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The Know Before You Owe Rule: What You Need to Know

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New closing forms are designed to make home buying less confusing and better protect home buyers. Here’s what you need to know as a prospective home owner from the new “Know Before You Owe” rule going into effect October 3, 2015.

According to the Consumer Financial Protection Bureau, the U.S. government’s agency responsible for consumer protection related to the financial sector:

The most important component of the new rule is an easier-to-understand closing document, known simply as the Closing Disclosure.

Under the new rule, home buyers will be given three business days prior to closing for review of this important document. This added time is to provide you with additional time to get all questions answered, and gain a more thorough understanding of the mortgage terms and the costs involved.

Targeting Consumer Concerns

The new rule is designed to address a number of problems consumers have identified as hindering the closing process:

Inadequate document review time. Gone will be the days when consumers first saw closing documents at the closing table, and were then expected to rush through the paperwork and sign without always understanding what they were signing.

Mistakes in closing documents. In the past, errors found in documents at the closing table, even simple misspellings of names or forgetting to add spouses, have caused closing delays while the entire package was redone. Under the new rule, these mistakes can be caught days before the closing date.

Too much paperwork all at once. A popular consumer complaint is that being bombarded by too much paperwork at the closing table leaves them feeling as though they could have overlooked something important in the rush to sign.

Difficult to understand. The new rule will allow consumers time to consult with experts for clarification of terms to ensure a thorough understanding prior to the closing date. New documents will also be more straightforward.

Rule Not Designed to Delay Closing

Naturally, anything that provides additional time for review or revision raises the question of whether the home buying process will cause a closing date to be put off. In most cases, you won’t need to worry about delays.

The new rule, while it does offer additional protection, will only impact your closing date if there is a change to any one of three very specific items related to your closing disclosure. In those cases, your lender must allow you to take an additional three business days to review an updated version of the disclosure documents. Depending on how early you receive your disclosure documents and whether you take your full three days each time, this could impact your closing date.

Those three changes that will allow an additional review period include:

  • An increase in the annual percentage rate (APR) by greater than 1/8 of a percentage point for a fixed-rate loan or 1/4 of a percentage point for an adjustable rate mortgage (ARM). Keep in mind that decreases in interest rates or fees won’t cause a delay.
  • Addition of a prepayment penalty.
  • Significant changes in your loan product, such as moving from a fixed-rate mortgage to an adjustable-rate loan.

Other changes in your disclosure documents, such as typos or minor wording errors, issues discovered during a final walk-through or even changes in payments unrelated to the above scenarios will not affect your initial three-day review or delay your closing. This includes changes resulting in additional seller credits.

That’s not to say, of course, that one or both parties might not agree to delay a closing for other reasons unrelated to changes in your disclosure documents.

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