After the collapse of the housing market and revelations about the prevalence of
questionable residential mortgage loans a few years back, the US Congress has been
working on new regulations designed to give borrowers more complete information about
their loans. Opinion as to whether the new regs, which took effect October 1, provide
borrowers with useful information is divided, but there is no doubt that the process of
closing a mortgage loan transaction has become more complicated and time-consuming.
and, ultimately, more expensive.
One purpose of the new regs is to help potential borrowers shop around for
their loans, comparing the terms offered by various lenders on an “apples to apples” basis.
Within three business days after a borrower inquires of a lender, the lender must provide
the borrower with a required form (referred to as a “Loan Estimate”) which sets forth in
detail the terms and conditions of its “best” residential mortgage loan. The “best” loan is
what would be offered to a borrower who has an ideal credit record and proposes to buy a
property that is worth the price. The Loan Estimate is a three-page form setting forth all
details of the loan – as well as the amount and interest rate, it also estimates monthly loan
and tax and insurance escrow payments, closing costs, and the cash a borrower would need
to close. By soliciting Loan Estimates from multiple lenders, borrowers can compare terms
and decide which lender to apply to. This does not mean, however, that a given borrower
will ultimately be able to obtain a loan on the “best” terms – once the borrower submits a
loan application, the lender will engage in normal underwriting, evaluating the creditworthiness
of the borrower and the appraisal of the property.
A second purpose of the new regs is to protect borrowers from unanticipated
increases in costs and fees between the commitment terms and the final figures at closing.
The general scheme was set up a few years ago in the last round of reforms. Costs are
divided into those charged by the lender which cannot increase, costs charged by the lender
which can increase only by specified tolerances, and costs of outside providers selected by
the borrower. The latter are not limited, as the lender’s estimate is just that – it does not
control fees charged by an outside provider, such as a lawyer or property inspector.
The burden of complying with the new regs falls primarily on lenders and settlement
agents, rather than on the parties. However, both buyers and sellers are affected.
Lenders and settlement agents are subject to strict liability and heavy fines for
violations of any of the detailed regulations. Accordingly, buyers and seller should expect
them to err on the side of caution in terms of accuracy and time frames.
Until the new rules took effect, the closing statement (referred to as the “HUD-1″)
summarizing the financial details of the transaction was usually prepared by the settlement
agent the day before. It was sometimes revised the morning of closing to account for lastminute
changes such as unexpected conditions discovered during the buyer’s pre-closing
walk-through. That is a thing of the past. Now the final closing statement (referred to as
the “Closing Disclosure”) must be provided to the borrower three business days before
closing. It is a five-page document providing more information, organized differently,
than the HUD-1. Most lenders insist on preparing it themselves rather than allowing the
settlement agent to do so.
If key aspects of the loan change after the Closing Disclosure has been provided (key
aspects include a change in APR or loan program), another Closing Disclosure must be
provided and a new three-day waiting period commenced. If there are other changes to the
Closing Disclosure, the parties may agree to postpone closing for a day.
What are the practical effects for buyers and sellers? In a word, delay. Lenders are
taking longer to issue loan commitments because of the requirement that the commitment
be accompanied by the detailed, binding and error-free Loan Estimate. Closing dates in
residential contracts in New Jersey have long been regarded as non-binding estimates, and
that will not change. If the parties do not submit all information for the Closing Disclosure
well before the desired closing date (including items such as mortgage payoff amounts,
repair credits, fuel oil and utility adjustments) there may not be time for the lender to
provide the Closing Disclosure three business days prior to the desired closing date. It has
always been risky for buyers and sellers to make moving and other plans hinging on a
specified closing date – now it is even more so. Although they are not prohibited by the
new regs, for practical reasons simultaneous transactions, in which a party closes both the
sale of his old property and the purchase of the new one in the same day, will be all but
impossible except in all-cash deals.
What should buyers and sellers do? Provide all information ASAP, and be patient.
Or, for those who can afford it, pay cash.
DISCLAIMER – This article is for general information only and is not intended to
provide legal advice or to address specific legal problems. This article does not create an
attorney-client relationship. For legal advice concerning real estate transactions and all
other legal matters, consult an attorney.
