Borrowers will also get at least three days to review the loan before they close on the mortgage. Currently they can make changes even on closing day and still complete the sale. (The rules will go into effect during the weekend, but housing pros say they will be enforced starting Monday.)
The new rules were mandated by the Consumer Financial Protection Bureau to cut down on the issues that came up during the financial crisis, when many buyers lost their homes after signing up for complicated mortgages they didn’t fully understand.
“People may have missed, in essence, the fine print around what really they were signing up for,” said Terry Moore, senior managing director at Accenture Credit Services. With the new rules, buyers should have a better grasp of what rate they are paying and how much their mortgage will cost them.
Instead of getting as many as four disclosure forms when applying for and closing on a mortgage, consumers should now get two, simpler forms. One is the loan estimate, which should break out the total loan amount, the estimated monthly payment and the amount of cash needed to close. The second form is called the closing disclosure, which should be provided three days before closing and should help borrowers see how the loan may have changed since they received their initial estimates.
The three-day time window, which is another major change in the closing process, is meant to give buyers more time to review loans closely and make sure they understand what they’re signing up for, brokers said. “In the past, it has happened where they get the document and they don’t have the time to go through it,” said Will Wiard, a real estate broker in the Washington area.
Buyers should use the three-day window to double-check the details of their loans. For example, buyers should look at their total loan amount and interest rate, Moore said. They should also review how much cash they’ll need to provide up front and ask their lender to explain any increase in closing costs. Buyers should double-check that monthly payments will be what they expected. And they should watch for more complicated loan features, such as whether there is a prepayment penalty, Moore said.
While the new rules are supposed to make the closing process easier for home buyers, experts warn that they should expect delays. The rules could extend the overall time it takes to close on a sale, Wiard said. For instance, someone who requests a change to their loan during the three-day period, such as adjusting the closing costs, may then need to wait another three days before they can close on the sale.
The new disclosure period may also cause issues for people trying to sell one house and buy another at the same time, said Stephen Baker, a broker with Re/Max Central Realty in Lake Mary, Fla. Doing both simultaneously is always a juggling act, but a last-minute change that restarts the three-day window could mess up the timeline for moving into their new home, he said.