What's The Difference Between a Closing Disclosure and a Settlement Statement?

photo by Alena Darmel

Whether you're the buyer or the seller, the final part of most real estate journeys is the home closing process. And one important aspect of closing is the settlement statement... or is it the closing disclosure? These two terms can sometimes make things more confusing than they have to be, so today I'll be clearing up the confusion to help make your closing that much easier.

Here's where the confusion starts. The terms "Settlement Statement" and "Closing Statement" are interchangeable. Although "Settlement" is what is typically used within real estate. These terms are used for the document provided to the home seller to help them understand their costs and payouts.

In contrast, the term "Closing Disclosure" is the term used for the document that's specific to the buyer and the fees they incur.

Definition of a Settlement Statement

A settlement statement is an itemized list of fees and credits involved in the entire real estate transaction. This document is a detailed account of what funds like real estate agent commissions, taxes, etc. are owed by the seller.

Of particular interest to the seller is the final entry of the statement which shows the net proceeds they'll receive and what the buyer owes.

What's in a Settlement Statement

Debits vs. Credits

Your settlement statement will be organized into debits and credits in the same way your checking account statement would be. The debits are going to represent the expenses you're incurring while the credits will represent any deposits or increases to the final balance.

Financial

The amount the home buyer is paying for the home will be listed under the "Financial" label on the settlement statement and then any items being debited against that price will be listed.

Next will be listed any personal property such as furniture or appliances the seller has agreed to sell to the buyer. These will be listed as credits to the final balance.

Any repair credits or any of the buyer's closing costs the seller has agreed to pay will also be listed.

The earnest money deposit minus the agent commission is the excess deposit (See explanation of "Excess Deposit" below). All remaining funds will go to either the seller or settlement agent.

"Deposit including earnest money" is exactly what it says, the amount the buyer put down in good faith, including the deposit after the seller accepted the offer.

The Loan Amount is how much the lender is financing toward the purchase of the home.

Existing Loan(s) Assumed only applies if the buyer is taking over the seller's existing mortgage such as in the case of a VA loan transfer, etc.

Prorations / Adjustments

This section will list items such as the property taxes or HOA dues the seller will owe leading up to the time the keys are handed over to the new owner.

Each locality may have taxes specific to their area to consider such as garbage pickup, wastewater, etc. as well as different tax schedules.

If the closing date is March 10th and the seller's tax bill for January through April is due May 1st - the seller is responsible for the taxes from January through the closing date of March 10th and the buyer will be responsible for taxes from March 11th through May 1st.

Likewise, a seller credit in this section indicates the amount the home buyer will owe for any prepaid taxes or payments. In South Carolina, our taxes are paid in arrears. On a settlement statement, we will see the sellers give a credit to the buyers for their portion of the year's taxes.

Loan Charges to Lender 

Loan Charges will detail the charges from the buyer's mortgage lender. If the buyer has negotiated with the seller to pay some of these costs, that debit will also be listed here.

If the buyer has made an upfront payment to lower their interest rate, they'll be listed here as mortgage points.

Application Fee

The application fee is charged to the buyer for processing the loan application.

Origination Fee

The origination fee is also charged to the buyer for preparing and evaluating the loan.

Underwriting Fee

This is charged to the buyer for processing the loan.

Mortgage Insurance Premium

Mortgage insurance is charged when the buyer puts down less than 20% on a conventional loan.

Prepaid Interest

Interest will accrue daily between the closing date and the buyer's first mortgage payment. This is due from the buyer at closing.

Appraisal Fee

Typically covered by the buyer, these are fees required by the lender to pay for the home appraisal.

Credit Report Fee

This is the fee for pulling the buyer's credit report during the loan process. 

Impounds

The buyer will typically set up an impound account that bundles together the cost of their mortgage principal, interest, taxes, and mortgage insurance into one payment.

Aggregate Adjustment

This calculation prevents the buyer's lender from collecting more money from the buyer than allowed by RESPA (Real Estate Settlement and Procedures Act).

Title Charges and Escrow Settlement Charges

These are fees from the title or escrow companies for notarizing signatures or performing other required tasks.

Owner’s Title Insurance 

This is additional coverage for the home buyer should an unknown issue concerning the title arise after closing. This coverage is recommended, but not required.

Loan Policy of Title Insurance

Similar to the Owner's Title Insurance, this coverage is for the lender in the event title issues arise after closing. This coverage is required by the lender.

Title Search Fee

This is the fee charged to search public records on the property being sold for any issues.

