The mortgage game might be the same, but the rules have changed to favor homebuyers instead of lenders.
The Consumer Financial Protection Bureau (CFPB) is pinch-hitting for HUD. Its mission: to make sure another housing crisis, like the one from 2008, never happens again. One way to help achieve that goal is to make the buying process clearer to consumers, whether you’re looking at homes for sale in Houston, TX, or Sarasota, FL.
“Starting October 3, when you apply for a new mortgage, you’ll receive new disclosures designed to ease the process of taking out a loan, help you save money, and ensure you know before you owe,” says Tricia McClung, assistant director of mortgage markets for the CFPB.
In a nutshell, the mortgage process should now be more transparent to consumers and include information that helps homebuyers figure out what they can afford to buy. The new rules, called “Know Before You Owe,” help borrowers — in most cases, anyway.
Here’s an overview of the changes and what they mean for you.
Before the new mortgage disclosures went into effect, homebuyers were presented with the TMI (too much information) version of mortgage documents: a Truth-in-Lending disclosure with the Good Faith Estimate and then another Truth-in-Lending disclosure with the HUD-1 Settlement Statement. And those were just the forms’ names. As you can imagine, it was a tad complicated. And lenders didn’t even have to disclose everything.
“The old Good Faith Estimate and the HUD-1 did not spell out the two most important things to most consumers: knowing what their new payment will be and how much cash will be required at closing,” says California mortgage consultant Greg Cook.
The CFPB replaced the four documents with two simpler ones: the Loan Estimate and the Closing Disclosure. The new forms “help you shop for the best deal and avoid costly surprises at closing,” says McClung.
Homebuyers now have “a better perspective of the true cost of their loan instead of having to compare multiple documents with conflicting figures,” says Frank Berriz, CEO of California Members Title Insurance Co.
The three-day-wait rule
The new CFPB mortgage disclosure rules call for a three-day period to allow buyers to look over and become familiar with the Closing Disclosure before they get to the settlement table. This marks “the biggest overhaul of the mortgage process in decades,” says Amiel Hagai Steuerman, president of Cypress Mortgage in Illinois.
The three-day period “gives you time to ask your lender all the questions you might have about the terms of your mortgage, as well as consult with an adviser or housing counselor,” says Tricia McClung.
“Borrowers will know every tax, fee, and risk. And they will know if there are any penalties for paying off the loan early or whether there is a balloon payment at the end,” says Gloria Shulman, a California mortgage broker.
The mulligan, or the do-over
If the loan product changes during the three-day review period, you must start over and take another three days to review those changes. Just what triggers the additional three-day period includes the following:
If the annual percentage rate (APR) increases by more than ⅛ of a percent for a fixed-rate loan and ¼ of a percent for an adjustable loan. (If the APR decreases, the additional three-day period is not required.)
If a prepayment penalty is added.
If the basic loan changes, such as from a fixed rate to an adjustable one.
Minor changes such as a typo on a closing document or the discovery at walk-through of a bedroom window that won’t open — causing you to want a credit from the buyer — won’t trigger the extra three-day wait.
But even still, “Problems could arise with the three-day disclosure period, creating a domino effect,” says Frank Berriz. “If a closing is delayed by the buyer, it will directly impact the closing of the house the seller is trying to buy.”
The new normal: a 45-day closing?
A typical closing takes 30 days, but many lenders now assume they’ll need more time to close. “In the early going, consumers might expect to see the mortgage process lengthened — approximately 45 days to close rather than the previous 30 — as the new disclosure rule is implemented,” says Sharon Voss, real estate agent and president of the Orlando Regional REALTOR® Association.
“A consumer in a hurry is not going to have an easy time of it,” says Casey Fleming, author of The Loan Guide: How to Get the Best Possible Mortgage. “Most of the waiting periods are mandatory; they cannot be waived.”
This three-day rule, although well-intentioned, could cause you to lose out. If you’re in a hot market and it takes 45 days to close, a cash buyer who’s ready to close quickly might be a lot more attractive, leaving you to clear the game board and start a whole new one.
But once the dust settles, the closing time frame should adjust. “We expect to get back to previous processing times within a few months,” says Fleming.
Dealing with a longer closing period
Gloria Shulman offers two tips to help ensure you aren’t burned by a longer closing:
Ask for a rate lock longer than 30 days.
Avoid any loan that does not waive the per diem charge for late closings.