The Greek philosopher Heraclitus once wrote, “The Only Thing That Is Constant Is Change.” And a more modern philosopher, Bob Dylan, wrote the song, “The Times They Are A Changin’.” Both of them are right – change is constant and the times are a changin’ – even with mortgage loans. The Consumer Financial Protection Bureau (CFPB) has changed the rules with the goal of making sure that the housing crisis of 2007 never again happens. If you are in the market or soon will be in the market for a mortgage loan it’s important to know how the times changed effective October 3.
Before the new rules regarding disclosure went into effect prospective homebuyers got a TMI (too much information) version of their mortgage documents. This included a Truth-in-Lending disclosure with the Good Faith Estimate and another Truth-in-Lending disclosure with an HUD-1 Settlement Statement. These forms were very complicated and lenders were not even required to disclose everything. For example, the Good Faith Estimate and HUD-1 did not reveal the two most important things – the amount of your new payment and how much money you would need to bring with you at closing.
Simpler is better
With most things in life simpler is better. For example, if you want to buy a car it’s better if the process is simple and not complicated. Fortunately, the same is now true of mortgages. The four documents listed above have now been replaced with two simpler ones. They are a Loan Estimate and a Closing Disclosure. According to the CFPB, this should help you find the best mortgage deal and eliminate the possibility of costly surprises when you go to close on the loan you applied for.
A three-day cooling off period
These new mortgage rules also include a three-day wait or cooling off period for you to look over the Closing Disclosure and become familiar with it before settlement. According to the president of Cyprus Mortgage in Illinois, this marks “the biggest overhaul of the mortgage process in decades.”
This three-day wait rule gives you three days to ask your lender any questions you might have about the terms of your mortgage or even consult with a housing counselor or an advisor. You will know every tax, fee and risk. You will also know if you will be penalized for paying off the loan early and if there’s a balloon payment at the end.
You even get a mulligan
In golf, a mulligan is a do-over. A golfer who shanks a drive into a pond might ask for a mulligan so he could try again and that original drive wouldn’t count. The mortgage business now has a mulligan in that if anything about your loan changes during the three-day wait period, you can start over and take another three days to review whatever changes were made. What would trigger the additional three days includes a change in the APR by more than ½% on a fixed rate loan and ¼% on an adjustable rate loan. Of course, if your APR goes down you would not get nor would you need an additional three days.
You would also get a do over if your mortgage issuer adds a pre-payment penalty or if the basic loan were changed from a fixed rate to an adjustable rate one.
The new normal
You hear the term the new normal tossed around a lot these days and it’s definitely true for mortgages. While the three-day wait rule has its advantages it also comes with a new normal. The old normal was to close in 30 days. Now, at least for the next few months, it may take 45 days to close on your loan. This is because many lenders believe it will take more time for them close on mortgages. If you’re in a hurry to get a mortgage you won’t have an easy time of it. The three-day rule is well-intentioned but it could cause you to miss out on a house. This is because if your seller believes it will take you 45 days to get too close and she or he has a cash offer that would close faster this could trump your offer.
If you believe it could take you more than 30 days to close on your mortgage there are ways to keep from getting burned. First, you should ask for a rate lock longer than 30 days. If you’re not familiar with a rate lock this is an agreement between you and your lender that allows you to lock in your interest rate for a specified amount of time at the prevailing market interest rate. Rate locks can be for 30, 45 or even 60 days. However, be aware that your lender may charge a lock fee. Second, stay away from any loan where there’s a per diem charge in the case of a late closing.
A mortgage is something you will have to live with for many years – maybe as many as 30. You need to do your research and read every document carefully and make sure you understand it before signing it. While the CFPB has made the mortgage process simpler and easier to understand the burden is still on you or caveat emptor – let the buyer beware. Is your mortgage conventional or FHA? How much money will you be required to bring to closing? Are you being charged points? Will you need to buy private mortgage insurance (PMI)? What are the annual property taxes and who will pay them? Does your payment include taxes and homeowner’s insurance (PITI or payment with taxes and insurance) Are you certain you will be able to make your monthly payments? These are all things you need to understand before signing on the dotted line.
In addition to the phrase that the “only thing constant is change”, is the timeworn phrase of buyer’s regret. You will have to live with that mortgage for many years and you need to ensure it’s not one you end up regretting for all those years.