What Is a Pre Closing Disclosure?

A Pre Closing Disclosure is a significant document received by borrowers during the home buying process. It serves as a comprehensive summary of the final loan terms and associated costs before the official closing of a mortgage. This document ensures transparency and provides borrowers with a clear understanding of their financial obligations.

Understanding the Closing Disclosure

The document commonly referred to as a “Pre Closing Disclosure” is officially known as the Closing Disclosure. Its purpose is to provide consumers with a complete and final statement of their mortgage loan terms and all closing costs. This document is a direct result of the TILA-RESPA Integrated Disclosure (TRID) rule, which was implemented and is enforced by the Consumer Financial Protection Bureau (CFPB).

The TRID rule aims to simplify the mortgage disclosure process and enhance consumer understanding. Lenders are mandated to provide the Closing Disclosure to borrowers, ensuring they have adequate time to review all financial aspects of their loan. This regulatory framework promotes transparency, allowing borrowers to compare the final terms with earlier estimates and identify any discrepancies. The Closing Disclosure is a protective measure, designed to prevent last-minute surprises at the closing table.

Key Sections and Information

The Closing Disclosure details various financial aspects of the mortgage transaction, organized into several distinct sections. One of the primary areas outlines the Loan Terms, including the exact loan amount, the final interest rate, and the monthly principal and interest payment. For adjustable-rate mortgages, this section also specifies details regarding potential interest rate changes, such as the initial fixed period, adjustment intervals, and rate caps.

Another section provides Projected Payments, offering a comprehensive breakdown of the total estimated monthly payment. This includes principal, interest, and estimated amounts for property taxes and homeowners insurance that will be collected and held in an escrow account.

The disclosure itemizes all Costs at Closing, segmented into “Loan Costs” and “Other Costs.” Loan Costs encompass fees directly associated with the mortgage, such as origination charges, which cover administrative expenses. It also lists fees for services the borrower did not shop for, such as appraisal fees and credit report fees. Additionally, it specifies costs for services the borrower was permitted to shop for, like title insurance premiums or pest inspection fees.

“Other Costs” include government charges such as recording fees and transfer taxes. This section also details prepaids, which are expenses paid in advance, such as homeowners insurance premiums, property taxes, and per diem interest. An initial escrow payment, usually covering two to three months of property taxes and insurance, is also outlined. Finally, the “Cash to Close” summary provides the total amount of funds the borrower will need to bring to the closing, incorporating all costs and credits.

The document also includes Summaries of Transactions, which detail the financial exchanges between the borrower and the seller. Various Loan Disclosures are also presented, covering terms such as whether the loan can be assumed by another party, if there is a demand feature allowing the lender to call the loan due, and policies regarding late payments, including any grace periods and typical late fees. It also addresses negative amortization, if applicable, how partial payments are handled, the security interest the lender holds on the property, and specific details about the escrow account.

Furthermore, the Closing Disclosure provides Comparisons, presenting the Annual Percentage Rate (APR) and the Total Interest Percentage (TIP). The APR represents the true annual cost of borrowing, encompassing the interest rate and most loan fees. The TIP indicates the total amount of interest paid over the life of the loan as a percentage of the loan amount. Lastly, the disclosure provides Contact Information for the lender, mortgage broker, and closing agent.

Receiving and Reviewing the Disclosure

Borrowers are mandated to receive the Closing Disclosure at least three business days before the scheduled loan closing. This timeframe provides a necessary window for thorough review, allowing borrowers to understand the terms and costs without immediate pressure. For the purpose of this rule, a “business day” is generally defined as all calendar days except Sundays and federal public holidays.

The disclosure is typically delivered electronically via a secure portal or through mail. Upon receipt, borrowers should immediately begin a diligent review process. A particularly important step involves comparing the final Closing Disclosure with the initial Loan Estimate that was provided earlier in the loan process. This comparison helps identify any significant changes in the loan terms, interest rate, or estimated closing costs.

Borrowers should check for consistency in key items such as the loan amount, the final interest rate, and the total cash needed at closing. It is also important to verify the accuracy of all personal information, property details, and to check for any spelling errors. Understanding the meaning and implications of each line item is important. This proactive review helps ensure that all aspects of the loan align with prior agreements and expectations.

Addressing Discrepancies

If any discrepancies or unexpected changes are identified on the Closing Disclosure, immediate action is necessary. Borrowers should contact their lender or closing agent without delay to inquire about the specific items in question. Prompt communication is important to resolve issues before the closing date.

It is important to understand that some changes to the loan terms are considered valid and may necessitate a new three-business-day waiting period before closing. Examples of such changes include an increase in the Annual Percentage Rate (APR) above a certain threshold, a change in the loan product itself, or the addition of a prepayment penalty. These types of changes are significant enough to warrant additional review time.

However, other discrepancies might simply be errors or unexpected charges that require correction. Maintaining a record of all communications, including dates, times, and summaries of conversations, is a prudent step. While addressing discrepancies is important for accuracy, borrowers should be aware that resolving significant issues or triggering a new waiting period could potentially impact the original closing timeline.