What is the legal difference between a Loan Estimate and a Closing Disclosure?
The moment you see your final mortgage numbers is often a mix of excitement and anxiety. But that anxiety can turn to panic if the 'cash-to-close' amount on your Closing Disclosure (CD) is thousands of dollars higher than what you saw on your initial Loan Estimate (LE). It's a common homebuyer frustration that can feel like a classic bait-and-switch.
While frustrating, this change is often legal and predictable—if you know what to look for. The two documents serve very different purposes under a federal rule called the TILA-RESPA Integrated Disclosure (TRID) rule.
- Loan Estimate (LE): This is a three-page form you receive within three business days of applying for a mortgage. Its purpose is to provide a standardized, good-faith estimate of your loan terms and closing costs. It's a snapshot based on the best information available at that early stage. Think of it as a detailed preliminary quote.
- Closing Disclosure (CD): This is a five-page form you receive at least three business days before your scheduled closing. This document provides the final, actual terms and costs of your loan. It reflects final numbers from the title company, your chosen insurance provider, and precise date-based calculations.
The three-day review period for the CD is legally mandated. It gives you time to compare it to your most recent LE, ask questions, and address any discrepancies without being rushed at the closing table.
Which closing costs have a zero tolerance for change by law?
Federal law protects consumers by placing strict limits on how much certain fees can change between the LE and the CD. 'Zero tolerance' means these specific costs cannot increase at all unless there is a valid 'changed circumstance,' such as you changing your loan program or the loan amount.
These fees are typically the ones controlled directly by the lender or mortgage broker.
- Origination Charges: This includes any fees your lender charges for creating and processing the loan, like application fees, processing fees, or underwriting fees.
- Points for the Interest Rate: If you paid points to lower your interest rate, the cost for those points cannot increase once your rate is locked.
- Transfer Taxes: These are state and local government taxes for transferring the property title. While not a lender fee, they are considered a zero-tolerance item.
- Lender-Required Services: If your lender requires you to use a specific third-party provider for a service (like an appraiser or credit reporting agency), you cannot be charged more than what was quoted on the LE.
If any of these fees increase on your CD without a valid reason, the lender must issue a credit to cover the difference. This is known as a 'tolerance cure.' (The data, information, or policy mentioned here may vary over time.)
Which fees are legally allowed to change by up to 10% in Texas?
Another category of fees has more flexibility. These costs are for third-party services that the lender allows you to shop for. If you choose a provider from the lender’s recommended list, the total cost for these services cannot increase by more than 10% cumulatively.
It’s important to understand the cumulative part. It’s not a 10% limit per individual fee. Instead, the law looks at the total sum of all fees in this category. For example, if the LE estimated $2,000 for this group of services, the final cost on the CD cannot exceed $2,200.
Common fees in the 10% tolerance category include:
- Recording Fees: Charged by the county to record the deed and mortgage documents.
- Title Services: This includes the title search, title insurance binder, and settlement agent fees if you use a professional from the lender's list.
If you choose to use a provider not on the lender's recommended list (for example, your own title company), then there is no legal limit on how much that fee can change. (The data, information, or policy mentioned here may vary over time.)
What are 'prepaids' and why do they cause the biggest changes?
While tolerance rules get a lot of attention, the single biggest driver of a higher-than-expected cash-to-close number is almost always 'prepaids.' These are not lender fees; they are your own costs of homeownership that must be paid upfront at closing. The LE often contains placeholders for these items, while the CD has the precise figures.
Homeowner's Insurance Premium
Your lender will require you to pay for your first full year of homeowner's insurance at or before closing. The LE will show an estimate for this premium. However, the final cost depends entirely on the provider and coverage you choose. If the lender estimated $1,800 for the year but the policy you selected costs $2,500, your cash-to-close just went up by $700. (The data, information, or policy mentioned here may vary over time.)
Prepaid Mortgage Interest
Your first mortgage payment is typically due on the first day of the month after the month you close. For instance, if you close on May 10th, your first payment is not due until July 1st. However, you still owe interest for the days in May that you own the home (from May 10th to May 31st). This is called prepaid interest.
