Buyers: 6 Things to Know About the New "Know Before You Owe" Rule

If you’ve ever bought a home in the past, you’ve likely experienced some level of confusion over the cumbersome mortgage documents that came along with the transaction. Going through this paperwork can be like reading a foreign language. Many buyers have complained about confusing terminology, inconsistencies in information, and inadequate time to go through and understand the mortgage documents before signing on the dotted line.

What often resulted was buyers being stuck with fees that they weren’t even aware of, simply because of the complex paperwork that they were forced to navigate in a short period of time.

The good news is, the relatively new “Know Before You Owe” lending initiative, which includes the TILA-RESPA Integrated Disclosure rule (TRID), was created to arm borrowers with the information needed to make an informed decision regarding mortgages. By more clearly understanding your loan options, you can avoid being unpleasantly surprised at the costs of your mortgage when it comes time to close.

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Here are 6 things you should know about new changes to mortgage disclosures.

1. Documents are much shorter in length.

The mortgage documents that you get will essentially be cut in half. What used to be four forms has now been reduced to two. Before the TRID rules took effect in October 2015, borrowers would typically receive both the Good Faith Estimate and Truth-in-Lending Act statements when applying for a mortgage. Final TILA-RESPA statements and an HUD-1 settlement would then be given just before closing.

Today, only the Loan Estimate and Closing Disclosure will be given to borrowers. The first document is supplied to the borrower within three days of the mortgage application being submitted, and the latter is sent out three days prior to closing. These new forms are a lot easier to understand, and don’t take as long to sift through given their shorter length.

2. Mortgages can be more easily compared.

Shopping around for a mortgage and comparing them to each other is much more feasible thanks to the simplified Loan Estimate document. Finding a mortgage package with terms and conditions that best suits your financial situation is essential, which is why it’s a good idea to weigh one mortgage against another.

The Loan Estimate makes this job a lot easier because it itemizes each cost associated with a mortgage, such as the interest rate, the monthly payments, and how much the mortgage will cost over a five-year term. Having these numbers listed in detail makes side-by-side comparison easy.

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3. Lender fees are outlined in detail.

Any loan origination fees that your lender may charge will be spelled out on the Loan Estimate. Costs incurred for their services include underwriting fees, points, and application fees. By knowing what these fees are, you’ll be able to compare them among various lenders before you settle on one. 

4. You’ll have a better idea of how much money you’ll need to close.

There’s no secret when it comes to how much money you’ll need to close on your mortgage these days. The “Estimated Cash to Close” section of the Loan Estimate will outline details about approximately how much money will be needed to complete the transaction. This amount will include the down payment, less your deposit or any adjustments or credits from the seller. Any closing costs that are added to the mortgage amount will also be listed on the Loan Estimate.

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5. You’ll have three days to go over your mortgage documents.

Your lender must supply you with the Closing Disclosure no later than three business days before closing. This three-day time period gives you a chance to take your time going over the terms of the mortgage, and compare the final expenses to those outlined on the Loan Estimate. Having a few days to review these details gives you the opportunity to raise questions you might have before sealing the deal.

6. The new disclosures shouldn’t delay your closing.

For the most part, the new disclosures won’t cause a delay in the transaction’s closing, as long as there aren’t any changes to pertinent items in the mortgage. However, your lender will have to give you another three-day review period if there is an increase in the APR by over 1/8% for a fixed-rate mortgage or 1/4% for an adjustable-rate mortgage. In addition, three extra days will also need to be provided if a prepayment penalty is added, and if there is a change to the loan product itself.

The new “Know Before You Owe” mortgage rules make it easier than ever before to understand the stipulations in your mortgage documents, and give you plenty of time to review them before you decide to go ahead with the mortgage. If there is anything you find confusing, it’s always best to consult with a lawyer or housing advisor to have any questions answered before closing on your mortgage.