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Two new mortgage documents are coming: The Loan Estimate form and the Closing Disclosure forms are designed to give consumers a clearer picture of their borrowing costs.
Mortgage shoppers should see the full cost of a loan at the time they apply, and have a more detailed breakdown a few days before closing. These have long been the marching orders given by federal financial regulators. And for the most part, they’re followed. Lenders typically provide a Good Faith Estimate (GFE) form when a person first applies for a home loan, followed by a “HUD-1” Settlement Statement shortly before closing day.
But starting October 3rd 2015, these all-important mortgage documents are being replaced. The Consumer Financial Protection Bureau (CFPB), one of several government agencies that regulate the mortgage lending industry, has set a date for the implementation of two new mortgage documents. These forms are very important to borrowers, and for two different reasons:
The new loan estimate form helps borrowers understand the full cost of the mortgage, including fees and interest. It can be used during the shopping process to compare “apples to apples.”
The new closing disclosure form helps borrowers know what to expect on closing day, and how much cash they’ll have to bring to the table.
Here’s what you should know about these new mortgage documents starting October 3rd 2015
The ‘Loan Estimate’ Form Helps You Comparison Shop
As its name implies, the new Loan Estimate form is designed to give borrowers an approximated view of the full cost of the mortgage loan.
In this context, “full cost” means that the form shows the various fees and charges that can inflate the amount of money due at closing.
Many home buyers are surprised by the different lending fees that can pile up along the way. There’s a fee for everything, from the initial application to the final document preparation. The Loan Estimate form offers an estimated breakdown of these various charges that will be due at closing.
More importantly, it shows the amount being borrowed, the interest rate being assigned to the loan, and whether or not there are prepayment penalties.
This form standardizes the loan estimating process, which makes it easier for consumers to comparison shop when getting quotes from different lenders. Lenders must provide this document within three days of the application.
The new Loan Estimate form replaces the early Truth in Lending Statement and the Good Faith Estimate, two documents that often contained duplicate information. By rolling two documents into one, and by presenting the information in a more consumer-friendly manner, CFPB hopes to reduce confusion and better prepare borrowers for the closing process.
The ‘Closing Disclosure’ Form Prepares You for Closing
The new Closing Disclosure form helps borrowers prepare for the actual costs that will be due at closing. Think of it as a finalized, and therefore more accurate, version of the Loan Estimate.
Borrowers must receive the Closing Disclosure at least three business days before the scheduled closing date. This gives them time to review the document and prepare a check for the total amount needed to close the loan.As with the previous document, the goal here is to reduce confusion and provide clearer information to consumers. The revised 5-page form provides a detailed breakdown of the money due at closing, and it shows where that money is going.
Educating Consumers and Avoiding Surprises
The creation of these new mortgage documents was driven by three overriding goals. The CFPB wanted to (1) improve consumer understanding of the mortgage process, (2) simply comparison shopping, and (3) help people avoid “costly surprises at the closing table.”