The “Know Before You Owe” Rule
Before 2015, borrowers received a mix of confusing and overlapping federal forms, like the HUD-1 Settlement Statement and the Truth-in-Lending Statement. To simplify the process and empower consumers, the Consumer Financial Protection Bureau (CFPB) introduced the “Know Before You Owe” mortgage rule.
This initiative created two streamlined forms:
- The Loan Estimate, which you receive after applying for a loan.
- The Closing Disclosure, which you receive just before closing.
This system ensures the terms you were quoted closely match the terms you agree to sign.
A Page-by-Page Guide to Your Closing Disclosure
This five-page document is designed for clarity. Here’s how to review it section by section.
Page 1: Loan Overview
This page summarizes the most critical details of your loan. Verify the following:
- Loan Terms: Check your final loan amount, interest rate, and monthly principal and interest payment. Ensure the loan type (e.g., 30-Year Fixed) is correct.
- Projected Payments: This shows your estimated total monthly payment, including mortgage insurance and funds for your escrow account (for property taxes and homeowners insurance).
- Costs at Closing: This section shows your total Closing Costs and the final “Cash to Close” figure—the amount you must bring to the closing.
Page 2: Detailed Closing Costs
This page provides a complete itemization of all loan-related costs. You’ll find lender fees, appraisal charges, title insurance fees, and other third-party service costs. Compare this page carefully against your initial Loan Estimate to spot any discrepancies.
Page 3: Calculating Cash to Close
This page shows the math behind your final costs. A “Summaries of Transactions” table acts as a balance sheet, listing debits and credits for both you and the seller. The “Calculating Cash to Close” table confirms the final amount, factoring in your deposit and any credits from the seller.
Page 4: Additional Loan Disclosures
This page contains important details about your loan obligations, including:
- Whether your loan has an escrow account.
- The fees for late payments.
- A warning if your loan includes a prepayment penalty.
Page 5: Loan Calculations and Contact Information
The final page provides more calculations, like your Annual Percentage Rate (APR), and lists contact information for the lender, real estate agents, and closing agent. When you sign this page, you are only acknowledging that you received the form. It does not obligate you to accept the loan; that happens when you sign the final loan documents at closing.
The 3-Day Review Rule
Lenders must provide your Closing Disclosure at least three business days before your scheduled closing. According to the CFPB, a business day includes all calendar days except Sundays and federal holidays. For example, if you receive your disclosure on a Thursday, the earliest you can close is the following Monday.
This mandatory period gives you time to review the terms and ask questions. If there are significant changes to the loan—such as an increase in the APR, a different loan product, or the addition of a prepayment penalty—the three-day clock resets, and you get a new disclosure and review period.
What to Check Before You Sign
To avoid delays or future problems, double-check these key areas:
- Personal Information: Verify that your name and the property address are spelled correctly. A simple typo can cause significant delays.
- Compare to Loan Estimate: Place the Closing Disclosure and Loan Estimate side-by-side. While some costs can change slightly, fees like lender origination charges have zero tolerance for increases.
- Ask Questions: If a number is different than expected or you don’t understand a fee, contact your lender or closing agent immediately. It’s their responsibility to provide a clear explanation before you sign.
For more details, you can review the CFPB’s official sample document on their consumer website.