It can be easy getting caught up in a home-buying euphoria when you’re about to close on a house, and you may be tempted to let the lender, agents and lawyers handle the paperwork. But before you make one of the biggest financial decisions of your life, you need to personally review your closing disclosure: a five-page document that provides the final details about your mortgage.
By law, you are required to receive your closing disclosure three business days prior to the closing date. This will give you time to double-check the paperwork and understand the basic terms of your mortgage. Errors or problems with your documents could delay closing or affect the cost of your loan.
Before closing day, review these five items in your closing disclosure and flag any errors. It will be easier to fix any issues before closing, instead of after the fact.
1. Your name & contact information
Make sure your name, contact information and other basic personal details are correct. Minor misspellings could cause major issues later, especially when it comes to properly reporting your loan to the credit bureaus, which affects your credit score.
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2. Basic loan details
Your loan details should outline the type of mortgage you’re taking out, monthly payments and how much you owe in total. It’s crucial that these details are correct because they define your financial obligations for your new home.
First, check the basic loan details at the top of your closing disclosure. This will include the length of the loan, purpose of the loan, product (fixed rate loan, adjustable rate mortgage, etc.) and type of loan (conventional, FHA, VA, etc.).
Next, check the loan amount, which is the total amount you will owe to your lender. This should match the number in your most recent loan estimate. If it doesn’t, you need to follow up with your lender.
Make sure the interest rate is correct because it directly affects your monthly payment. You don’t want to pay more than you have to. If you have a fixed interest rate, this will never change (unless you refinance). If you have an adjustable rate mortgage, you’ll need an explanation how your interest rate may change and if there are any limits on how much it can fluctuate. If the rate doesn’t match what you previously agreed to, call your lender.
Your monthly payment says how much you’re on the hook for every month, and there shouldn’t be any surprises here. The closing disclosure should also detail how and where your monthly payment is allocated, said Erik K. Jacobs, a real estate lawyer at Cicero, France & Alexander, P.C. Part of your payment will go to principal and interest, and part will likely go to an escrow account to pay for property taxes and insurance if you have one, he said. More on escrow later.
Remember that the amount you pay for insurance and property taxes can change over time. For example, property taxes may go up when the local government raises taxes or assesses your home’s value and decides it is worth more than when you originally purchased it.
3. Closing costs
Closing costs are the upfront fees you have to pay that don’t involve the down payment or mortgage. Closing costs typically make up 2% to 5% of the purchase price of the home and may include the loan application fee, title fees like the title search and title insurance, taxes, and insurance premiums. Make sure your closing costs match your most recent loan estimate.
If you see the phrase cash to close, it means the amount of money you need to bring to the table at closing. It includes all closing costs and any down payment you may have. Seller credits, earnest money deposits and closing costs you already paid will be credited toward this amount.
The closing disclosure will include a breakdown of how cash to close is calculated, starting with total closing costs and subtracting any credits you received or money already paid. Make sure this breakdown gives you credit for everything you should be receiving.
4. Escrow accounts
Many homeowners pay their property taxes, homeowner’s insurance and private mortgage insurance (when it applies) using an escrow account. Homeowners make monthly contributions to an escrow account, which will make appropriate bill payments on your behalf. The escrow section of your closing disclosure should explain if you have an escrow account and how much you will pay.
Usually, buyers who put up less than a 20% down payment on their home will be required by the lender to pay their taxes and insurance through a separate escrow account, which is maintained by a bank, said Jacobs. “The mortgage documents also generally explain how and when a buyer can elect not to escrow for taxes and insurance.”
5. Payment penalties
When you close on your home, you are agreeing to pay back the lender on a monthly basis according to certain terms. Make sure you understand the consequences of late payments, partial payments and paying off your mortgage early.
Late payment penalty
Make sure you understand the consequences of making a late payment. Typically you have a certain amount of time to pay your lender after the due date has passed, and then a late fee will be applied. While you should always strive to make your payments on time and in full, it’s a good idea to familiarize yourself with the late penalty.
If you can’t make a full mortgage payment in any given month, your lender may accept partial payments. If it does, it might hold that payment in a separate account rather than directly applying it to your loan. It may also charge you a late fee until you make up the shortfall, and a late payment could even land on your credit report. Make sure you understand if your lender accepts partial payments, and how they are applied. Lenders who don’t accept partial payments may return your payment in full or even begin foreclosure proceedings.
A prepayment penalty is a fee that lenders charge if you pay all or part of your mortgage early. Typically, this will only apply if you pay off your entire mortgage in a relatively short time frame ( typically three or five years). They don’t usually apply if you simply put a little extra toward your mortgage over a long period of time, but you should double check.
Image: GettyImages / Inti St Clair
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