New mortgage forms and timelines
For most people, buying their American dream is the biggest financial investment they’ll make. But the home buying process can be stress filled and confusing. During the last 20 years, as the paperwork grew from a few pages to dozens, buyers were often asked to sign on the dotted line with less than enough information to truly understand what they had agreed to.
But now things have changed, mostly for the better. As of October 2015, new federal rules were implemented that ushered in some of what experts are saying are the biggest changes in the mortgage and real estate industries in decades. These changes include easier-to-understand forms and new timelines and are expected to make the home buying process easier and more transparent.
The new rules were a response to lending practices that occurred during the housing boom, when some lenders offered terms that many borrowers didn’t understand and the lenders didn’t explain. While legal, these practices helped fuel the housing bust of 2008 and triggered the Great Recession.
As part of the Know Before You Owe rules, the new disclosure forms are a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which created a new Consumer Financial Protection Bureau, part of the Department of the Treasury. The CFPB combined four different forms into two documents, the Loan Estimate, presented at the beginning of the process, and the Closing Disclosure, at the end, in a similar format so that buyers can easily compare them and understand changes that might occur. Bankrate.com’s mortgage analyst, Holden Lewis, told USA Today that it was once almost impossible for a borrower to compare the costs, but the new paperwork has changed that.
The new Loan Estimate allows buyers to compare loan offers by showing the interest rate, monthly payment and total closing costs on the front page. Instead of bundling the costs, the new forms show exactly how much borrowers pay for each service separately, making comparisons easier and letting buyers better see not just the initial interest rates, but also lender fees, fees by required third parties such as appraisers, title insurance and closing cost estimates.
There are also new timelines. The Loan Estimate now has to be in the hands of buyers no more than three days after they apply for a loan, giving buyers from seven to ten days, depending on the lender, to review the figures. The five-page Closing Disclosure, once often presented at closing, now has to be presented three days before the close.
Before the new rules were implemented, a homebuyer might receive a quote from a lender, then find out at the closing that the rate or fees originally quoted had risen, leaving them stuck with the new terms and having to unexpectedly spend thousands of dollars. Now, if there are any major changes to the loan, such as a rate change (of more than one-eighth percent for a fixed-rate loan or one-quarter percent for adjustable-rate loans), a change from fixed rate to variable rate or an added prepayment penalty, the three-day waiting period kicks in, making it difficult for lenders to make last-minute changes. Minor changes, though, do not require a waiting period. Most changes can still be made at the closing table.
Nevertheless, the new rules might end up causing problems for the unwary. In many markets, the time between the final purchase agreement and the day of closing was about 30 days. Now, the National Association of Realtors is telling their agents to advise their clients to allow 45 days or even two months until a closing, at least until the bugs are out of the system.
Many real estate agents are concerned that if one or more buyers and sellers have to sell a home before they can get the bugs out, even a short delay can have a ripple effect and might jeopardize a series of transactions. The three-day rule can’t be shortened, even if the buyer requests it. To add to the confusion, mortgage lenders, real estate agents and lawyers are still deliberating what the various provisions actually mean for them and for consumers. It might take a while until the legal interpretations are decided once and for all.
Carl Leatherman, a Realtor in Harlingen, Texas, says that the biggest challenge for many agents and lenders is to get their clients to adjust to a longer time between the purchase agreement and the close. “It takes longer at the beginning and at the end of the process,” he says. “We are asking for more time between the finalized purchase agreement and the closing. And, we need to be certain to get the documents to the title company in a timely manner.”
The National Association of Realtors notes that more than 80 percent of Realtors have taken training on the new rules, and lenders have upgraded systems and provided training. As a result, your Realtor or lender will be your best advisor in closing the deal. HLM
Sources: consumerfinance.gov, usatoday.com and washingtonpost.com.