Buying a home is a huge, and often confusing, process (there are even things you should do before you start looking). Getting your mortgage and lender sorted out can be difficult. The Consumer Financial Protection Bureau has a plan to help make this a little simpler, more accurate, and less costly. The Know Before You Owe disclosure rule is meant to make closing on a home simpler and more transparent for the buyer. Since the rule is already in effect, it's a good idea to take some time to learn about the new closing documents and Loan Estimate forms you will encounter as a potential homebuyer.
How It Used to Work
Until Oct. 3, lenders would disclose closing costs to buyers with the Good Faith Estimate and the Truth in Lending Act forms. These outlined what the lender was offering for your mortgage. The TILA form would show the annual percentage rate, fixed or variable nature, finance charge and any possible prepayment penalties or fees associated with the loan. It also outlined the amount financed and total of all payments you will make over the life of your mortgage, broken down into principal and interest, mortgage insurance, property taxes and homeowners insurance. After that, homebuyers would receive the final set of closing documents — a Final TILA Disclosure and HUD-1 Settlement Statement, another document with the final loan terms and closing costs.
The New Loan Estimate Form
With the new Know Before You Owe rule, a lender will provide a new document — a three-page Loan Estimate. It is divided into sections that explain the costs of your home if you go through with the mortgage offer with this specific lender. The first section explains the loan terms, including the loan amount, interest rate, and total monthly principal and interest. A box that tells you if the item cost can increase after closing follows each of the items. This section also reveals whether the loan comes with prepayment penalties or balloon payments. Next, you will find your projected payments, estimated taxes, insurance and assessments. The last section shows closing costs, providing the total as well as a breakdown. Last, you will find the prepaid homeowners insurance cost, property taxes cost, and the "estimated cash to close," a combination of the closing costs and your down payment. New rules indicate that the lender provides this easy-to-understand loan summary and must stand by the estimate for 10 days, giving you time to shop around. The lender has to stick with the estimates of its own fees. Final costs for third-party charges should bear a close resemblance to their estimated figures.
Once you receive a loan estimate under the new system, it should be easier to compare your options and get better prepared for the closing. Once you decide on a lender, you will receive the new closing disclosure, which shows the finalized loan terms and a detailed breakdown of your closing costs in five pages. Now, you are at the final step of officially becoming a homeowner. Before the settlement, you'll want to have a professional inspector walk through the house to assess any potential problems, get a homeowners insurance policy, gathering all the necessary documents, and visit the bank to get cashier's checks for the down payment, closing costs, taxes and fees. Then, get ready to sign some more papers and accept your keys.
These new mandatory documents for closing on a home should allow you to clearly review your mortgage details before making your final arrangements. The information is meant to be clear, but you can check out the CFPB website to get a closer look at and better understanding of both the old forms and new ones.
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