New, streamlined forms designed to make mortgage lending process more transparent
Beginning in October of this year, the forms homebuyers and their lenders use in completing a real estate transaction will change. Thanks to new requirements from the Dodd-Frank Wall Street Reform and Consumer Protection Act, homebuyers will now have fewer documents to review, and the documents provided during the loan application phase, and at the closing table, will be much more closely aligned.
The New Forms – Loan Estimate and Closing Disclosure
When applying for a loan today, homebuyers receive a Good Faith Estimate (GFE) and a Truth-in-Lending (TIL) statement. Both documents provide important information about the loan the homebuyer is applying for, as well as the fees he/she might expect to pay at closing (though some of those fees could change by the time the buyer gets to the closing table).
The new forms combine the Good Faith Estimate and the Truth-in-Lending statement in a single Loan Estimate. With the new Loan Estimate, lenders are required to provide a standard set of information about their loan product (e.g., term, interest rate, estimated tax/insurance payments, pre-payment penalties and estimated cash to close). This means homebuyers can more easily make “apples to apples” comparisons between competing lenders.
View a sample of the new Loan Estimate.
Lenders will provide the new Loan Estimate within 3 days after the applicant provides the following information:
- Full name
- Social security number
- Address of home to be purchased
- Estimate of home’s value (usually the sale price)
- Amount to be borrowed
It’s important to note that a Loan Estimate is not loan approval. It’s simply a commitment to honor the fees outlined in the Loan Estimate, provided there are no changes in circumstance that would impact the loan.
Homebuyers must inform the lender of their intent to move forward with the loan application process within 10 days, or fees on the Loan Estimate are subject to change. Homebuyers should find out from any lender they are applying with what the process is for signaling intent to proceed (email, phone call, etc.).
Once a homebuyer has indicated their intent to proceed, the selected lender can begin to charge necessary fees (e.g., credit reports, appraisals, processing fees, etc.), and collect any additional information/documentation from the homebuyer that’s needed. As in the past, homebuyers will want to move quickly in getting their lender necessary documentation in order to help ensure a quick decision on loan approval, and not delay the closing date.
The Closing Disclosure
The Closing Disclosure replaces the HUD-1 and final Truth-in-Lending statement currently in use. The advantage of the new Closing Disclosure is that it mirrors the Loan Estimate, ensuring the loan applicant is receiving what was promised by the lender. It’s easier to read, and there are some additional requirements to note:
- Homebuyers must receive the Closing Disclosure 3 days prior to closing
- Certain changes will require that a new Closing Disclosure be prepared and delivered, including:
- An increase in APR of more than 1/8 percent
- Addition of a prepayment penalty
- A change to the basic loan product (e.g., switching from a fixed rate loan to an adjustable rate)
View a sample of the new Closing Disclosure.
The new Loan Estimate and Closing Disclosure will affect everyone involved in real estate transactions beginning Oct. 3, 2015. There are bound to be a few hiccups as lenders, settlement/title companies and others bring their processes into compliance. In the long run, however, these are changes that should make the home buying process easier and more transparent for all involved.