What new mortgage rules mean for first-time homebuyers
One of the most daunting parts of buying a home is wading through the reams of paperwork that come with securing a mortgage. But the process just got a little simpler.
As of Oct. 3, lenders had to provide borrowers with two new mortgage disclosures, replacing the four that were previously issued. The forms, created by the Consumer Financial Protection Bureau, are streamlined and easier to understand.
“The documents are designed to be more transparent and understandable, and I think they are really well done,” said Holden Lewis, a mortgage analyst at Bankrate.com, which tracks loan rates.
Consumers, including first-time homebuyers, can now feel more confident about comparing mortgages and signing on the dotted line when buying a home. A survey published earlier this year by the CFPB found that nearly half of all homebuyers do not shop around for a mortgage.
If you’re in the market for a home loan, here’s what you can expect to get from a lender.
When you apply
for a mortgage
Under the new rules, lenders must provide you with the first of the new forms, called a loan estimate, no later than three business days after you’ve applied for a mortgage. The three-page document lays out the terms of the mortgage, including the loan amount, interest rate and closing expenses.
It also provides two key numbers: how much the loan will cost you in terms of principal payments, interest, closing costs and mortgage insurance (if applicable) over the next five years, and how much principal you will have paid off over the same period.
“You can look at those two numbers and easily compare one loan to the next,” Lewis said. “It will make the mortgage decision easier for a lot of people.”
The CFPB recommends applying for a mortgage from at least three lenders before selecting a loan.
When you close on a home
Once you’ve picked a lender, you must receive the second disclosure, known as the closing disclosure, three business days before your scheduled closing date. Previously, lenders provided a similar disclosure just 24 hours in advance, if requested, leaving you little time to spot errors.
The closing disclosure is five pages and contains much of the same information that you’ll find on the loan estimate.
“The closing disclosure is much clearer now,” Lewis said. “You can compare it side by side with the loan estimate to see what’s changed.
“And I think people will feel more confident and secure that nothing will sneak past them, that they got the loan that they were promised.”
Keep in mind that if your lender makes any significant changes to your loan after the closing disclosure has been sent — say, your interest rate increases — a new disclosure has to be issued and the three-day waiting period resets, potentially pushing back your closing date.
As such, Lewis said buyers should be especially conscientious about their credit profile.
“A lot of first-time homebuyers may be tempted to buy new appliances and tools for their home, opening a store credit card to get a discount when you make the purchases,” he said. “But a new credit account could push down your score,” and consequently drive up your loan rate if the lender checks your credit score a day or two before closing.
“Just don’t do it,” he said.
The CFPB has put together resources online that will help you better understand the new disclosure forms and the process of applying for a home loan. Go to consumerfinance.gov/knowbeforeyouowe.