Mortgage disclosure law changes in 2015
Consumers financing homes in the U.S. are protected from fee abuses by two main regulations: the Truth In Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA).
Respectively, TILA and RESPA protect you from closing cost abuses and prevent housing service providers (like lenders, real estate agents and title companies) from giving each other referral fees for your business.
The Consumer Financial Protection Bureau (CFPB) enforces TILA and RESPA, and on October 3, 2015, the CFPB combined all previously required mortgage rate and fee disclosures into two simple forms to make it easier for consumers to understand their mortgages. This initiative is called the TILA-RESPA Integrated Disclosure Rule (TRID).
The Loan Estimate and Closing Disclosure
The two forms TRID created are called the Loan Estimate and the Closing Disclosure.
The Loan Estimate must be provided to you within three days of applying with a lender, and it replaced the Good Faith Estimate and Truth In Lending disclosures home buyers used to get prior to October 3, 2015. It details loan terms, projected payments over the life of your mortgage, and line item closing costs.
The Closing Disclosure must be provided to you at least three business days before closing on your mortgage, and it replaced the final settlement statement, which was also known as the HUD or HUD-1. It looks almost exactly like the Loan Estimate, but adds a breakdown of costs paid by buyer versus seller versus third parties. This means you’re reviewing final terms in the same format you saw in the Loan Estimate initially, and you’ve got three days to digest it before you close.
Make sure you read and understand the specific timing rules lenders (and you) must follow with these disclosures when closing a home purchase or refinance, because they could affect how long it takes to complete the mortgage process.
If you agree to go forward with closing after the Closing Disclosure’s three-day waiting period, you’ll also need to sign a full set of loan documents. Among those, the following two are most important.
The promissory note (aka “the note”)
The note is your loan contract, and contains the terms of your loan (such as 30-year fixed or 5-year ARM); specifies the rate, payment intervals and payment changes along the way; and states whether you’ll incur a prepayment penalty if you pay off the loan early.
In the note, you agree that your home is security for the loan, so your lender will have a claim to your property if you don’t repay according to the note’s terms. This note provision will refer to a separate document that’s the “security instrument,” called a mortgage or a deed of trust.
The security instrument (aka “the mortgage” or “the deed of trust”)Both a mortgage and a deed of trust pledge the property as security for the note. Fannie Mae provides a list that specifies which states require mortgages vs. deeds of trust so you know which one you’ll sign along with your note based on where you live.
Depending on the loan you choose, you’ll need to comply with one of these three occupancy provisions contained in all mortgages and deeds of trust:
- Owner-occupied. You must move into the property within 60 days of closing and live there as your primary residence for at least one year. Then you’re allowed to use it as a rental or a second home.
- Second home. You can only use the property as a second home and aren’t allowed to rent the home.
- Non-owner-occupied. You’re paying a higher rate for this loan, so you’re free to convert occupancy to owner-occupied or second home if and when you see fit.