On Oct. 3, the Consumer Financial Protection Bureau implemented a major new revision to the mortgage process. The new program, known as “Know Before You Owe”, might mean headaches for banks and loan lenders, but the increased transparency is good news for everybody in the market for a new home, including first-time condo buyers.
What You Need To Know About “Know Before You Owe”
The most significant changes being rolled out under the “Know Before You Owe” program will impact lenders and property managers more than potential buyers. “Know Before You Owe” was created to help buyers better understand the closing process and all of the associated fees, along with helping buyers shop around for the best loan rates.
To accomplish this, the CFPB has consolidated four closing documents under the previous HUD-1 system into two easy-to-understand forms: the Loan Estimate and Closing Disclosure.
The Loan Estimate
The Loan Estimate replaces the Good Faith Estimate and Truth-in-Lending disclosure forms, which have been in use for decades. The Loan Estimate includes interest rates and expected future changes, lender and third-party service fees, and estimated closing costs.
There are two major differences between the Loan Estimate and the HUD-1.
- The first major change is that loan lenders are now required to supply a quote within four days of receiving the request.
- The second, and more impactful, change is that borrowers will have a 10-day grace period to shop around for other options, such as different mortgage lengths, or interest rates.
The process is now more like collecting quotes on car insurance or shopping around for contractors. You wouldn’t just buy the first deck you came across, why should you jump into a payment you’re going to be making for the next 30 years?
The Closing Disclosure form stands to have the greatest impact on the buying process. The Closing Disclosure form replaces the HUD-1 Settlement Statement and final Truth-in-Lending form.
The Closing Disclosure form makes sure that buyers aren’t being nickel-and-dime’d with unnecessary costs, particularly the lender’s appraisal fee and the attorney’s fee. Other fees may not increase more than 10% from the price quoted on the Loan Estimator.
What “Know Before You Owe” Means For First Time Condo-Buyers
The new mortgage rules will have more of an impact on sellers and lenders than buyers and borrowers. Things will be in a state of flux for a while, however, as lenders and property managers get used to the new rules.
The most notable changes for first-time condo buyers will be:
- Things need to happen earlier in the process. To make sure there are no delays at closing, certain things need to happen earlier in the closing process. Schedule walk-throughs a week before closing, instead of the night before, to make sure there are no surprise repairs before the Closing Disclosure is issued.
- The National Association Of Realtors has advised its members to extend contracts by 15 days, from 30 to 45, to help them get used to the new rules. This means that while the purchase process isn’t all that different for buyers, it will just take a little longer.
- Every offer will have a uniform appearance. This will make comparing mortgage offers easier, to help consumers find the best possible deal.
pro tip: Borrowers will want to check the APR, or Annual Percentage Rate, which is located on the last page Loan of the Estimate.
Three things that could trigger a three-day delay at closing time, including:
- If your APR increases for some reason
- If the bank adds a prepayment penalty, which is a fee to discourage buyers from refinancing
- If the loan changes, for example from an adjustable rate to a fixed one
If there’s a small mistake in the Closing Disclosure, some mortgage lenders will take on the cost themselves. Others will delay the closing until all numbers match exactly.
“Know Before You Owe” Resources
To make the process as painless as possible, the CFPB has released a number of resources for the “Know Before You Owe” program.
Your Home Loan Toolkit – First and foremost is the CFPB’s exhaustive toolkit, with everything anyone could need regarding buying or selling a home. You’ll receive the Home Loan Toolkit when you apply for a mortgage, but it can be downloaded ahead of time.
They’ve also created digital resources for understanding the Loan Estimate and Closing Disclosure forms. The digital resources define common terms used throughout the paperwork and states the pages where they’re used, so they can be easily compared between the two forms.
Consumerfinance.gov have updated the “Owning A Home” site with a comprehensive step-by-step overview of the mortgage process. The guide also has resources for understanding your loan options and best prepare for closing.
HUD-approved counselors are another excellent resource for understanding the new mortgage rules. HUD counselors can often times be consulted with for free or at a very low cost. You can use Consumerfinance.gov’s Search Tool to find a HUD counselor in your area.
How are you finding the new mortgage rules? Are they easy to use and understand? How are these rules impacting your housing search? Let us know in the comments!