"Know Before You Owe" is the result of efforts by the Consumer Financial Protection Bureau (CFPB) to make the mortgage process simpler and easier to understand. First-time homeowners can easily get overwhelmed by the barrage of jargon, and historically have had difficulty making a fair comparison on mortgage offers from different sources. Starting in October of 2015, Know Before You Owe addressed this problem by reducing the number of disclosure forms down to two and standardizing its format.
Those two forms are the Loan Estimate and the Closing Disclosure. The Loan Estimate is used at the beginning of the home-buying process to help you easily compare loan offers from different lenders, while the Closing Disclosure is issued at the end to help you understand all the final costs associated with your home and to compare them to the estimates in the original Loan Estimate.
Even with a simplified system, it can be daunting to sift through all the information to verify that it is understood and that there are no surprises or hidden fees — especially when you are about to sign papers that will put you tens of thousands of dollars in debt (if not hundreds of thousands). As a result, you are allowed three business days under Know Before You Owe to review the Closing Disclosure and address any questions before completing the closing process.
Many changes can take place during that final three-day review, some of which require an updated disclosure from the lender. Changes range from differences in payment amounts such as commissions, taxes, or escrow to any unexpected surprises found during a final walk-through such as storm damage or non-functioning appliances.
It is rare that no changes at all take place within three days of closing — but do these changes require resetting the three-day review period? In the majority of cases, the answer is no. If every change required a renewal of the three-day review, mortgages would never be completed.
However, there are three categories of substantial change that do require resetting the three-day review period. They are:
- Significant Annual Percentage Rate (APR) Increase – The APR plays a central role in the affordability of your home, and a substantial shift upward in APR requires a full review of the circumstances and affordability of the mortgage. "Substantial" by CFPB terms means an increase of more than ¼% for an adjustable loan and 1/8% for a fixed-rate loan. APR decreases are not subject to review if they are related to changes in fees or the overall interest rate.
- New Prepayment Penalty – The addition of a last-minute pre-payment penalty can make near-term selling or refinancing prohibitively expensive. You deserve the chance to redo your calculations, and perhaps ask why such a penalty was not disclosed earlier.
- Fundamental Changes – Changing the basic characteristics of a loan, like switching from an adjustable-rate loan to a fixed rate, or from a standard loan to one with interest-only payments, calls for a renewal of the three-day review period.
Keep in mind that the three-day review exists for your benefit as a homebuyer. The burden is on lenders to make sure that you have the correct information to review, before the closing meeting takes place.
CFPB is not trying to delay your home ownership; they are only trying to give it enough time to take place smoothly and without incident. Only the most significant changes, the three listed above, can delay the process. Otherwise, it is full speed ahead to home ownership.