perform services not required by the lender, such as a property inspection. The borrower is responsible for these costs
For the following items, the lender may charge the borrower more than the amount disclosed on the Loan Estimate as long as the total sum of the costs added together does not exceed the sum of the costs disclosed on the Loan Estimate by more than 10%:
- Recording fees: fees paid to local governments to record the mortgage
- Charges for third-party services where the charge is not paid to the lender and the borrower selects a service provider on the lender’s wish list: Examples of these cost items include title insurance and settlement agent fees
For all other cost items, lenders are not permitted to charge consumers more than the amount disclosed on the Loan Estimate under any circumstances other than changed circumstances that permit a revised Loan Estimate. The cost items include:
- Fees paid to the lender or mortgage broker: examples include the interest rate and any lender or origination fees
- Fees paid to a third party service provider if the lender did not permit the borrower to shop for the service provider: Examples include the appraisal report fee, credit report fee and tax service fee
- Transfer taxes: This is a tax paid to a local government when a property is transferred from one owner to another owner. This fee is usually paid for by the property seller
Know What to Do if You Find Discrepancies Between the Closing Disclosure and the Loan Estimate
If any of your final loan terms increase more than the guidelines specified above, you should immediately contact your lender to understand the discrepancy. Your goal is to work with your lender to make sure that you are not overpaying for your mortgage.
If you cannot resolve the differences, then you should consider canceling your loan and working with a different lender. While this involves extra time and effort on your part, it may save you thousands of dollars in the near and long term. When done correctly, comparing the Closing Disclosure to the Loan Estimate can help you ensure that your final loan terms are fair and accurate.
If you are considering switching lenders we recommend that you contact multiple lenders in the table below to compare loan proposals. If you change lenders make sure that your new lender can close your mortgage within your desired time frame.
Sources
“Can my final mortgage costs increase from what was on my Loan Estimate?” CFPB. Consumer Financial Protection Bureau, September 13 2017. Web.
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