After the 2008 mortgage crisis shook the residential mortgage industry to its core, regulators stepped in with the goal of making lending more transparent and less confusing for consumers. This resulted in many new regulations with standardized procedures, requirements, documentation, and disclosures. Arguably the most important implementation to come from this overhaul was the introduction of the Loan Estimate & Closing Disclosure.
The Loan Estimate
The Loan Estimate is designed to be an upfront overview encompassing all the loan details. This document allows consumers to compare the best financing offer from each lender at the start of the loan process. The disclosure contains information about important loan features including the interest rate and a breakdown of anticipated fees/closing costs. While the figures provided on this disclosure can change throughout the loan process the lender is unable to make major changes without issuing re-disclosures.
The Closing Disclosure
The Closing Disclosure is a more finalized and detailed version of the loan estimate and is provided to the borrower toward the end of the loan process. The purpose of this document is to ensure one last time that consumers fully understand the terms of their loan. A good practice is to compare the Loan Estimate provided at the beginning of the process to the Closing Disclosure to see how the loan changed over the course of the process. Additionally, it is worth noting that there are three different Closing Disclosures: The Initial Closing Disclosure, The Final Closing Disclosure, & the Post Closing Closing Disclosure.
Understanding The Disclosures
For many individuals looking at Loan Estimates and Closing Disclosures for the first time can be a bit overwhelming. After all, it is densely packed information and industry jargon which you are likely to be unfamiliar with. The key to fully understanding these disclosures is to move section by section.
This page broadly outlines all of the identifying information, key loan terms, projected payments, and overall estimated closing costs. The big picture items are covered on this page.
This page breaks down all of the closing costs line by line. Below is a breakdown of each section in plain terms:
Section A Fees (Origination Charges)
-Fees that the lender is directly charging the consumer. These are arguably the most important fees to be aware of as they vary the most as lenders have direct control over them.
Section B Fees (Services You Cannot Shop For)
-These fees are from 3rd party companies which the lender partners or was required to use to obtain documentation for your transaction. While the fees may vary slightly from lender to lender there are typically no major differences.]
Section C Fees (Services You Can Shop For)
-These are typically Title & Escrow Fees. For refinances the lender usually uses a default company, but you can request they use your preferred company. For purchases the listing agent typically chooses their preferred title/escrow company.
Section D (Total Loan Costs)
-Total of sections A+B+C
Section E (Taxes and Other Government Fees)
-These are recording fees and transfer taxes based on your local municipality.
Section F (Prepaids)
-These are items that must be paid at the time of loan closing but would otherwise be paid regardless of whether or not you procured your loan.
Section G (Initial Escrow Payment at Closing)
-These are the initial costs required to set up an impound account for your loan. Should you choose not to have an impound account you will not see any fees here.
Section H (Other)
-This can be any fee that is not covered by all the other sections. For example, an owner’s title policy, HOA transfer fee, Home Warranty Plan and inspection fees would go in this section.
Section I (Total Other Costs)
-Total of sections E+F+G+H
-Total of D+I. All costs associated with your loan.
All Other Pages:
These pages vary slightly between the Loan Estimate and Closing Disclosure but overall provide additional loan information that the consumer might find useful. Some of the additional information contained include transaction details, lender information, loan calculations, loan comparisons,
The importance of understanding Loan Estimates and Closing Disclosures can not be overstated. Good lenders and loan originators will always offer to review these disclosures with you so that you can ask questions along the way. After all, it does make sense to ensure you fully understand what will likely be one of the largest loans you will ever take out. Feel free to give us a call at 760-930-0569 and one of our Mortgage Loan Originators will be happy to answer any questions you may have.