2 Things You Must Know About the New Mortgage Rules

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The "Know Before You Owe" rules that went into effect October 3rd are supposed to make it easier for consumers to understand exactly how much they are paying for their mortgage loans, and compare offers from different lenders. But could the new rules also slow the mortgage process?

Maybe. But any slowdown should only be temporary, said Debbie Hoffman, chief legal officer with mortgage services firm Digital Risk.

"In the long-term, no, these new rules shouldn't make it take any longer to close a mortgage loan," Hoffman says. "It should actually make the whole process more streamlined. It should have a positive impact. But in the short-term, things might take a bit longer."

That's because everyone involved in the mortgage process — from loan officers, to title insurers, to the underwriters who determine who does and doesn't qualify for mortgage dollars — has to learn the new lending procedures spelled out in the "Know Before You Owe" rules. But once that happens, Hoffman predicts that the new rules, and the new disclosure forms that they mandate, will make getting a mortgage a less intimidating process for consumers. As for those extra days to close a loan, Hoffman predicts that they will fade away, too, as lenders and underwriters adapt to the new rules.

The Changes

The rules, instituted by the Consumer Financial Protection Bureau, require mortgage lenders to make some changes in the way they hand out mortgage money to borrowers. Consumers don’t have to concern themselves with most of these changes. But they should be aware of the introduction of two new forms that list the costs and terms of the mortgage loans for which they are applying, known as the Loan Estimate and the Closing Disclosure. This pair of forms replace four previous disclosures that lenders passed out to borrowers during the mortgage process.

The Loan Estimate

Within three days of submitting a loan application with a lender, consumers should receive the first of the new disclosures, their Loan Estimate disclosure. This disclosure will list how large of a loan you are taking out, the interest rate attached to your loan, your estimated monthly payment, and the estimated amount you'll pay each month in taxes, insurance, and assessments.

Just as importantly, the Loan Estimate will list your estimated closing costs and the estimated amount of cash you'll need to bring to the closing table. The second page of the Loan Estimate will break down your closing costs, showing you, for example, how much you'll pay for title insurance, the appraisal of your new home, underwriting services, and a pest inspection.

The goal is to make it easier for you to understand how much your mortgage will actually cost you, both at the closing table and over the life of the loan. The Consumer Financial Protection Bureau says that the Loan Estimate also makes it easier for consumers to shop for the best offers from mortgage lenders. That's because consumers will be able to directly compare Loan Estimates from every lender with which they apply.

The Closing Disclosure

The new rules also require lenders to provide you with a second disclosure form, the Closing Disclosure, at least three business days before your scheduled mortgage closing. This disclosure is similar to the Loan Estimate, only it lists your final official closing costs and loan terms. The costs listed on this disclosure are no longer estimates, but are the actual costs you’ll pay when you sign the paperwork that makes your loan official.

You should take three days to compare your Closing Disclosure with your Loan Estimate to make sure that none of your closing costs have increased greatly. Costs might rise or fall slightly from the time you apply for a loan to the time you receive your Closing Disclosure, but they shouldn't rise by much.

If you do notice significant changes, contact your lender to correct the mistakes. If your lender has to send you a new Closing Disclosure with more accurate figures, the three-day review period starts again.

"I think the new disclosures add a lot of assets for the consumer," Hoffman says. "The information is easier to understand. It makes the loan process more transparent. Just the fact that they list exactly how much cash the borrowers need to bring to closing is a nice benefit. The forms should make it easier for borrowers to understand the mortgage process."

Have you benefited from the new mortgage disclosure rules?