New Mortgage Rules: The Pros and Cons of “Know Before You Owe”

Applying for a mortgage should be a little less complicated than it used to be. The Consumer Financial Protection Bureau’s new ‘Know Before You Owe’ mortgage disclosure forms took effect in October 2015, simplifying the paperwork and giving homeowners a three-day grace period to evaluate a new mortgage. Before meeting with a lender, review these tips to see how the new rules have changed the mortgage application process. 

The New Loan Estimate Form

When you begin shopping around for a mortgage, each lender will now give you a loan estimate form. The form shows you in clear language the amount of the mortgage they want to give you, the interest rate and what your mortgage payments will be. The form also lists closing costs and any applicable fees or penalties.

Tip: Looking at these forms side-by-side, you’ll be able to compare what each lender is planning to offer you, and you’ll be able to make a more educated decision.

The New Closing Disclosure Form

Once you decide on the lender you want to apply to, they will give you a closing disclosure form when your application is approved. This form spells out the same information as the estimate form — including the mortgage value, interest rate and closing costs — in the same clear language.

Tip: Put the closing disclosure form beside the estimate form to see how their official offer may differ from what you were originally promised.

Your Three-Day Grace Period

Once you receive the closing disclosure form, you have three business days to review the mortgage before it becomes official. This means that if you signed the mortgage on Friday, you have until Wednesday to contact the lender with any questions, changes you want to make, or even to cancel the mortgage if you’ve changed your mind.

Tip: Comparing your mortgage disclosure form with the mortgage estimates you received from other lenders may give you some leverage to get a better deal.

Potential Problems

In November 2015, just a few weeks into the new mortgage process, realtors reported no significant problems for their customers. However, legal experts have pointed out that the three-day grace period could get sticky if you apply for a mortgage close to the closing date of your home.

This is because the three-day period can’t be reduced for any reason. Additionally, if you do make a change to the mortgage contract, the lender must give you a new disclosure, which extends that grace period by another three days. If the three-day period doesn’t expire before your closing date, it could put your purchase in jeopardy.

Tip: If you want to make a change to the mortgage when your closing date is near, contact the lender as soon as possible.