Big changes in the process of buying a house kick in Aug. 1, the day new federal mortgage rules take effect that are designed to eliminate closing-day surprises or confusion.
While title companies and real estate agents and lawyers are scrambling to be ready by the deadline, home buyers should feel more like guests at a well-executed dinner party, oblivious to the mess in the kitchen and content to be served each course at just the right time.
"It's going to bring better peace of mind that you know what you're getting into with this loan," said Ben Niernberg, executive vice president at Northbrook-based Proper Title. If all the professionals in the pipeline handle the new rules well, homebuyers should notice only that "things have gotten easier to understand," he said.
For the homebuyer, the new rules created by the Consumer Financial Protection Bureau bring two key changes: All the financial details of their purchase will be spelled out more simply, and the forms containing those details will be in their hands three business days before the closing, giving them time to ask for clarity on anything they don't understand.
"You're getting time to see all the moving parts of your loan a few days before you sit down at that table to close the transaction," said Maurice Hampton, managing broker and CEO of Centered International Realty based in Beverly. CFPB says consumers will
"Know Before You Owe."RESPONSE TO SUBPRIME MELTDOWN
Enabled by the Dodd-Frank Act, the
TILA-RISPA Integrated Disclosure rules, as they are known, come largely as a response to the subprime mortgage meltdown, in which some borrowers were unaware of the moving terms of their adjustable-rate mortgages and wound up in default when a rising interest rate increased their monthly payments.
While some experienced real estate buyers may see the changes as a belt-and-suspenders approach to the relatively rare problem of buyers misunderstanding their loans, eventually the changes will become transparent, say most people in real estate and related industries.
"There will be a few more steps along the way, but the steps are to protect people and give them a chance to make a better financial decision," said Tom Pilafas, executive vice president of Near North National Title Insurance in Chicago.
Here are four things to know about the changes:
• The rules apply to loan applications initiated Aug. 1 or later. Any loan in process prior to that will operate under existing rules. All-cash purchasers also are exempt.
• The rules require two new forms, both of which replace—and are intended to simplify—existing forms.
First is the loan estimate, delivered to the borrower within three days of application and projecting the monthly costs, the closing costs and the cash the borrower will need to bring to the closing. This form will take the place of a Truth in Lending, or TILA, form and the Good Faith Estimate. Second is a Closing Disclosure form, delivered three business days before the scheduled closing. This one replaces a closing-day form known as HUD-1 and a second TILA form.
"The difference with the new forms is that the figures on the first one and the second one have to agree, or be very close," said Jeffrey Baker, a lawyer with Sorling Northrup in Springfield who works for the Illinois Association of Realtors. "There was no mechanism requiring them to match up in the past."
CFPB's rules include penalties for lenders if the figures on the two forms aren't within an established range, Baker said. The idea is to prevent buyers who've fallen in love with a certain house from getting markedly more expensive terms at closing than they were counting on, "when they might feel they have to just go ahead and do it," Baker said.
• Both forms emphasize clarity.
"When you closed in the past, you got a spreadsheet that was a bunch of numbered lines," said Christopher Hacker, a co-founder of ShortTrack, a Chicago-based real estate transaction software company. "It was confusing, and you needed somebody to decipher it for you." Under the new rules, "you'll see something text-based and more intuitive that tells you what you'll owe" on a monthly basis, and how that will change in the future, in the case of a loan with an adjustable rate.
• Last-minute changes in a sale will be harder to make.
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