Mortgage disclosure changes are here.
If you have read any books or scoured any online articles about residential mortgage financing, as of October 3, 2015, you can pretty much scratch it! Not the theoretical aspects about financing, but the initial disclosures that were once known as the “Good Faith Estimate (GFE),” “Truth in Lending (TIL)” and the final closing statements known as the “final Til,” and “Hud-1.” “The Know Before You Owe” mortgage disclosure rule replaces and combines the four above-mentioned disclosure forms with two new ones, the Loan Estimate (LE) and the Closing Disclosure (CD). The new forms are easier to understand and supposedly easier to use (to be determined). The major changes, aside from intentioned financial clarity, have an impact on how quickly initial disclosures need to be disclosed, targeted closing dates, and the liability imposed on lenders in terms of closing cost disclosure accuracy. Federal mortgage disclosures are required by law and will also practically play an integral part of your mortgage financing decisions. That being the case, for all those seeking residential mortgage financing for a purchase or refinance, see below for a description of the new and improved federal disclosures, and yawning is allowed. (By the way, it’s the federal government’s second round of “new and improved” forms.)
The LE
The LE combines and replaces the Good Faith Estimate and the initial Truth-in-Lending (TIL) statement. This form highlights the most important elements of the transaction and allows for easy cost comparisons.
The (CD)
The CD combines and replaces the HUD-1 Settlement Statement and the final Truth-in-Lending (TIL) statement. This form should mirror the information provided on the (LE) unless prior rate and term changes are made.
To help you prepare, we’ve summarized what has and has not changed about the mortgage process and how these changes may affect you. The more time and effort you invest in learning about the home loan process, defining what you want and what you qualify for before you select a home, the smoother the path from application to closing.
The application process typically begins after you have identified a property, and the mortgage financing process begins with a LE and signed intent to proceed. Note: Pre-approvals and pre-qualifications are unchanged by the rule.
Lenders must provide LE’s within three business days after you have provided: your name, income, Social Security number (so the lender can check credit), the subject property address, an estimate of the home’s value, and the amount you want to borrow. Note: The lender must provide the LE within three business days, but there is no set time frame for you to receive it. If the lender mails the LE, you may receive the LE more than three days after your application.
Previously, lenders may have requested certain upfront fees after a required estimate was sent. Under the new rule, this is not permissible. Now payment information can be obtained only after the lender provides the LE and you have indicated your intent to proceed. Nothing moves along unless you indicate your intent to proceed.Once you have reviewed your LE and determined which loan best meets your needs, you let the lender know you are interested in moving forward by signing their form called “intent to proceed.” After 10 business days without that indication, the lender is no longer required to honor the terms initially offered in the LE. If the lender closes an application because the application remained incomplete, you will most likely need to start over from the beginning. Once you indicate your intent to proceed, fees can be charged. Note: Until you indicate your intent to proceed, lenders can’t charge any fees in connection with a mortgage application, including an application or appraisal fee. The only exception is a reasonable fee for the credit report.
A lender is responsible for providing accurate pricing and closing cost information for the loan requested, based on the best information reasonably available at the time the disclosure is provided. However, if the information about you, the proposed loan or the property was incorrect or changes, a revised LE may be issued. This is referred to as a changed circumstance. A new LE can reflect changed rates and terms caused by the new information.
Not all changes require the lender to issue a revised LE. Minor changes, for example when the seller agrees to pay for a specific cost not included in the original agreement, do not require the lender to issue a revised LE. Significant changes most likely do, such as:
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, due to a new loan or a missed payment.
The lender could not document overtime, bonus or other income that you provided on your application.
Lenders need to make sure that you receive the CD at least three business days before closing. This gives you time to review a summary of the final loan terms. You will no longer be faced with significant changes from the lender and be pressured to sign on the same day.
The CD can be compared with the information contained in the initial or a revised LE (or, in the case of a revised CD, the initial CD). Small changes have been built into the rule to accommodate small, last-minute changes typical of purchase transactions. However, when changes to the transaction are significant, a new three-business-day review period starts the clock ticking all over again. There are only three things that may trigger a new CD three-day countdown: (1) an increase in APR (annual percentage rate) 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) A change in loan product (e.g. adjustable to fixed). (3) A prepayment penalty is added (rare these days).
To provide a CD three business days before the closing that reflects all of the terms of the transaction, settlement agents and creditors need as much information from the buyer, the seller and the agents about the transaction as far in advance of closing as possible. At the same time, most settlement issues, such as adjustments to seller credits to account for repairs that are currently addressed as late as the day of closing, can continue to be handled at closing without requiring a new three-business-day review period. Note: The CD must contain the buyer’s and the seller’s real estate brokerages’ and agents’ names, addresses, state license ID numbers, email addresses and phone numbers. If this information is unknown, the form can’t be completed. This information needs to be communicated to the lender to prevent delay.
No other changes require a new three-day review.
There has been much misinformation around this point. Any other changes in the days leading up to closing do not require a new three-day review, although the lender will still have to provide an updated disclosure. For example, the following circumstances do not require a new three-day review: Unanticipated walk-through issues such as a broken refrigerator or a missing stove, even if they require seller credits to the buyer. Payment changes 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.
Takeaways:
Think through mortgage choices first so that you can select a mortgage loan that meets your needs.
Use pre-application time to decide on a loan type and down payment amount before focusing on a closing date.
Make sure you are comfortable that you can afford the home and feel confident in your ability to receive a mortgage loan approval for the required amount.
Review your credit report early in the process. Through early review, you may be able to find and correct errors to potentially raise your credit score and reduce your cost of borrowing.
Once you identify a property or decide to refinance, apply for a LE to get an idea of costs involved and money needed to close.
Be conscience of the new timeframes involved before locking a rate.
Keep a good contact list of names, numbers and emails of all professionals involved in the transaction.
Enjoy reviewing the two new forms, which is a lot better than four.
Carl Guzman, NMLS# 65291, CPA, is the founder and president of Greenback Capital Mortgage Corp., a Zillow 5-star lender: http://www.zillow.com/profile/Greenback-Capital/Reviews/?my=y.
He is a residential financing expert and a deal maker with over 26 years’ industry experience. Carl and his team will help you get the best mortgage financing for your situation and his advice will save you thousands! www.greenbackcapital.com [email protected].
By Carl Guzman