Insurance Binder

The insurance binder is proof of temporary homeowners insurance until a full policy is issued.

Escrow/ Settlement fee

The fee charged for completing the settlement and distributing funds to the appropriate parties.

Notary Fee

The fee paid for witnessing the closing document signatures by a licensed notary.

Signing Fee

Fees assessed for any additional notary or document signing.

Commission

This section refers to the commissions paid to the real estate agent(s). These fees are usually the responsibility of the seller, but the total commission amount is usually split between the listing agent and the buyer's agent.

Government Recording Transfer Charges

These are fees charged by the county, state, or municipality recording the deed and mortgages of the new owner.

Payoffs

This section of the closing statement details any amounts or associated fees the seller owes to pay off the remaining mortgage of the home being sold.

Miscellaneous

This section will list any remaining fees or charges that don't fit into any of the above categories such as pest inspection fees, survey fees, HOA dues, etc.

Subtotals / Totals

The end of the statement will show a summary of what the seller owes and what they'll receive.

What is an "Excess Deposit" at closing?

The "Excess Deposit" line on the seller's settlement statement tends to cause a lot of questions and confusion. This line item refers to any funds that remain from the buyer's earnest money after distributing the real estate commission fees.

That excess is a credit to the seller and will be included in their total payout.

photo by Oleg Magni

Definition of a Closing Disclosure

The Closing Disclosure is specifically for the home buyer to understand what they'll owe at closing. This includes taxes, fees, etc. The buyer's lender will prepare the closing disclosure based on the estimated settlement statement provided by the closing agent. If the numbers on the closing disclosure and settlement statement don't match, it's an indication that there are issues that will require further review.

The home seller does not receive a copy of the closing disclosure but both buyer and seller still receive settlement statements that summarize costs and payouts.

What's In a Closing Disclosure?

Loan Term

The loan term section conveys the terms of your mortgage, providing an accurate look at how much and for how long you'll be paying for your loan. This section will contain five parts:

1. Loan amount

This will be the total amount planned to borrow after deducting the down payment and all applicable fees that were rolled into the loan. If you notice discrepancies between this number and the original loan estimate, get in touch with your lender.

>RELATED: A Guide to Pre-Approval for First-Time Home Buyers in Charleston, South Carolina

2. Interest rate

This number is a percentage of the total loan amount you pay each year as interest for borrowing the money. It's essentially the fee you pay to borrow the money but it's included in your total monthly mortgage payments. This number should also not be different from that of your initial loan estimate.

3. Monthly principal and interest

This section will show the actual interest and principal payments you'll be responsible for with your loan. Mortgage insurance and escrow payments will not be included here.

4. Prepayment penalty

This section will include an amount if your lender is charging a penalty for paying off your balance early.

5. Balloon payment:

Balloon payments are one-time payments at the end of the loan. These are usually present to keep the initial early payments lower leading up to the balloon payment. These sound like a great idea until you get closer to the end of your loan terms and have a very large payment due. Be sure of all the requirements of this route before committing.

photo by Michael Burrows

Projected Payments

You'll refer to this section of the closing disclosure to understand how the amount you owe will change over the years and give you a clear overall picture of your month-to-month and year-to-year costs for the loan.

Payment calculation

Unlike the principal and interest section above, the payment calculation section will include all the elements of your payment. Principal, interest, mortgage insurance (if applicable), and estimated escrow for homeowners insurance and property taxes. If you're taking out an ARM or adjustable-rate mortgage, this will also include the calculation for the max payment at each rate change.

Estimated total monthly payment

This section is the total you're expected to pay each month which includes all the elements listed above. Not all mortgages will include an escrow account, but this is where that payment will be located if yours does. Speaking to your mortgage lender if this number is in any way different from your original loan estimate.

Costs at Closing

Typical closing costs are between 3-and 6% of your total loan amount. This section is there to give you a better understanding of what you'll pay at closing. At the bottom of all the itemized costs, you see the "Cash to Close" amount which is the full amount you'll need to have on hand on closing day. This amount includes your down payment amount so it should be higher than your total closing costs.

Loan Costs

This section provides a comprehensive overview of the fees involved in securing your mortgage.

Origination fee:

The origination fee refers to the administrative costs related to your mortgage application. This is typically between 0.5%-1% of your total loan amount.

Mortgage points

Mortgage points are purchased to reduce the total interest rate on your loan. Each point equals 1% of the total loan amount so this number will vary depending on the amount you're borrowing. But, the number will be reflected here.

