Closing Disclosure vs. Settlement Statement: A Clear Guide for Home Buyers and Sellers

Understanding the difference between a Closing Disclosure and a Settlement Statement is critical for a smooth real estate closing. While both documents detail the financial aspects of your transaction, they serve distinct purposes for different parties. The Closing Disclosure is a federally mandated form for the borrower, outlining the final loan terms. The ALTA Settlement Statement is a comprehensive accounting of all costs for both the buyer and seller. This guide explains each document's role, timing, and how they work together to ensure an accurate and transparent closing process.

What is a Closing Disclosure?

A Closing Disclosure is a five-page form required by the Consumer Financial Protection Bureau (CFPB) under the TILA-RESPA Integrated Disclosure (TRID) rule. Its primary purpose is consumer protection, providing the home buyer (the borrower) with the final details of their mortgage loan. Lenders are legally obligated to provide this document at least three business days before the scheduled closing date. This "three-day rule" gives you time to review the terms and compare them to the initial Loan Estimate you received.

The Closing Disclosure clearly outlines:

• Final Loan Terms: Your interest rate, loan amount, loan type, and term.
• Projected Monthly Payments: A breakdown of your principal, interest, mortgage insurance, and estimated escrow payments for taxes and insurance.
• Closing Cost Details: An itemized list of all costs, including lender fees and third-party charges like appraisal and title insurance fees.
• Cash to Close: The exact amount you need to bring to the closing table, which is the final calculation after accounting for your deposit and other credits.

What is an ALTA Settlement Statement?

An ALTA Settlement Statement is a detailed, itemized list of all the financial charges and credits involved in the real estate transaction. It is prepared by the closing agent, which could be a title company, escrow officer, or real estate attorney. Unlike the Closing Disclosure, the settlement statement accounts for the financial obligations of both the buyer and the seller.

This document is essential for the final accounting of the deal and includes:

• All Prorations: Calculations for property taxes, homeowners association (HOA) dues, and other expenses are divided fairly between the buyer and seller based on the closing date.
• Commission Distribution: The total real estate commission and how it is split between the buyer’s and listing agents.
• Payoffs: The exact amount required to pay off the seller’s existing mortgage and any other liens on the property.
• Final Settlement: The net proceeds the seller receives and the total cash the buyer must provide.

Key Differences: Purpose, Recipients, and Timing

The main distinctions between these two critical documents are rooted in their intent and audience.

Accuracy is Paramount: The financial totals on the buyer’s Closing Disclosure, particularly the "Cash to Close," must match the corresponding totals on the ALTA Settlement Statement. Your closing agent will reconcile any discrepancies before the final signing.

How Closing Documents Vary by State

The exact flow of documents can depend on your state's real estate customs. Based on our experience assessment, the process generally falls into three categories:

• Escrow States (e.g., California, Washington, Arizona): An escrow or title company neutralizes the closing process. Both the Closing Disclosure (from the lender) and the ALTA Settlement Statement (from the title company) are standard.
• Attorney States (e.g., New York, Georgia, Massachusetts): A real estate attorney oversees the closing. You will still receive a Closing Disclosure from your lender, and the attorney will prepare a settlement statement, which may be an ALTA form or a state-specific equivalent.
• Cash Transactions (All States): When no mortgage is involved, there is no lender and therefore no Closing Disclosure. The ALTA Settlement Statement (or occasionally an older HUD-1 form) becomes the primary financial document for both parties.

Practical Advice for Your Closing Day

To ensure a confident closing, follow these steps:

1. Review Your Closing Disclosure Immediately. Use the three-day review period to compare the final terms with your initial Loan Estimate. Question any significant, unexplained changes with your lender.
2. Cross-Check the Totals. When you receive the ALTA Settlement Statement, verify that the key numbers, like your "Cash to Close," match the Closing Disclosure.
3. Keep Both Documents for Your Records. The Closing Disclosure is your official record of the loan. The Settlement Statement is invaluable for tax purposes, as it documents deductible expenses like property taxes paid at closing and, for sellers, the costs used to calculate capital gains.

Before you sign, carefully review both documents and ask your closing agent to explain any line item you do not understand. This due diligence is the best way to avoid last-minute surprises and ensure a successful transaction.