- Example: On a $450,000 loan at a 6.5% interest rate, the daily interest is approximately $80.14.
- If the LE assumed a closing date of May 20th, it would estimate 12 days of prepaid interest ($961.68).
- If your closing gets moved up to May 10th, you will actually owe 22 days of interest ($1,763.08), an increase of over $800 to your cash-to-close.
(The data, information, or policy mentioned here may vary over time.)
How do property tax prorations affect my final cash-to-close number?
In many states, property taxes are paid in arrears, meaning you pay them at the end of the year for the time you've already owned the home. At closing, the seller must credit you for the portion of the year they owned the property.
This credit from the seller reduces your cash-to-close amount, but the calculation is based on the exact closing date and can be confusing.
- Example: Let's say annual property taxes are $9,000, and you close on June 15th. The year is 365 days, so the daily tax rate is $24.66.
- The seller owned the home for 165 days (January 1st to June 14th).
- The seller will give you a credit at closing for 165 days x $24.66 = $4,068.90.
This credit from the seller directly reduces the amount of cash you need to bring to closing. The LE might have a rough estimate for this proration, but the CD will have the exact, to-the-penny calculation. This single line item can shift your final number by hundreds or even thousands of dollars. (The data, information, or policy mentioned here may vary over time.)
What should I do if I think a fee was unfairly increased by the lender?
If you see a significant jump in your cash-to-close, don't panic. Take a systematic approach.
- Request an Explanation: Call your loan officer immediately. Ask them to walk you through the CD line-by-line and explain each change from the last LE you received.
- Identify the Category: Determine if the increased fee is a zero tolerance, 10% tolerance, or an unlimited-change item (like prepaids).
- Ask About Tolerance Cures: If a fee in the zero or 10% tolerance categories increased beyond its legal limit, politely point it out and ask how the lender will be issuing a credit to 'cure' the violation. Legally, they must cover the overage.
- File a Complaint if Necessary: If the lender is unresponsive or you believe a fee is illegal, you can file a complaint with the Consumer Financial Protection Bureau (CFPB).
How can I more accurately estimate my final cash-to-close amount?
While you can't know the exact number until you get the CD, you can get much closer to the final figure ahead of time.
- Shop for Insurance Early: Get a firm quote for your homeowner's insurance policy as soon as your offer is accepted and provide it to your lender. This replaces the estimate with a real number.
- Confirm the Tax Amount: Use county appraisal district websites to find the actual property tax bill for the previous year instead of relying on a listing estimate. (The data, information, or policy mentioned here may vary over time.)
- Target Your Closing Date: Once you have a target closing date, ask your loan officer to prepare a fee worksheet based on that date. This will provide a much more accurate prepaid interest calculation.
- Review Every Loan Estimate: If anything about your loan changes (rate, loan amount, program), you will receive a revised LE. Always review it carefully, as it resets the baseline for fee tolerances. Understanding your closing numbers is key to a smooth home purchase. If you're facing confusing figures or need a second opinion on your Texas mortgage documents, our team specializes in providing clear, straightforward guidance to ensure you close with confidence.
Ready to navigate the closing process with confidence? Take the first step toward your new home and Apply Now for a mortgage with a team that values clarity and transparency.
Author Bio
David Ghazaryan is the expert mortgage strategist and founder behind iQRATE Mortgages. With a mission to fund home loans that traditional banks won't touch, David specializes in helping clients with unique financial situations, including those recovering from foreclosure or bankruptcy. He expertly crafts smart, strategic, and stress-free mortgages by leveraging a vast network of over 100 lenders to secure competitive rates for investors and homebuyers alike. Praised for exceptional customer service, David has helped hundreds of families with a 97% satisfaction rate, guiding them to the mortgage they deserve.
References
Consumer Financial Protection Bureau - What is a Loan Estimate?
Consumer Financial Protection Bureau - What is a Closing Disclosure?
