The Consumer Financial Protection Bureau (CFPB) has a plan to make closing on a home a simpler and more transparent process. Beginning on October 3rd the CFPB’s new Know Before You Owe mortgage disclosure rule will take effect. As of that date, homebuyers’ closing documents should be easier to understand. Loan estimates are here to stay.
Out with the Old: TIL + GFE
In the outgoing system, lenders disclose closing costs to buyers by means of two forms, the Good Faith Estimate (GFE) and the Truth-in-Lending (TIL) disclosure. The homebuyer gets a total of five pieces of paper from their potential lender.
The TIL disclosure is a two-page form that explains the basics of the proposed mortgage. It’s not a contract or a commitment to lend. It will show you the Annual Percentage Rate (the annualized interest rate for the money you’re borrowing), the finance charge for the money you’re borrowing, the amount financed and the total of all the payments you’ll make over the life of your mortgage.
The TIL will also break down your monthly payments into principal and interest, mortgage insurance and property tax and insurance (kept in escrow). The document will tell you if your mortgage interest rate is variable or fixed and if it comes with prepayment penalties.
The GFE shows you an estimate of your settlement charges and loan terms should you be approved for the home loan. It shows you a summary of the loan and the answers to questions like “Can my interest rate rise?” and “Does the loan have a balloon payment?”
The GFE also shows an estimate of the extra charges you’ll face as closing costs. These can add up, so having a detailed list is important if you want to stay on budget. Some settlement charges you may not have thought of include title insurance and transfer taxes.
Check out our closing costs calculator.
In with the New: Loan Estimate
Under the new system, Loan Estimates replace the TIL and the GFE. The Loan Estimate combines the loan terms break-down of the TIL with the closing costs break-down of the GFE. The Loan Estimate is three pages, two pages shorter than the old TIL+GFE combo.
The Loan Estimate is divided into different sections that offer clear explanations of the costs you’ll face if you go through with the mortgage. The first section explains the loan terms, including the loan amount, interest rate and total monthly principal and interest. Next to each of these items is a box that tells you, yes or no, whether the item can increase after closing. Finally, you’ll see lines telling you whether the loan comes with prepayment penalties or balloon payments.
The next section explains your projected payments. It will show you how your payments will decrease once you are no longer required to pay private mortgage insurance if your loan requires you to do so. This section also shows you estimated taxes, insurance and assessments.
The following section explains closing costs. It shows you a total and also breaks the charges down into origination charges, charges you can shop for (to reduce your costs) and charges you can’t shop for. It also shows you other costs such as prepaid homeowners insurance and property taxes. Finally, the form shows you “estimated cash to close” which is a combination of the closing costs and your down payment.
Related Article: Is An Adjustable Rate Mortgage Right For You?
Out With the Old: Final TIL Disclosure + HUD-1 Settlement Statement
In the outgoing system, your final set of closing documents will be the Final TIL Disclosure and the HUD-1 Settlement Statement. This is a further five pages with the final loan terms and closing costs. If you’re at this stage the time to shop around to lower your closing costs has passed.
In with the New: Closing Disclosure
In the new system, the Closing Disclosure replaces the Final TIL Disclosure and the HUD-1 Settlement Statement. The Closing Disclosure is a five-page form that combines the finalized loan terms with a detailed break-down of your closing costs. It’s designed to be easier to read and understand than the forms it’s replacing.
The Closing Disclosure makes it easy to see what you’re being charged, what you’ll owe each month and what your liability will be in the event of foreclosure. It tells you whether your lender will accept partial payments and whether your loan has a negative amortization feature that would increase the loan amount over time. In short, it makes it easier to see how much flexibility you have and to identify red flags like prepayment penalties and negative amortization.
Related Article: What Are HUD Loans?
The idea behind the redesign of the mandatory closing documents is to make financing a home purchase and closing on a home more transparent for the homebuyer. With the new documents, you should be able to tell right away if your mortgage interest rate could change, if you’ll owe money for private mortgage insurance and if you’ll be on the hook for a balloon payment down the road. This information is presented clearly, with check boxes and yes-or-no questions. Want to take a closer look at the old forms and the new forms? The CFPB has a page with downloadable PDFs of all of them for anyone who wants to compare the two systems.
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