Understanding “Know Before You Owe”

New rules from the Consumer Financial Protection Bureau (CFPB) went into effect October 3. The new rules, coined “Know Before You Owe,” are designed to simplify the process for borrowers purchasing a home. Here is what prospective home buyers should “know” about the new rules.

The overarching goal of Know Before You Owe is to make the mortgage process easier for consumers to understand. The new rules accomplish this goal by introducing new paperwork and disclosure rules for mortgage lenders. The new standards now require lenders to detail exactly how much a borrower must pay for closing costs and the changes to monthly payments over the lifetime of the loan, all the way through its term. The result of the new regulations will help consumers prepare for changes to their mortgage payment years down the road.

Furthermore, the new regulations require lenders to submit the details of the loan to the borrowers at least three days before closing on the loan. The previous standards allowed lenders to make changes to a home loan right up through the closing, and sometimes even during the closing. This three-day buffer is designed to provide the borrower with additional time to understand the terms of the mortgage loan before signing and closing on a home. The CFPB recommends that borrowers use this three-day window to consult with a lender, lawyer, or housing counselor and take three specific actions.

First, consumers are encouraged to review the Closing Disclosure, one component of the new paperwork, which reports the details of the loan and how it may change in the future. Next, the CFPB offers a closing checklist to prepare borrowers for closing. The checklist offers guidance on what to expect at the closing and provides a list of questions to ask the lender. Lastly, if an error is found in the paperwork, the CFPB recommends that the borrower call a loan officer or settlement agent immediately to get the error fixed and avoid any delays in closing on the house.

The implementation of the new rules is expected to be good for consumers, especially first-time or inexperienced home buyers, but some experts suggest the new paperwork and regulations could cause delays in the home-buying process. In most cases, these delays should not seriously affect the purchase or sale of a home, but they could cause headaches for some homeowners that are in the process of both buying and selling a home and need to quickly push through the sale of a home. Though some hassles are to be expected, many industry insiders believe that mortgage lenders will be able to quickly adjust and do not expect any long-term effects beyond the first month or two of implementation.