What Is a Preliminary Closing Disclosure?

The Preliminary Closing Disclosure is a key document in the residential mortgage transaction process. It offers homebuyers a detailed look into the financial aspects of their prospective loan and property purchase. This disclosure promotes transparency, allowing individuals to review and understand the costs and terms involved before finalizing their home loan. It serves as an early opportunity for borrowers to confirm that financial commitments align with their expectations.

Understanding the Preliminary Closing Disclosure

The Preliminary Closing Disclosure is a document lenders are required to provide to mortgage applicants. This requirement stems from the TILA-RESPA Integrated Disclosure (TRID) rule, which aims to simplify and clarify the home loan process for consumers. The lender must deliver this disclosure to the borrower at least three business days before the scheduled closing date, allowing ample time for review.

This document functions as a draft or estimate of the final costs and terms associated with the mortgage. Its primary purpose is to prevent last-minute financial surprises for homebuyers. By providing a clear, itemized breakdown of expenses, it empowers borrowers to make informed decisions and ensures compliance with consumer protection regulations set by the Consumer Financial Protection Bureau (CFPB). While it presents estimated figures, it is a formal communication designed to give borrowers a comprehensive overview before the transaction becomes legally binding.

Essential Details within the Document

The Preliminary Closing Disclosure contains specific financial information, organized into distinct categories. The loan terms section details the mortgage’s core elements, including the loan amount, interest rate, loan type (fixed or adjustable), and loan term. It also indicates if the loan includes a prepayment penalty or a balloon payment.

Another section outlines projected payments, estimating monthly principal and interest, property taxes, homeowner’s insurance, and any mortgage insurance. The disclosure itemizes all closing costs, distinguishing between loan costs, which encompass origination charges, fees for services you cannot shop for (like appraisals or credit reports), and charges for services you can shop for (such as title services). Other costs, including taxes, government recording fees, initial escrow payments, and prepaid items like homeowner’s insurance premiums, are also listed.

The “Cash to Close” figure represents the total money the borrower needs to bring to the closing, accounting for the down payment, closing costs, and other necessary funds, minus any credits. The disclosure also includes summaries of transactions for both the borrower and the seller, showing who pays for what. Contact information for all parties, including the lender, loan originator, and closing agent, is provided.

Your Role in Reviewing the Disclosure

Upon receiving the Preliminary Closing Disclosure, review it during the mandatory three-business-day period. Compare the details with the initial Loan Estimate to identify discrepancies or unexpected changes in loan terms or costs. Look for changes in the interest rate, loan amount, or any new fees.

Verify that your personal information, such as your name and property address, is accurate. Even minor spelling errors can lead to complications. Confirm any agreed-upon seller credits or earnest money deposits have been applied correctly.

If you discover errors, discrepancies, or have questions, contact your lender or closing agent immediately. This is the time to seek clarification and resolve issues before the final closing. Addressing concerns promptly prevents delays and ensures the final terms align with your understanding.

Preliminary vs. Final Closing Disclosure

The Preliminary Closing Disclosure and the Final Closing Disclosure serve distinct roles in the mortgage process, though they share much of the same information. The preliminary version, also referred to as the Initial Closing Disclosure, is provided as an estimate or draft of the final terms and costs. Its primary function is to give borrowers a preview and the required three-day period to review the transaction details.

The Final Closing Disclosure, conversely, is the legally binding document signed at the closing table. While the preliminary disclosure allows for review and identification of potential issues, the final version contains the confirmed and actual figures. Minor adjustments, such as final prorations for taxes or small changes in prepaid items, may occur between the preliminary and final versions.

However, significant changes to the loan terms, such as an increase in the annual percentage rate (APR) beyond a certain threshold or the addition of a prepayment penalty, typically necessitate a new three-business-day review period. The preliminary disclosure prepares you for the final document by offering a comprehensive overview, ensuring that you are fully aware of the financial obligations before committing to the mortgage. It acts as a crucial checkpoint, allowing for corrections and clarifications to be made well in advance of the official closing.