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BUYING OR SELLING A HOUSE? IT JUST GOT MORE COMPLICATED
After the collapse of the housing market and revelations about the prevalence of
questionable residential mortgage loans a few years back, the US Congress has been
working on new regulations designed to give borrowers more complete information about
their loans. Opinion as to whether the new regs, which took effect October 1, provide
borrowers with useful information is divided, but there is no doubt that the process of
closing a mortgage loan transaction has become more complicated and time-consuming.
and, ultimately, more expensive.
One purpose of the new regs is to help potential borrowers shop around for
their loans, comparing the terms offered by various lenders on an “apples to apples” basis.
Within three business days after a borrower inquires of a lender, the lender must provide
the borrower with a required form (referred to as a “Loan Estimate”) which sets forth in
detail the terms and conditions of its “best” residential mortgage loan. The “best” loan is
what would be offered to a borrower who has an ideal credit record and proposes to buy a
property that is worth the price. The Loan Estimate is a three-page form setting forth all
details of the loan – as well as the amount and interest rate, it also estimates monthly loan
and tax and insurance escrow payments, closing costs, and the cash a borrower would need
to close. By soliciting Loan Estimates from multiple lenders, borrowers can compare terms
and decide which lender to apply to. This does not mean, however, that a given borrower
will ultimately be able to obtain a loan on the “best” terms – once the borrower submits a
loan application, the lender will engage in normal underwriting, evaluating the creditworthiness
of the borrower and the appraisal of the property.
A second purpose of the new regs is to protect borrowers from unanticipated
increases in costs and fees between the commitment terms and the final figures at closing.
The general scheme was set up a few years ago in the last round of reforms. Costs are
divided into those charged by the lender which cannot increase, costs charged by the lender
which can increase only by specified tolerances, and costs of outside providers selected by
the borrower. The latter are not limited, as the lender’s estimate is just that – it does not
control fees charged by an outside provider, such as a lawyer or property inspector.
The burden of complying with the new regs falls primarily on lenders and settlement
agents, rather than on the parties. However, both buyers and sellers are affected.
Lenders and settlement agents are subject to strict liability and heavy fines for
violations of any of the detailed regulations. Accordingly, buyers and seller should expect
them to err on the side of caution in terms of accuracy and time frames.
Until the new rules took effect, the closing statement (referred to as the “HUD-1″)
summarizing the financial details of the transaction was usually prepared by the settlement
agent the day before. It was sometimes revised the morning of closing to account for lastminute
changes such as unexpected conditions discovered during the buyer’s pre-closing
walk-through. That is a thing of the past. Now the final closing statement (referred to as
the “Closing Disclosure”) must be provided to the borrower three business days before
closing. It is a five-page document providing more information, organized differently,
than the HUD-1. Most lenders insist on preparing it themselves rather than allowing the
settlement agent to do so.
If key aspects of the loan change after the Closing Disclosure has been provided (key
aspects include a change in APR or loan program), another Closing Disclosure must be
provided and a new three-day waiting period commenced. If there are other changes to the
Closing Disclosure, the parties may agree to postpone closing for a day.
What are the practical effects for buyers and sellers? In a word, delay. Lenders are
taking longer to issue loan commitments because of the requirement that the commitment
be accompanied by the detailed, binding and error-free Loan Estimate. Closing dates in
residential contracts in New Jersey have long been regarded as non-binding estimates, and
that will not change. If the parties do not submit all information for the Closing Disclosure
well before the desired closing date (including items such as mortgage payoff amounts,
repair credits, fuel oil and utility adjustments) there may not be time for the lender to
provide the Closing Disclosure three business days prior to the desired closing date. It has
always been risky for buyers and sellers to make moving and other plans hinging on a
specified closing date – now it is even more so. Although they are not prohibited by the
new regs, for practical reasons simultaneous transactions, in which a party closes both the
sale of his old property and the purchase of the new one in the same day, will be all but
impossible except in all-cash deals.
What should buyers and sellers do? Provide all information ASAP, and be patient.
Or, for those who can afford it, pay cash.
DISCLAIMER – This article is for general information only and is not intended to
provide legal advice or to address specific legal problems. This article does not create an
attorney-client relationship. For legal advice concerning real estate transactions and all
other legal matters, consult an attorney.