New rules to make mortgage shopping less clunky
Shopping for a new home now? Or planning to go house hunting this spring? You'll want to pay attention to some new mortgage disclosures that rolled onto the scene this month.
The goal is to protect consumers from taking on too big of a mortgage, rushing into a loan before they understand the real cost or signing documents without realizing they're agreeing to some cumbersome conditions.
"It's designed to bring the prospective home buyer into a better position to understand the whole transaction," said Andy Slettebak, director of lending for the non-profit NeighborWorks America.
Janneke Ratcliffe, assistant director of the Office for Financial Education at the Consumer Financial Protection Bureau, said the new disclosures are an improvement compared with previous disclosures. They were created to be easier to read and give consumers more information up front about the home-buying process. Three key features, she said, are:
1. A lender now must provide you a Loan Estimate Form within three days of receiving your application.
The three-page Loan Estimate discloses the estimated costs of taxes and insurance, and how the interest rate and payments may change in the future. You could spot potential risks associated with the loan, such as if this particular product possibly includes a penalty for paying the loan off early. Or maybe there's a balloon payment — a larger than usual one-time payment at the end of the loan.
One key bit of detail: This form allows you to better compare loans by seeing how quickly you'd reduce the loan principal in five years. You'd see the total mortgage-related costs over five years.
Do some shopping for mortgages and a home before obtaining a Loan Estimate.
Before you receive this new document, you need to provide the lender with your name, your income, your Social Security number, the property address, an estimated value of the property and the desired mortgage.
2. Consumers must receive their closing documents at least three days before closing so they have a real chance to review the paper work.
Here's where some extra consumer protection could shake up the process a bit. The new three-day window gives you a chance to compare your final terms to what you received earlier in that loan estimate. You'd receive a five-page closing disclosure.
You'd know exactly what cash you need to bring to the closing table. You'd also want to check such things as your interest rate, loan amount, and monthly payment. You can see what you'd be charged for a late payment
Douglas Robinson, a spokesman for the non-profit NeighborWorks America, said some consumers had complained during the foreclosure crisis that the closing documents that were brought to the table were different from what was presented earlier. Now, consumers would have more time to review the terms and get more information if they want.
The process, though, is new and only went into place Oct. 3. So some lenders have expressed concern that the timing for providing the closing disclosures might create an inconvenience for some consumers who are particularly eager to close on their mortgage. Issues might arise, for example, if a last-minute change were to trigger the need for a new disclosure and yet another three-day wait before closing.
Some closings could take longer while title companies gain more experience, according to Bankrate.com. So borrowers could want a longer rate lock of 45 days or 60 days, instead of a 30-day lock, given some uncertainties.
Mike Lyon, executive vice president of operations for Quicken Loans, said the way he's reading the regulations a customer would need to acknowledge that he or she received the disclosure documents electronically in order to close more promptly. If not, that closing could string out to seven business days because of the way the rules are written.
How's that 401(k) working out? Some things to think about
The CFPB's compliance guide notes that if the disclosure is provided in person it is considered received on the day it's presented. If it is mailed or delivered electronically, though, the consumer is considered to have received the closing disclosure three business days after it is delivered or placed in the mail. And then, the consumer has three days to review after that, stringing out the process.
About 97% of Quicken's clients receive closing documents electronically via the company's MyQuickenLoans website, where the customer can instantly acknowledge the disclosure. If the consumer confirms receipt of documents received electronically, the creditor can consider it received on that date. And the closing could take place more quickly.
Lyon said there could be a learning curve when it comes to the timing.
"I think it's going to be a little bit of a bumpy ride up front," Lyon said.
3. Consumers can do more research online before shopping for a house or mortgage.
An online suite of tools at the CFPB site enables consumers to explore interest rate options in an area.
The CFPB site has an "Explore Interest Rates" feature that offers data from lenders and is updated each day. Consumers can scroll down a tool bar to select their state, enter in an estimate of the price of the house, and other information.
Most consumers view the home-buying process, perhaps not surprisingly, as a complicated transaction, according to research by NeighborWorks America.
So more information earlier in the game can be helpful.
A "Home Loan Tookit" is available, too. You'd get a toolkit when you apply for a mortgage to buy a home or a consumer could download the tool kit at www.consumerfinance.gov/know-before-you-owe.
One tip: If your credit score is below 700, you will likely pay more for your mortgage. But if you work on improving your credit and wait to buy a home, you will likely save money. Some people who improve their credit can save $50 or $100 a month on a typical payment, according to the "Your Home Loan Toolkit."
Contact Susan Tompor: 313-222-8876 or stompor@freepress.com. Follow Susan on Twitter @Tompor.