By Bob Sullivan

The process of buying a home changes dramatically on Oct. 3. Here’s what you need to know about Know Before You Owe.

What Is Know Before You Owe?

That’s the name the Consumer Financial Protection Bureau has given to changes in the procedure for buying a home, and specifically, in obtaining a mortgage. Federal financial reform legislation, known as the Dodd-Frank Act, directed the CFPB to improve the procedures for buying a home in the wake of the 2008 housing crisis. Know Before You Owe has been a focus of the agency since its creation.

How Does It Affect Me?

There are many elements of Know Before You Owe that concern people who work in home sales, but to buyers, the most critical changes involve loan estimates and closing documents — the paperwork you receive at the beginning and the end of the mortgage application process.

When Do the Changes Take Effect?

They’ll impact consumers who apply for a loan on or after Oct. 3. Mortgages that are already being processed before that date are regulated by the old rules.

How Are the Closing Documents Different?

Before the change, homebuyers received the poorly-named “HUD-1 Settlement Statement” — short for the U.S. Department of Housing and Urban Development — at closing, when they were already busy signing dozens of forms and unlikely to spot errors. (Note: It was always possible to ask for a preliminary HUD-1 several days before closing and some mortgage lenders did provide advance copies.) The HUD-1 looks a bit like an accountant’s ledger or an IRS tax form. Borrowers were also presented with a separate Truth In Lending Act (TILA) disclosure.

Both the HUD-1 and the TILA disclosure are being replaced by a single “Closing Disclosure” form. This form is still several pages long, but designed to be easier to read. The cover page includes clear representations of monthly payments, total payments, closing costs, prepayment penalties, balloon payments and potential interest rate changes during the life of the loan. Everything on page one of the document is a direct response to complaints about many practices that tripped up consumers during the housing bubble.

The rest of the document bears similarity to the old HUD-1, with borrowers’ details on one side and sellers’ details on the other. Late fees and other terms follow.

When Will I Get a Closing Disclosure?

That might be the most significant change. Banks, title companies or anyone else preparing for a closing will now be required to provide documents to consumers 72 hours before closing, giving them ample time for review. Real estate professionals have been very concerned about this requirement because real estate transactions have many moving parts, and this new rule requires that transaction details be finalized earlier in the process.

As is the case with all transactions, however, the more time buyers have to review paperwork, the better. Consumers should also review their credit report and credit score before starting the mortgage application process.

What Other Documents Are Changing?

At the beginning of the loan shopping process, consumers traditionally receive a “Good Faith Estimate.” That form is being replaced by the simply named “Loan Estimate.” The new form includes a few more details than the old one, and it should help consumers trying to shop around for the best deal.

Critically, the final page of the “Loan Estimate” includes a section called “Comparisons”, which clearly lists the interest, principal and loan costs paid after five years, and a new concept called “Total Interest Percentage”, which outlines the total interest paid during the life of the loan as a percentage of the amount borrowed. An interactive tool to see the “Loan Estimate” form is on the CFPB site.

Meanwhile, consumers will also receive a “Your Home Loan Toolkit” booklet when they close, which offers some additional tips about protecting the value of their investment. The CFPB has also published its “Owning a Home” guidebook online, which contains similar advice.

How Will Know Before You Know Affect the Mortgage Process?

Anyone buying a home during the next few weeks, or even months, should expect a little confusion as everyone gets used to the new process. Firms that generate closing documents must retool a lot of software to comply with the rule — that’s why it was delayed from August to October. You can expect some nervous loan officers and mortgage brokers for awhile.


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