Application fee

The amount listed here is the amount owed to cover the cost of processing your application and will vary from lender to lender.

Underwriting fee

An underwriter's job is to review your overall financial landscape to determine the risk factor of loaning money to you. The fee for this service is listed here.

Services borrower did not shop for

This list includes all the services required by and chosen by the lender which can include things such as the credit report fee, appraisal fee, tax monitoring fee, flood determination, and others. This is another area to compare to the original loan estimate to confirm the numbers match or are close in amount.

Services borrower did shop for

Items that you chose yourself such as surveys, your home inspection, pest inspections, and title-related services will be listed here.

Other Costs

Any additional fees not covered in the above sections like taxes and government fees, initial escrow, etc. will be listed here. This section may also include HOA fees, real estate commissions, title insurance, etc.

Taxes and other government fees

Fees associated with recording the new deed and mortgage into the public records are located here. Services like transfer taxes for the property changing hands and city, county, and possible state taxes are included here as well.

Prepaids

In this section, you'll find the amount of money you'll need in escrow to cover certain prepaid costs like mortgage insurance premium, homeowners insurance premium, property taxes, etc.

Initial escrow payment at closing

This section lists the amount of your initial escrow payment that includes your homeowner's insurance, mortgage insurance, and property taxes. This amount is different than the prepaids section.

Cash to Close

This is the full monetary amount you'll need to bring to the closing table. It includes the amount if any agreed upon, the seller agreed to pay toward your closing costs. 

Summaries of Transactions

Here, you can view a side-by-side breakdown of what the borrower and seller's costs are at closing. As the buyer, you'll be able to see credits for anything paid by the seller in advance such as HOA fees, taxes, etc. In addition, the buyer can see what the seller will owe at closing like credits, mortgage payoffs, etc.

Loan Disclosures

This section will offer a more detailed overview of the conditions of your loan which include the following:

Assumption

Assumption indicates whether the loan can be transferred to another person or not, without major changes in the terms.

Demand feature

Check carefully in this section. If your loan has a demand feature it will be indicated here. This feature allows the lender to require you to pay the entire balance of the loan at any time, including principal and interest.

Late payment

This section lays out whether your loan imposes late payment fees, how much they'll be, and when they're imposed.

Negative amortization

If negative amortization is indicated here it means that your loan doesn't fully mature. In other words, any interest not paid during the term of the loan is added to the original principal balance.

Partial payments

The possibility exists that at some point during your loan's term, you may not be able to make a full payment. This section will indicate whether or not the conditions of the loan allow for partial payments. Even if your loan does allow for this It's important to understand if the payment is going to be held in a separate account until full payment can be made, late fees are charged until full payment can be made, etc.

Security interest

This section indicates if you default on your mortgage that the lender can take your home and sell it to pay off your loan's balance.

Escrow account

This section will explain your escrow account in more detail including what homeowner expenses are included and what you'll need to pay into it.

Loan Calculations

The loan calculations section summarizes all finance charges, the total amount financed, and the annual percentage rate to show you how much your home will cost you over the life of the loan.

Other Disclosures

This section mostly contains general information about the closing such as tax deductions, refinancing information, and if your state laws will protect you from liability on the unpaid balance of the loan if the home is foreclosed on.

Contact Info and Confirm Receipt

This section requires a signature to confirm receipt of the disclosure and your contact information. It's important to note that your signature only confirms receipt of the information and not acceptance of the loan.

What is the Closing Disclosure 3-Day Rule?

Regulations state that home buyers are to receive the Closing Disclosure form at least 3 business days before the closing date. Also known as the "Know Before You Owe Rule", the regulations allow mortgage borrowers additional time to review the information, get their questions answered, and decide whether to proceed with closing or not if changes occur in these three areas:

 

1. Increases in the APR or annual percentage rate of more than an eighth of a percentage point for fixed-rate loans or a quarter percentage point for ARM or adjustable-rate mortgages.
2. Changes in the actual loan product itself such as a change from an ARM to a fixed-rate mortgage.
3. A prepayment penalty for paying off your principal balance early is added. 

In Conclusion 

photo by Alena Darmel

It’s important to review all paperwork involved in your home transaction carefully, and this article is a great example of the confusion that can arise when trying to navigate the home buying and selling process. Choosing a great real estate agent with plenty of experience can help you dot your “I’s” and cross your “T’s” ensuring that you don’t miss a thing and come away from your real estate transaction with a feeling of accomplishment instead of stress.

If you're thinking about buying or selling a home in the future, contact me today - ask any questions you may have!