What Is a Preliminary CD in Real Estate?
Master your real estate closing. Understand the Preliminary Closing Disclosure, how to review this vital document, and ensure your financial terms are accurate.
A Preliminary Closing Disclosure (CD) is a comprehensive document detailing proposed final loan terms and associated closing costs in a real estate transaction. Receiving this document shortly before closing allows homebuyers and sellers to understand their financial commitments before finalizing the property transfer.
Understanding the Preliminary CD
The Preliminary Closing Disclosure is a five-page document provided by the mortgage lender, outlining the proposed final terms of the mortgage loan and all associated closing costs. Its existence is mandated by the TILA-RESPA Integrated Disclosure (TRID) rule, which aims to standardize mortgage disclosures for consumers. This rule, implemented by the Consumer Financial Protection Bureau (CFPB) in 2015, ensures that borrowers receive clear information about their financial obligations before closing.
The CD contains loan terms, such as the loan amount, interest rate, and the monthly principal and interest payment. It also details whether the interest rate is fixed or adjustable and the loan’s overall term. Projected payments are also broken down, showing the estimated monthly costs including property taxes and homeowners insurance, especially if these are managed through an escrow account.
The Preliminary CD includes an itemized list of all closing costs, encompassing fees related to the loan, third-party services, government recording fees, and prepaid items. The document also states the “Cash to Close,” which is the total amount the buyer needs to bring to the closing table. Additionally, it includes summaries of transactions for both the buyer and, if applicable, the seller.
Reviewing the Preliminary CD
Upon receipt of the Preliminary Closing Disclosure, a thorough review is essential. Federal regulations stipulate that the lender must provide this document at least three business days before the scheduled closing date. This allows ample time for careful examination and to identify any potential issues. Saturdays count as business days for this rule, but Sundays and federal holidays do not.
Compare the Preliminary CD directly with the Loan Estimate (LE), the document received earlier in the loan process. Compare all loan terms, including the interest rate, loan amount, and monthly payment, to ensure consistency. All closing costs listed on the CD should be checked against the LE for changes. Certain fees, such as the lender’s origination charges, have a “zero tolerance” for increase, meaning they should not change from the LE. Other fees, like third-party services for which the borrower cannot shop, typically have a 10% tolerance for variation.
The Preliminary CD should also be cross-referenced with the executed purchase agreement or sales contract. This comparison ensures that the sale price, any agreed-upon seller credits, and specific repair allowances are accurately reflected. Scrutinizing the document for correct spelling of names and addresses, accurate property details, and the precise proration of property taxes and homeowners insurance is important. Any new fees or services not previously disclosed on the Loan Estimate, or increases in fees beyond the allowed tolerance levels, warrant immediate attention.
Discrepancies and Next Steps
Should any errors, inconsistencies, or unexpected changes be discovered during the review of the Preliminary Closing Disclosure, immediately contact the loan officer, real estate agent, or title company to report the discrepancy. Clear and timely communication is important to facilitate a swift resolution.
Discrepancies are addressed through investigation and recalculation of the affected figures. If significant changes are required, such as a change in the loan product or the addition of a prepayment penalty, the lender must issue a new Preliminary CD. This issuance of a revised document triggers a new three-business-day waiting period before the loan can close.
After all issues have been investigated and resolved, the lender will prepare a Final Closing Disclosure. This document should mirror the corrected Preliminary CD, reflecting all agreed-upon adjustments. The Final CD is the document signed at the closing table, and it is important to conduct one last quick review at this stage to confirm that all previously identified and corrected discrepancies are accurately reflected before signing the final loan documents.