- Contrary to popular belief, the new Closing Disclosure will remove a lot of the buyer's anxiety from the home-buying process.
- While all lenders will need the authorization to pull credit, different lenders may require different documents to begin the process.
- There are six items that will now constitute a loan application. This is important to note because once the lender has all six items, they must deliver the Loan Estimate to the borrower within three days.
There is a buzz in the air in the real estate community, and it surrounds the new Closing Disclosure. The Closing Disclosure, or CD, replaced the HUD-1 beginning Oct. 3, 2015.
Educate buyers and sellers
Contrary to popular belief, the new Closing Disclosure will remove a lot of the buyer’s anxiety from the home-buying process. Real estate agents and lenders are spreading some gloom and doom about this new document when, in actuality, we simply need to change the way we present information and deadlines to our clients.
The key to a smooth transition from the HUD-1 to the Closing Disclosure will be the education of our clients. It is imperative to educate both buyers and sellers as to how this new document can impact the sale or the purchase of a property.
Why the change from HUD-1 to Closing Disclosure?
First, let’s look at why the change was made from the HUD-1 to the Closing Disclosure. Under Federal law, lenders were required to provide three different disclosure forms to a consumer applying for a mortgage. The law also required lenders to provide the consumer with two separate forms shortly before closing on the loan.
Because these forms were designed by two different Federal agencies, under two Federal statutes, the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act of 1974 (RESPA), there was duplication and inconsistent information. As a result, consumers were confused.
The Dodd-Frank Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act mandated that these different forms be integrated into one easy-to-understand document. After years of research and analysis, we now have the TILA-RESPA rule.
Although the TILA-RESPA rule has the greatest impact on the lender, it is important for real estate agents to understand the new rule, so they can communicate it to their clients. Remember, it’s all about managing the expectations of the client.
How real estate agents discuss the changes with their buyers starts with the pre-approval process. With most lenders, it will be easiest for the buyer or borrower to complete their mortgage application online.
Once the borrower has completed the application, the lender will send them required documents to enable them to begin the credit process. While all lenders will need the authorization to pull credit, different lenders may require different documents to begin the process. Forms may include:
- Authorization to Pre-Qualify Credit Report Authorization Form
- Mortgage Loan E-Sign Disclosure
It’s important to note that each borrower must sign a separate Mortgage Loan E-Sign Disclosure form. All documents must be signed by the respective borrowers and returned to the lender before the lender is allowed to order the credit report.
The loan application
There are six items that will now constitute a loan application. This is important to note because once the lender has all six items, they must deliver the Loan Estimate to the borrower within three days. The six items are:
- Consumer’s Name
- Consumer’s Income
- Consumer’s Social Security number to obtain a credit report
- Address of property
- Estimate of the value of the property
- The mortgage loan amount sought
What this means for you
If you are accustomed to having the lender include the property address on your pre-approval letter you can no longer do that. At this point, the lender will know all of the other factors for the loan approval. Providing the property address would start the clock ticking for the Loan Estimate.
Once you have a ratified contract
Once you have a ratified contract and sent a copy to the lender, the lender has three days to send the borrower the initial disclosures as well as the Intent to Proceed document. The signed Intent to Proceed document must be received by the lender immediately because they cannot order the appraisal or title work without it.
Buyers who want to shop around
If you have a buyer who wants to shop around to various lenders to see which one offers the best interest rates after they have a ratified contract, let them know that time is of the essence.
If there are appraisal or financing contingencies in their contract, they might have a difficult time adhering to those time frames — if they don’t select a lender quickly. Once they do select a lender, they must sign and return the Intent to Proceed document as soon as possible.
Help the lender meet the required timeframes
After the lender receives the signed Intent to Proceed document, the process is fairly close to what we currently do. The differences are the timeframes in which the lender has to provide information to the borrower. These timeframes enable the lender to comply with the law pertaining to when the buyer must see certain documents.
The borrower must also have their home owners insurance in place at least 10 days prior to closing. The lender needs to have all of the fees associated with the transaction, so they can give the title company an accurate Closing Disclosure.
The borrower has a three-day review period
The lender will send all borrowers the Closing Disclosure three days prior to closing. This three-day time period is intended to give the borrower time to review the fees and the terms associated with the mortgage loan.
What can delay settlement?
There are three changes that can delay settlement by requiring an additional three days to review. Those items include:
- The APR (annual percentage rate) increases by more than an eighth of a percent for fixed rate loans or a quarter of a percent for adjustable loans
- A prepayment penalty is added, which makes it expensive to refinance or sell
- The basic loan product change, such as a switch from fixed rate to adjustable interest rate or to a loan with interest-only payments
What won’t delay settlement?
Although these changes might require the lender to update some of the information on the Closing Disclosure, these items should not delay settlement by requiring an additional three-day review period.
- Unexpected issues at the final walk-through, such as a broken refrigerator or a missing stove, even if they require seller credits to the buyer
- Most changes to payments made at closing, including the amount of the real estate commission, taxes and utilities proration and the amount paid into escrow
- Typos found at the settlement table
For more detailed information on what will or will not cause a delay in settlement, click here.
Getting to settlement is a group effort
As always, getting a property to settlement is a group effort. It is now even more important for the borrower to complete their online mortgage application and provide the necessary documentation to the lender in a timely fashion.
The lender will only be able to adhere to these strict guidelines with the cooperation of all parties involved in the transaction. Talk to your buyers about this part of the home buying process at the first buyer meeting.
Also talk to your sellers and let them know how these new laws might impact the closing date. Education upfront is key. No one likes surprises when their money is involved.
Candy Miles Crocker is the founder of Real Life Real Estate Training.