Whether you’re a first time buyer or an experienced homeowner familiar with getting a mortgage, now’s the time to take another look at the process.
A new federal rule, which took effect last October, has made changes to the forms you receive before and during the closing process. This gives you more time to review these disclosures than in the past. The new rule, known as “Know Before You Owe,” combines four disclosure forms into just two, the Loan Estimate and the Closing Disclosure.
The two forms are designed to make it easy for you to compare what your lender estimated for your mortgage and closing costs and what the final costs will be. You’ll receive the forms–including the final costs–in time for you to make sure there haven’t been major changes to the deal you were offered on your Loan Estimate.
You’ll have time to ask your lender all the questions you might have about the terms of your mortgage and consult with a lawyer or housing counselor.
Understanding your Loan Estimate
The loan estimate is designed to make it easier to shop around and compare loan offers from multiple lenders. Here’s how.
When you are applying for a mortgage, request loan estimates from at least three lenders before choosing one, so that you can find the best deal. Each will supply your information on the same, easy-to-read form.
The form clearly lists estimates for interest rate, estimated monthly payments including taxes, principal, interest, insurance, and mortgage insurance (if required), and whether there would be a penalty for paying off the mortgage early.
Lenders also provide estimates of detailed closing costs. These include three kinds of costs: origination charges charged by the lender, costs for services that you can’t shop for like appraisal, and costs for services that you can shop for like title insurance.
How to use your Loan Estimate to shop around
First, review interest rates and costs for mortgage insurance. These will vary by lender and you save money by picking the best rate. Next, review origination charges. They include an origination fee the lender charges the borrower for loan services like taking and processing your loan application, underwriting and funding the loan, and other administrative services.
Origination fees generally cannot increase at closing, but it’s unlikely they will decline much either. Origination charges must be paid in cash at closing. However, the fees are negotiable and a lender might agree to reduce them and raise your interest rate slightly. Compare origination costs from each lender to find the best deal and save.
Finally, review costs you cannot shop for and compare costs. Total up each lender’s estimates and find the least expensive. Then turn to costs for closing services that you can shop for. Review these services with your real estate to see if all are required by local law and custom. If not, decide if you really need them.
Lenders must provide you with a written list of vendors. You can shop for your own vendors and you may be able to save, especially on title costs. Some optional services, like home inspection, you can select and pay directly.
The Closing Disclosure
You’ll have three business days between receiving your closing disclosure from your lender and signing the forms to accept the terms of your mortgage. This is a five-page form so use that time to carefully compare the closing disclosure with your loan estimate to make sure everything is in order. Make sure that you are credited for closing costs you paid before closing and that the total payments and cash to close amounts are accurate.
Any alterations made at the closing table must be reflected in an amended closing disclosure following the closing. Just three changes will require a new closing disclosure and will require a new three-day waiting period: changing the APR by more than 1/8%, changing a loan product, or adding a pre-payment penalty.
