Learn what has and hasn’t changed about the mortgage process

The Know Before You Owe rule does not make changes to preapprovals or prequalifications.

The more time and effort your clients invest in learning about home loans and defining what they want and what they’re capable of financing before they select a home, the smoother the path from contract to closing will be.

Ideally, before they select a home, your clients will have talked with one or more lenders or homeownership counselors and will:

• Have decided upon the specific type of loan that will best meet their needs (for example, conventional vs. FHA), and
  
• Feel confident that they will be able to obtain financing.
  

This enhances their ability to request and receive meaningful Loan Estimates for comparison.

The application process typically begins after your client has identified a property.

Lenders must provide Loan Estimates within three business days after your clients have provided that lender with:

• their name
  
• their income
  
• their Social Security number (so the lender can check credit)
  
• the address of the home they hope to purchase
  
• an estimate of the home’s value (typically the sale price)
  
• the amount they want to borrow
  

Previously, comparing multiple loans could be cumbersome because each lender might have different requirements, including extensive written documentation. Now, although lenders may accept and consider income verification documents and other information voluntarily provided, they cannot require this documentation as a condition of providing a Loan Estimate. As a result, your clients should have a much easier time getting and comparing Loan Estimates from different lenders.

Clients who describe the specific type of loan they are interested in will receive the most useful information on their Loan Estimate. This is where their earlier investment of time and effort to decide upon a specific loan type pays off. By comparing the same kind of loan across different lenders, your clients are more likely to find their best deal. Clients may find our interactive guide to the Loan Estimate helpful since it highlights the parts of the forms and defines mortgage terms.

Clients can also explore other topics with competing lenders, including the lender’s interest rate lock policies, the lender’s ability to close within the desired timeframe, whether electronic delivery of documents is anticipated, and how your clients should expect to interact with the lender during the loan process.

Issuing a Loan Estimate does not mean that the lender has approved or denied the loan. By issuing the Loan Estimate, the lender has committed to honoring the fees described in the Loan Estimate as long as the loan is later approved without any changes in circumstance affecting the loan application.

Once your clients have compared Loan Estimates and determined which loan best meets their needs, they need to let the lender know. If your client is silent, the lender cannot assume an intent to proceed. Lenders likely have different requirements for what your clients need to do to indicate their intent to proceed.

Generally, lenders won’t move forward with an application without a clear indication from your clients that they intend to proceed. And after 10 business days without that indication, the lender is no longer required to honor the terms initially offered in the Loan Estimate. If the lender closes an application because the application remained incomplete, your clients will most likely need to start over from the beginning.

Until your clients indicate their intent to proceed, lenders can’t charge any fees in connection with a mortgage application, including an application or appraisal fee. The only exception is a reasonable fee for the credit report.

Previously, lenders may have requested credit card information or a post-dated check to be charged or cashed later, after a required estimate was sent. Under the new rule, this is not permissible. Payment information can be obtained only after the lender provides the Loan Estimate and your clients have expressed their intent to proceed.

Because lenders cannot collect payment information in advance, lenders may require your clients to provide payment for an appraisal, application, or other loan processing fee immediately after or as a part of confirming the intent to proceed with the application. Lenders may require payment before beginning the appraisal, processing, verification or underwriting processes.

A lender is responsible for providing accurate pricing information for the loan requested, based on the best information reasonably available to the lender at the time the disclosure is provided. However, if the information about your client, the proposed loan, or the property was incorrect or changes, a revised Loan Estimate may be issued. This can be referred to as a changed circumstance. A new Loan Estimate can reflect changed rates and terms caused by the new information.

Not all changes require the lender to issue a revised Loan Estimate. Minor changes, for example when the seller agrees to pay for a specific cost not included in the original agreement, do not require the lender to issue a revised Loan Estimate. Significant changes most likely do.

Common reasons why a Loan Estimate may be revised include:

• Your client decided to change loan programs or the amount of the down payment.
  
• The appraisal on the home came in higher or lower than expected.
  
• Your client’s credit status changed, perhaps owing to a new loan or a missed payment.
  
• The lender could not document overtime, bonus, or other income provided on your client’s application.
  

If changes occur later in the mortgage process, lenders may need time to respond. For example, if your client requests a different loan program late in the process, an appraisal or underwriting step may need to be repeated.

Lenders need to make sure that your clients receive the Closing Disclosure at least three business days before closing. This gives your clients time to review a summary of the final loan terms. Clients should no longer be faced with significant changes from the lender and be pressured to sign on the same day.

The Closing Disclosure can be compared with the information contained in the initial or a revised Loan Estimate (or, in the case of a revised Closing Disclosure, the initial Closing Disclosure). Flexibility has been built into the rule to accommodate small, last-minute changes typical of purchase transactions. However, when changes to the transaction are significant, a new three-business-day review period is required. Since large, last-minute changes should be rare, an additional review period should also be rare. Learn why an extra three-day review is unlikely.

To provide a Closing Disclosure three business days before the closing that reflects all of the terms of the transaction, settlement agents and creditors need as much information from the buyer, the seller and the agents about the transaction as far in advance of closing as possible. At the same time, most settlement issues, such as adjustments to seller credits to account for repairs, that are currently addressed as late as the day of closing can continue to be handled at closing without requiring a new three-business-day review period.

Your clients should never be faced with major changes to their loan terms on the day of closing and be forced to make such an important decision under pressure. While most changes that come up in the last few days before settlement will not delay a closing, there are three major changes to loan terms that will require the lender to issue a revised Closing Disclosure and will trigger a new three-business-day review period. Your clients generally may not waive their right to this review period. The changes that trigger a new three-business-day review period are:

1. The APR (annual percentage rate) increases by more than 1/8 of a percent for regular loans (most fixed-rate loans) or 1/4 of a percent for irregular loans (most adjustable loans). A decrease in APR will not require a new three-day review if it is based on changes to the interest rate or other fees. Lenders have been required to provide a three-day review for these changes in APR since 2009.
   
2. A prepayment penalty is added, making it expensive to refinance or sell.
   
3. The basic loan product changes, such as a switch from fixed rate to adjustable interest rate or to a loan with interest-only payments.