The process for buying a home is different than it used to be. Following the 2008 housing crisis, the Consumer Financial Protection Bureau (CFPB) was directed by Federal financial reform legislation to improve the mortgage process to protect consumers by helping them:
- Better understand loan options
- Shop for the best mortgage
- Avoid surprises at closing
While there are several elements affected by Know Before You Owe (the name the CFPB has assigned to the change in procedures), the most critical changes involve revisions to the paperwork you receive at the beginning and end of the mortgage application process.
The HUD-1 Settlement Statement (a form that itemizes all charges for a borrower and seller as part of a real estate transaction) and Truth in Lending disclosure (a document disclosing the APR details intended to provide a sense of the true loan cost) have been replaced with a single Closing Disclosure. While the single document is still several pages long, it was designed to be easier to read and provide clear representation of information including monthly payments, total payments, closing costs, potential interest rate changes, and other terms. Also new, the Closing Disclosure is now required to be provided to consumers at least 72 hours before closing is scheduled, to allow enough time for review.
The Good Faith Estimate (a clear explanation of the terms of a mortgage), Early Truth in Lending and Mortgage Servicing Disclosure forms are being replaced by the Loan Estimate. The new form highlights risky features such as balloon payments and prepayment penalties. It also provides for easier comparison of amounts such as APR, and the total loan costs. A new item, Total Interest Percentage, outlines the total interest paid over the life of the loan, expressed as a percentage of the amount borrowed.
To provide additional information, advice and tips, all consumers will also receive a “Your Home Loan Toolkit” booklet at closing.
Even if you’ve been through the mortgage process, take a few minutes to understand the new mortgage process. As always, First Internet Bank Loan Officers are available to answer any questions.