New mortgage rules went into effect in October. These rules, designed to make the process more thorough and cut down on error and confusion, have a number of implications for both lenders and homebuyers – as well as for the real estate market as a whole. Let’s take a closer look at how things have changed, and how they’re impacting the industry so far.
How the Rules Protect Borrowers
Throughout the recent foreclosure crisis, homebuyers struggled with their loans. They didn’t understand the terms and conditions of their loans, which in turn blindsided them with fee changes and rate increases at closure. At the core of the problem was a lack of disclosure in the mortgage process, despite the regulations in place by the Consumer Financial Protection Bureau
The new TILA-RESPA Integrated Discourse rule requires more transparency from lenders, with “Know Before You Owe” forms that replaced previous forms on October 3. The new forms aim to reduce confusion and help consumers understand the terms and conditions of their loans and fees
These new forms, the Loan Estimate and Closing Disclosure forms, have been used in every mortgage transaction since their implementation and will continue as such. Ultimately, the system is designed to simplify the process of navigating loans and closing on a property
Loan Estimate
With the new Loan Estimate form, prospective homebuyers will receive a detailed explanation of the terms and conditions of potential loans within three days of submitting an application. The forms explain the amount and interest rate, as well as whether these figures could change after closing
By providing a clear breakdown of the figures, the forms allow users to compare loans from multiple lenders in one place, which will in turn make it easier to shop around and find the best possible rate and terms. Lenders must also provide clear information about whether interest rates are fixed or adjustable, in addition to outlining potential future penalties
Closing Disclosure
In addition to clear estimates, lenders must also provide the Closing Disclosure form three days before the closing date. This prevents lenders from changing loan terms at the last minute. As a result, inspections, repairs, and contingencies must take place earlier during the process.
The Closing Disclosure form, as with the Loan Estimate form, must clearly delineate loan amount, interest rates, monthly payments, and other costs – which will allow buyers to verify that these costs haven’t changed since the initial estimate, or ask why they have changed.
What Hasn’t Changed
According to the Consumer Finance Protection Bureau, the Know Before You Owe rule doesn’t change preapprovals or pre-qualifications. As such, buyers will still need to invest the necessary time and effort to learn about how home loans work and how to define what they want – as well as what they’re able to finance
It’s still a very good idea for prospective buyers to discuss the process with a lending counselor, learn about specific types of loans, and confidently identify their ability to finance the cost
Paying Off a Mortgage
With this in mind – and regardless of where loans are sourced from – it’s important only to buy as much home as you can afford. Property management experts Green Residential offer this example: You may qualify for a loan of $250,000, but it may be smarter to buy a home priced at $200,000. This will allow you to put more equity into the property and pay off your mortgage more quickly
As a result of the new Know Before You Owe rule, it may take longer for prospective buyers to close on a home. However, don’t let this discourage you. The extended time it could take will make it safer and easier for buyers to understand the precise terms of the process and make the wisest possible choice based on their wants, needs, and financial situations.