“Know Before You Owe”- New Rules Help Consumers Understand the Total Cost of a Home Loan

The new rules:

• Simplify and consolidate the required loan disclosures, and
• Change the timing of some activities in the mortgage process.

In the past, there were four important documents received by buyers throughout the loan process, two at application and two at closing.  These four documents have been streamlined into two.  Initially, at application, buyers would get a Truth-In Lending Statement and a Good Faith Estimate.  Under the new rules, they will receive a “Loan Estimate.”  Buyers will find this document far easier to understand exactly what lenders are offering and much easier to compare different lenders and different loan programs.

At closing, buyers used to get the final truth-in lending statement and a settlement statement, or HUD.  Now, buyers will receive a “Closing Disclosure Form.”

In addition to making the documents much clearer, the timing of when these documents are due has changed.  It is these timing issues and what triggers a change that buyers need to understand.

Prior to searching for a home, it is critical to contact one or more lenders to gain an understanding of what you can afford.  It continues to be important to provide your Buyer’s Agent with your comfortable price range.

Once a property is identified, some buyers know the lender they want to use and some shop around.  The new forms will make it much easier to compare programs from different lenders.  Once you apply, lenders have 3 days to send you the Loan Estimate.

Once a buyer indicates to a lender that “they intend to proceed” with the loan, the lender can charge an application fee and will begin the process.  Until the buyers makes it clear they are proceeding, they cannot be charged for receiving a Loan Estimate.  While you are shopping, don’t indicate that you are proceeding with the lender until you are sure you have found the lender you want to work with.

Buyers need to know if during the process something changes, the need for a new loan estimate could be triggered.  Common reasons why a Loan Estimate may be revised include:

• You decided to change loan programs or the amount of the down payment.
• The appraisal on the home came in higher or lower than expected.
• Your credit status changed, perhaps owing to a new loan or a missed payment.
• The lender could not document overtime, bonus, or other income provided on your client’s application.

Something like negotiating repairs should not trigger a new loan estimate.

Another very important change is that the Closing Disclosure must be received by the buyer AT LEAST three days prior to closing.  No longer will settlement statements come the day of closing or at the closing table.  At least three days prior to closing the lenders will be sending the Closing Disclosure to the Buyers.  The closing Attorney will prepare the seller’s numbers.

If one of the following occurs, it is possible that another three-day review could be triggered.

1. The APR (annual percentage rate) increases by more than 1/8 of a percent for regular loans (most fixed-rate loans) or 1/4 of a percent for irregular loans (most adjustable loans). A decrease in APR will not require a new three-day review if it is based on changes to the interest rate or other fees. Lenders have been required to provide a three-day review for these changes in APR since 2009.
2. 2.    A prepayment penalty is added, making it expensive to refinance or sell. (This is impossible in NC because we don’t have prepayment penalties.
3. The basic loan product changes, such as a switch from fixed rate to adjustable interest rate or to a loan with interest-only payments.

No other changes require a new three-day review

More typical changes prior to closing will not trigger a new three-day review, however, the lender will still have to provide an updated disclosure.  For example, the following circumstances will not require a new three-day review:

• Unexpected discoveries on a walk-through such as a broken refrigerator or a missing stove, even if they require seller credits to the buyer.
• Most changes to payments made at closing, including the amount of the real estate commission, taxes and utilities proration, and the amount paid into escrow.
• Typos found at the closing table.