Let’s face it: Taking out a mortgage to buy a new house can be an intimidating experience.
As you plunge into what may be the most expensive transaction of your lifetime, the “good-faith estimates” and “truth-in-lending” disclosures that lenders send to you can be confusing.
Worse yet, some of the numbers in the disclosures may not even turn out to be accurate.
Then comes the loan closing or settlement, which sometimes hits you with a last-minute paper blitz that you have little time to review and understand. I've sat in closings where the essential documents did not arrive until an hour or more past the scheduled start time, leaving no opportunity to read through them carefully, look for errors and ask questions.
All of this can leave your head spinning at the worst possible time — just when you’re dealing with final moving arrangements, planning for purchases of furniture and appliances and a million other details that come with buying a house.
But here’s some important, and welcome, news: Thanks to new federal rules, you’re about to get much clearer disclosures of loan fees and settlement charges. And you’re going to get them sooner and more reliably — no more than three days after your mortgage application and no less than three days before the closing for your settlement papers. There are some potential downsides to the new procedures, which I’ll get to below, but the rules are mainly a big plus for buyers who want to understand what they’re signing.
From Oct. 3 onward, the traditional truth-in-lending, good-faith estimates and “HUD-1” closing statement will disappear. Homebuyers will instead receive a new, more consumer-friendly “Loan Estimate” disclosure upfront and a “Closing Disclosure” form in advance of your settlement. (Both forms are available at www.consumerfinance.gov.)
The Loan Estimate is intended to walk you through the key features of the mortgage you are applying for, from monthly payment amounts, interest rates, escrow charges for taxes and insurance, plus an advance screenshot of your closing costs. These charges are sensibly arranged according to items that are not permitted to change before the settlement date (lender-imposed fees), along with charges that you can control by shopping among competitors (title search, title insurance, survey and pest inspections).
The Closing Disclosure is a five-page, easy-to-follow breakdown of your loan details, closing costs, the cash you need to close, separate summaries of the financial details of the entire transaction for both you (the buyer) and the seller, plus useful information about fine-print issues in the mortgage documents. Is the loan “assumable?” That is, can you pass it along to a future buyer? What about late payments, partial payments, escrow account items? Finally, it provides a full page of contact information — how you can get in touch with the realty broker, loan broker, lender and settlement agent if questions arise later.
One of the biggest changes: The lender will now be required to deliver the Closing Disclosure to you no less than three business days before the actual settlement date. Under current rules, you are supposed to get the HUD-1 settlement sheet a day in advance, but that rarely happens. If you don’t receive the new Closing Disclosure by the three-day deadline, there can be no settlement until it arrives and you have three days to review. Equally important, the lender will now be held responsible by federal regulators — the Consumer Financial Protection Bureau — for any errors in the Closing Disclosure, and will be required to correct them before the transaction legally closes. For most changes, the lender can correct them without triggering a new three-day review period for you, but there are exceptions:
A full review period is mandatory if:
- The annual percentage rate (APR) in Closing Disclosure is one eighth of a point (1/8 percent) higher than was originally quoted in the Loan Estimate.
- The lender has added a prepayment penalty to the mortgage, imposing fees on you for paying it off earlier than a set date.
- There is a fundamental change to the loan type, such as a switch from a fixed interest rate to an adjustable rate.
All this sounds positive for buyers, so where are the potential complications? Start with the mandatory three-day review. Some lenders and real estate agents worry that the review process could delay scheduled closings if borrowers spot problems — things like repairs with dollar set-asides in the sales contract that are not completed by the seller discovered in a walk-through inspection. Or differences between estimates in the upfront loan estimates and the final numbers settlement numbers, plus other commonplace issue that inevitably pop up in real estate transactions.
Under the traditional rules, matters like these could be adjusted by the parties at the settlement table. Now lenders will need to make the changes and send back the revised documents to the buyer and seller, causing a delay. Washington attorney Philip Schulman, a national legal expert in real estate settlement law, says lenders and real estate agents should add as much as two weeks to current closing schedules to accommodate potential review period changes.
Ben Niernberg, executive vice president at Proper Title LLC, a title insurance agency in Illinois, says “sellers who are anxious to sell, and buyers who are trying to coordinate their move-in dates, will need to consider” the possibility of last-minute delays “and plan accordingly.” Some industry estimates suggest today’s 30-day closing schedules could expand into 45-day schedules. As a direct result, mortgage companies that offer applicants standard 30-day “rate locks” — guarantees that their interest rates won’t increase between the time of application and the closing date — may have to switch to 45-day and 60-day rate locks. That, in turn, could increase borrowers’ costs, since many lenders charge fees for rate locks longer than 30 days.
Bottom line: The new disclosures and settlement rules should provide major benefits for homebuyers in the coming months — more accuracy in financing, more transparency about settlement charges. But as lenders, title insurers and real estate agents transition to the new procedures, there could be delays to some closings and maybe even small increases in loan fees. But they’re likely to be worth the trouble. As the Consumer Financial Protection Bureau puts it, it’s smart to “know before you owe.”